Public consultations: Addressing Ontario’s Underground Economy in the Residential Construction Sector: Final Report for the Minister of Finance On Behalf of Former Parliamentary Assistant Laura Albanese, MPP

Introduction:

In the winter and spring of 2016, then Parliamentary Assistant to the Minister of Finance, Laura Albanese conducted a series of consultations with the residential construction industry on behalf of the Government of Ontario. This report summarizes participants’ feedback and recommendations for addressing the underground economy in the residential construction industry.

Context:

The underground economy is a serious issue in Ontario. When individuals and businesses deliberately ignore their tax and legal obligations, they put the safety of workers and consumers at risk. Participation in the underground economy also creates an unfair competitive advantage for illegitimate operators over those businesses that choose to play by the rules.

According to Statistics Canada, the country’s underground economy is estimated to be 2.4 per cent of annual gross domestic product (GDP), and is estimated to largely occur in the construction, retail and hospitality sectors where cash payments are common. This means that about $16.7 billion in annual economic activity can be attributed to the underground economy in Ontario.

The government is already taking a number of concrete actions to address Ontario’s underground economy, including:

• Enhancing compliance-focussed measures to address the activity in high-risk sectors, which has generated an additional $930 million;
• Making the use, manufacture and distribution of electronic sales suppression devices an offence under the Taxation Act, 2007; and
• Requiring corporations to demonstrate compliance with their tax obligations before receiving government contracts.

Statistics Canada has also found that the residential construction sector makes up almost 30 per cent of Ontario’s underground economy, which translates into about $4.8 billion in economic activity per year.

That is why the Province has undertaken a number of initiatives to address the underground economy in this industry, including a pilot project in the summer of 2015 that focussed on addressing unsafe activities typically associated with the underground economy in the residential roofing sector. Multiple ministries collaborated on the project and worked with the Canada Revenue Agency to conduct a series of parallel, targeted inspections. As a result of this work Ontario:

• Issued over 1,700 orders for compliance;
• Initiated nearly 250 prosecutions;
• Handed out over 550 information packages to homeowners and employers; and
• Identified instances of non-compliance with tax obligations.

In the 2015 Ontario Economic Outlook and Fiscal Review, the government committed to consulting with the construction sector on additional measures to help level the playing field and better protect workers and consumers. In January 2016, former Parliamentary Assistant Albanese launched a series of discussions to engage with and listen to key stakeholders in the residential construction sector. The objective of these conversations was to better understand the key issues, determine the impact of underground economic activity on legitimate businesses in the sector, and develop recommendations.

In February 2016, the former Parliamentary Assistant submitted an interim report, Addressing Ontario's Underground Economy in the Residential Construction Sector: Interim Report for the Minister of Finance On Behalf of Parliamentary Assistant Laura Albanese, MPP that summarized what was heard during the consultations and provided interim recommendations around these themes:

• Better collaboration within and across governments;
• Increase public awareness; and
• Incentives to reduce participation in the underground economy.

The 2016 Ontario Budget outlined the action the government is taking to address the interim recommendations, including:

• Developing a public awareness campaign that aims to educate the public on the risks and potential liabilities associated with participation in the underground economy.
• Strengthening its ability to identify and address the underground economy by proposing legislation that would:
• Enhance the way government gathers and uses information to target illicit activities typically associated with the underground economy;
• Expand enforcement capabilities to ensure businesses have the proper permits, licences and other required documentation to be considered legitimate; and
• Propose additional penalties to level the playing field for legitimate businesses.
• Partnering with natural gas utilities to help homeowners work with certified energy auditors and reputable contractors as part of the government’s investment in home energy audits and retrofits under the Green Investment Fund.

In spring 2016, the former Parliamentary Assistant met with more businesses and industry representatives to further inform the final recommendations to the Minister of Finance on addressing the underground economy in the residential construction sector.

Consultations

In addition to hosting a number of formal consultations,the former Parliamentary Assistant met with Ontarians informally to obtain their input regarding the residential construction sector and impact of the underground economy.

Phase 1 Consultations

In January 2016, the government heard from Ontarians across the province through a successful series of consultations including:

• Meetings with the Ontario Home Builders' Association (OHBA);
• Meetings with the Provincial Labour Management Health and Safety Committee (PLMHSC);
• Presentations as part of the Standing Committee on Finance and Economic Affairs;
• Pre-Budget consultations across the province; and
• Submissions received through the Ministry of Finance's email address: MOF - PPAB@ontario.ca.

Phase 2 Consultations

Following the first phase of consultations, the former Parliamentary Assistant continued to engage with and hear from Ontarians through:

• A roundtable session with representatives of key industry groups from across the province;
• Meetings and discussions with Ontarians and other stakeholders; and
• Submissions received through the Ministry of Finance's email address: undergroundeconomy@ontario.ca.

