Paying your contractor in cash is legal, but it's risky and you forgo a tax break

I understand cash means no paperwork, therefore no GST and likely no income to be reported by the contractor, which translates into a lower cost for the consumer.

But is it worth it? And I'm not talking ethically. Let's look at it from a financial point of view.

"It is legal to pay cash," notes Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management. "It is the other side's obligation to report it. At the end of the day, it's up to them to charge tax."

The real test of a legitimate transaction is whether your contractor will give you a receipt for the work. If there's no receipt, the work is likely not being reported as income.

The first problem with no receipt is no renovation tax credit. The average household spent about $12,600 on renovations in 2008. Based on that figure, most of us would be eligible for the credit.

The home renovation tax credit was announced in the February 2009 budget and provides tax relief of up to $1,350 on the first $10,000 you spend on a project.

This is where I think the government has done a nice job cutting into the underground economy. If I'm saving $1,350 on my $12,600 renovation by doing it "on the books," I'm going to need to get a steep discount from my contractor to do something with no paperwork.

"Many people speculate part of the reason for the renovation tax credit was not just to stimulate the economy, but to capture some of this revenue that may not be fully reported," Golombek says.

Although there are certainly deals to be had, John Kenward, chief operating officer of the Canadian Home Builders' Association, says there are risks that come with a "cash deal."

"We have a huge underground economy across the country, and what characterizes that economy is cash and the fact nothing is in writing anywhere," Kenward says.

Just try to sue somebody for unfinished or shoddy work when you have no contract. And not just small jobs are done for cash, he says.

"To me, people are ignorant of the risks they are creating for themselves," Kenward says. "You are dealing with people who have no insurance, no workers' compensation. You have no comeback if they wreck your house. If they get injured, you're the one who is going to get nailed. You could lose your house."

This should be reason enough to stay away from a cash deal, but the temptation to save money can be too much. And the renovation tax credit ends Feb. 1, 2010.

Worse yet, in Canada's largest province, there will be a great incentive to avoid contracts come July 1, 2010. Ontario will introduce a harmonized sales tax and the tax on a project will jump from five per cent to 13 per cent.

That will certainly drive people to cash very quickly.

"The HST fuelled the underground economy in the Atlantic provinces. Unless something is done to mitigate the effect of the HST in Ontario, it will absolutely fuel the underground economy," Kenward says.

-- Canwest News Service

Republished from the Winnipeg Free Press print edition July 5, 2009 C7