Everyone wants to save a dollar and sure you might get a kitchen renovation done and be able to knock off 15% of the total project price if you pay cash. Sounds great, so what could possibly go wrong you ask, well here are a few things that might make you think twice before handing over your cash.
Paying for a home improvement or construction work in cash to receive a ‘discount’ on the tax isn’t as glamorous as it may seem. That fact goes for homeowners and contractors alike. Individuals may think that a cash transaction can be relatively harmless but it's more harm than good. To help you understand the issues a few contractors have shared their stories to help make others understand why it's a problem.
1. The Scam
First, remember if it sounds too good to be true then it probably is and keep in mind not all contractors are not created equal. Homeowners need to do thorough research on how to select a good contractor before they sign a deal with anyone. Unfortunately, homeowners are at a disadvantage because it’s very difficult for an untrained eye to find errors in technical work. In addition, homeowners rarely know if their contractor’s work is up to code. It’s unlikely that the homeowner will know if a project is up to code before it’s too late. It’s best to either hire someone who's been recommended to you, you've gotten references and seen their past work or hire an inspector to assess the project before it’s complete.
Unfortunately, the worst contractors in the business take advantage of homeowners. They may just take a deposit of 30% to 50% first and disappear or complete (or nearly complete) and then leave a project in shambles. This is usually what happens:
The contractor might offer the homeowner a “great cash only price” for the project. They might even give an intentionally low quote to pique the client’s interest.
No contract is offered--that way, the contractor does not need to guarantee quality or completion.
The contractor might ask for a large up-front deposit.
The homeowner agrees and pays up.
They are left without protection, liability insurance, and actionable paperwork to bring the case forward to the law if need be.
The project is either never started or totally botched and fails to meet industry standards.
The homeowner doesn’t know how bad the situation is until it’s too late: they’ve blown their budget, and the contractor has run with their money.
The homeowner may not even be able to write a contractor review about their experience to warn their community members if the person is only available on sites such as Kijiji since they probably don't have a business license or a digital profile of any kind.
It's frustrating from a legitimate contractors side as well. I've had times where someone has asked me to quote for a job, the materials alone are costing around $10,000 and my potential client tells me they found someone else to do the whole job for under $8,000.00. I know those prices are unrealistic and I've not only lost the job but I worry that the client is going to be taken advantage of but how do you tell them without sound like you're not talking sour grapes.
2. You or your next contractor will have to pay to fix the poor workmanship
It’s bad enough when a homeowner hires a contractor who scams them. What’s worse is when a homeowner can’t afford to fix the mistakes that the contractor made. For example, if an electrician wires your home incorrectly, you and your family could be in grave danger. You can’t exactly leave the work as-is. In this situation, you must hire someone to fix their mistakes. The question then is how do you hire an expert if you’ve blown your budget on the fraud contractor? Who will pay to fix the job and protect you and your family? This is what one company had to say about it.
"Our experiences are always dealing with homeowners that have been taken in some way by poor workmanship from those in the underground economy. Afterwards, we struggle to get our money because the customer had already paid sometimes $4,000.00 to $5,000.00 cash for a bathroom renovation.
A lady called our office because she had someone come and install and bathroom in her basement; however, it was not working properly, so she called the city inspector in. Of course, nothing was to code. One of our team members went to check it out. It turned out that she had paid this “someone” $5,000.00 cash to “complete” her reno.
Our team member explained that we would have to jack hammer up the floor, take out everything that had been installed, re-install all the piping to code, and then reconfigure the bathroom. After we had completed the work and had final inspection we invoiced her. In the end we were out over $5,000.00 and we finally brought the issue to Small Claims Court.
In the end, we never received payment and had a lawyer’s bill of several thousand dollars. That is a huge amount of money for any small company. The lesson learned is to never take on a job where someone else had been paid but did not provide quality work unless you get all your money upfront."
It’s impractical for a contractor to request the full amount of a project before any of the work is completed—especially if the work could cost thousands of dollars to complete. It’s best for the contractor and homeowner to err on the side of caution before making or accepting large payments. Homeowners and contractors should do their homework and create a payment schedule based on work milestones. These milestones should be added to a written contract. Payments should only be made after each phase of the project outlined in the contract is completed.