Appendix A provides a list of stakeholders that participated in more formal consultation events or provided written submissions, Appendix B contains the questions discussed during those events.
The Ministry of Finance and former Parliamentary Assistant Albanese would like to thank everyone who took the time to participate(or give input)in these consultations.

Key Themes

Participants provided a variety of comments and suggestions on the impacts of the underground economy and ways in which the Province can better address illicit activities. However, certain themes, such as the need to increase public awareness about the impacts of underground economic activities and holding the public responsible for their actions, were repeated and seemed to impact a wider cross-section of participants. Stakeholders also expressed a greater need for collaboration at all levels, including governments, regulatory agencies, boards and commissions with industry partners to address the underground economy. Many participants also felt that the current labour environment creates an unfair advantage for businesses that use subcontractors instead of employees, and needs to be addressed so that businesses cannot continue to take advantage of this segment of the underground economy. Based on the consultations,four key themes emerged.

Strengthen collaboration within and across governments,industry and regulatory agencies, boards and commissions

The most resounding feedback the government heard from stakeholders is the need for all levels of government — municipal, provincial and federal to work more collaboratively to address the underground economy. Suggestions included:

• Build effective partnerships to ensure all players are aware of the impact of the underground economy on workers, consumers and businesses.
• Improve information sharing across municipal, provincial and federal governments, regulatory agencies and enforcement bodies.
• Work with the broader public sector and industry organizations to raise awareness and communicate regulatory and legislative requirements.

Increase public awareness

Participants appealed the government to increase its efforts to raise awareness about the impact of the underground economy on workers. Suggested measures included:

• Implement a public awareness campaign to inform homeowners of the risks and liabilities related to cash transactions and unwritten contracts, including liability for damages, injuries and even liens filed by unpaid suppliers.
• Increase contractors and subcontractors awareness of their tax and labour-related obligations.
• Inform homeowners and builders about permit and licensing requirements.
• Hold the public and homeowners accountable for their participation in the underground economy.

Reduce participation in the underground economy through incentives and accountability

The government heard many requests to provide incentives to homeowners and the general public to act responsibly by choosing to pay taxes and asking for a receipt. Participants felt that by highlighting the consumer benefits of working with registered businesses and licensed contractors, both consumers and businesses will be more likely to comply with their legal and tax obligations.
Specific feedback included:

• Reduce the regulatory burden associated with collecting, reporting and remitting taxes.
• Introduce incentives that require homeowners to get a receipt for home renovations and other home improvement work.
• Partner with other ministries on green energy and climate change initiatives, such as home retrofitting programs and providing incentives to homeowners.
• Hold those who choose to participate in the underground economy accountable for their actions.

Encourage or make it easier for contractors and subcontractors to be compliant

Participants also suggested that government take a close look at the way business is done in Ontario, particularly regarding the issue of independent contractors. They advised there is a strong need to develop a system that encourages and makes it easier for businesses, and more specifically subcontractors, to be compliant with both tax laws and health and safety requirements. The advice received included:

• Address issues related to employees being treated as independent contractors.
• Contractors may incorrectly use subcontractors rather than employees, to gain a competitive advantage from not having to remit taxes and other deductions on behalf of subcontractors.
• By requiring contractors to withhold taxes and other deductions from payments made to subcontractors, this could help to level the playing field.
• Create a link between trade licences and building permits as independent contractors and subcontractors are able to avoid their tax and other obligations due to existing loopholes.
• Institute mandatory job site orientation sessions and register all trades and sub-trades on the site. This would ensure that all subcontractors are aware of their responsibilities and create a record of subcontractors performing construction work.

Final Recommendations

Based on the consultations, it was recommended that the Province:

1. Examine opportunities for the Provincial and Federal government to enhance its current efforts in addressing underground economic activity in high risk sectors, including the residential construction sector.
2. Build on the success the government has seen with its pilot projects that target high-risk sectors.
3. Move forward with the government's 2015 Budget commitment to enhance information sharing across various ministries of Ontario government and between other levels of government (federal and municipal) to tackle underground economic activity in a more targeted and coordinated way.
4. Leverage information provided by regulatory entities and industry associations, in a responsible manner, to better focus efforts on areas of non-compliance.
5. Encourage ministries, all levels of government including municipalities, regulatory entities and industry organizations to partner together in campaigns that educate and increase public awareness of the impacts of the underground economy.
6. Launch a public awareness campaign that will inform Ontario homeowners, businesses and consumers of the risks and potential liabilities associated with participating in the underground economy.
7. Introduce incentives for homeowners to hire qualified and reputable contractors for home improvements.
8. Continue to partner with industry, similar to the forthcoming investment in home energy audits under the Green Energy Fund, to encourage homeowners to work with reputable contractors when renovating and retrofitting their homes.
9. Review best practices in other jurisdictions to identify measures that would better protect workers and encourage subcontractors to operate within the rules.
10. Work within and across various levels of governments, regulatory entities and industry organizations to further explore, develop options and determine the feasibility of:
    1. Revamping contractor/subcontractor requirements, to better level the playing field and enhance safety for all businesses, subcontractors and employees in the Ontario residential construction industry.
    2. Linking building permits to independent contractors or subcontractors performing the work.