3. The Client and Tradesperson could be at risk
Some people can be quite manipulative. One contractor admits, "those who ask for cash are almost as untrustworthy as any other tax-cheat. Once you pay them cash, your project is vulnerable."
The truth is that a contractor’s business could also be at risk when they work for a client who asks to pay in cash. Similarly, a homeowner’s project could be equally at risk for a scam when they pay a contractor in cash. At the end of the day, everyone should be wary of someone who insists on a cash transaction. Those who insist on paying cash may be doing so for illegal reasons. Do thorough research on any contractor who prefers cash only projects. Ask yourself if you want to do business with someone who isn’t ethical with their business practices.
I've had my own issues with clients who want to pay cash only, in the one instance I had painted an entire house and completed some repair work, the client gave me some of the money up front to cover the cost of paint but once the project was done she kept ignoring my calls and refused to pay up. Since I didn't have a contract taking her to small claims court or putting a lien on the house wasn't an option. So I've learned my lesson and I no longer will accept cash jobs since it puts me at risk as a contractor as well.
4. Trades people may have to welcome an auditor with open arms
Declaring sales and income tax is every small businesses responsibility. Keeping track of transactions and taxes can be more difficult for those who choose to work in cash. If a proprietor or company fails to report their taxes to the CRA, they could be at risk for fines, penalties, and jail time.
This contractor shares their friend’s GST audit experience:
"A friend of mine had all of their businesses audited. They had to pay for accounting fees. There were two auditors on site every morning for a month or two. So, they also had to pay for lost income opportunities. The auditors ended up discovering that the contractor owed about $200.00 in GST. Unfortunately, the audit cost them thousands of dollars."
5. You may think you’re not paying tax but your contractor may have charged you for it (to protect their business)
Contractors may not want to sacrifice business opportunities just because they have different taxation opinions than their clients. Some homeowners insist on paying cash because they want to save money and avoid paying taxes. But this can seriously threaten a contracting business’ standing with the CRA and the law; it can also destroy their reputation, and their business. Not every contractor is willing to sacrifice their business to appease a client, so they find a way around some issues.
Here’s how one contractor deals with clients who insists on brushing off taxes:
"When someone asks for a cash price, I inflate my estimate by 6% (GST plus the fuss of working in cash). Once they pay cash, the invoice is re-written, and the 6% is added onto the bill for taxes. The client thinks that they got a cash deal, but all taxes are paid."
6. You have no recourse if something goes wrong
Fly-by-night contractors exist and they are the types of people who make nightmares come true. These companies usually do business in cash and do not have any traceable work history.
It's important to use trades people or contractors with a traceable work history, numerous references, online reviews, and a contract ready for you to sign after they have assessed your property and given you a quote. In addition to all of this, the homeowner should also research the contractors' credentials such GST number and business license. Anyone who fails to have this information on paper or online is probably hiding something, and you shouldn’t get involved with them.
Traceable companies are much easier to grab a hold of in case your home improvement project starts going wrong. A written contract helps the homeowner gain legal recourse in case the company botches their project. If they have an online history and a traceable name, the client can always write an online review about the company to warn community members about potential threats as well as take legal action such as small claims court.
Reasons to Pay a little more for your reno
Contractors who run underground businesses typically fail to have liability insurance, Workers’ Compensation Insurance, as well as a business license. If they make an error during the project, then they are under no obligation to fix the problem; if a crew member gets hurt on your property, you may be responsible for their medical bills; and if they fail to abide by industry regulations, they probably won’t get penalized by their trade governing body. Protect your investments and your family. Forget about paying cash for your next home improvement project.
At Tara Construction although we may cost a little bit more than a cash job we can offer you reasonable rates and a 1-year guarantee on our workmanship. We are a bonded company with insurance and WCB to ensure both our workers and you are covered in case anything ever goes wrong. For us, our name is our fame and we want to ensure our clients trust us with their current project and any future work we might do for them as well as refer us to their friends and family so you know we are a company you can trust. Please feel free to call us at (403) 991-2813 if you would like to know more about our work experience, obtain references or have us take a look at your project.