Next Steps

The Minister of Finance will review the Addressing Ontario's Underground Economy in the Residential Construction Sector: Final Report for the Minister of Finance and use the feedback and recommendations to inform the development of the Underground Economy Strategy and future actions to address tax fairness in Ontario.

The government will continue to strengthen partnerships with the residential construction sector to strengthen worker and consumer protections, address the underground economy and maintain tax fairness.

Appendix A – Participants through Formal Consultation Sessions or Written Submissions

Brook Restoration	Electrical Safety Authority	Ontario Formwork Association
Building Industry and Land Development Association	EnerQuality	Ontario Home Builders' Association
BuyWise	Infrastructure Health and Safety Association	Ontario Painting Contractors Association
Carpenter's District Council of Ontario	International Association of Bridge, Structural, Ornamental and Reinforcing Iron Works	Progressive Certified Trades Coalition
Carpenter's Union	International Brotherhood of Electrical Worker's Construction Council of Ontario	Residential Construction Council of Ontario
Council of Ontario Labourers	Labourers International Union of North America (LIUNA) - Local 183	Siding and Window Dealers Association of Ontario / Clive Edwards
Dayus Roofing	London Home Builders Association	Sorbara Group
Electrical Contractors Association of Ontario	Ontario Construction Secretariat

Appendix B–Questions asked in Consultation Sessions

In discussions with the OHBA and the PLMHSC, the former Parliamentary Assistant asked the following questions:

1. What type of underground economy activities do you encounter within your sector (e.g., false invoicing, cash payments, partial payments, etc.)?
2. Why do people in the residential construction sector participate in the underground economy?
3. What is the single most important action that Ontario could undertake to deter underground economy activity in residential construction? Why is this important?
4. What consequences should individuals and businesses who undertake underground economy activity in the residential construction face?  What do you think would be most effective?
5. Have you encountered any new trends in underground economy activity in residential construction?
6. How can the government best communicate with stakeholders in residential construction?
7. What do those who work in residential construction need to know about the impact of the underground economy – what messages would make a difference?
8. What opportunities exist for your organization, or your membership, to partner with government to address some of the challenges you've raised today?

For the May 5th roundtable discussion, the former Parliamentary Assistant posed the following questions to stakeholders:

Pilot Projects in other Areas of Residential Construction:

1. What ideas do you have for further enhancing the Province's pilot project in the residential roofing sector, as it moves into its second year?
2. Have you encountered any new trends in underground economy activity in residential construction?
3. If there are new trends, what areas of residential construction are involved? Could the trends be addressed by pilot projects, similar to the ongoing residential roofing pilot project?
4. Are there other opportunities that the government should be exploring to address the underground economy?

Specialized Audit Teams:

5. Are there opportunities to leverage industry membership in a referrals process in the future to further support the work of these teams? Would this be an effective mechanism to support provincial and federal compliance efforts?
   

Underground Economy Legislation:

6. What enforcement measures would be the most effective to ensure that businesses have the proper permits, licenses and documentation to operate legitimately and deter participation in the underground economy?
7. What penalties would level the playing field for legitimate businesses?
8. Do you have any concerns with the Province enhancing its capacity to share business information for the purpose of addressing underground economy activity?

Public Awareness Campaign:

9. How often do consumers ask if they can pay under the table? When consumers asked to pay, did they give you reasons as to why – what were they?
10. What messages would be most effective in increasing the awareness of those who work in residential construction about the impact of the underground economy?
11. What opportunities exist for your organization, or your membership, to partner with government to communicate with stakeholders in residential construction and/or homeowners about the risks of participating in the underground economy?
12. What is the single most important message that Ontario could deliver to deter underground economy activity from your perspective?  Why is this important?  How should this message be delivered?

Home Energy Audits and Retrofits:

13. What would make the Province’s commitment to partner with natural gas utilities effective in helping homeowners work with certified energy auditors and reputable contactors?
14. What information would be critical to include in education and awareness efforts related to home energy retrofits?