Construction industry’s underground economy steals billions every year

‘Time to stand up and speak out,’ says Canadian carpenters’ union president

The United Brotherhood of Carpenters (UBC) held its 2022 Tax Fraud Days of Action (April 11-16) last week to raise awareness among Canadians about construction industry tax fraud.

The Winnipeg-headquartered UBC is not alone in complaining about the construction industry tax fraud phenomenon.

Construction tax fraud

United Brotherhood of Carpenters Canada president Jason Rowe.

In Canada, government taxation authorities at the federal and provincial levels have maintained for years that the highest levels of tax evasion and tax fraud they deal with take place consistently within the construction industry sector.

“The underground economy is thriving in Canada, especially in the construction industry, stealing billions of dollars every year,” says Jason Rowe, vice-president of the UBC’s Canadian district. “Tax fraud is robbing honest and hardworking Canadians and their families of the services they have worked for and deserve,” he maintains.

Evading responsibilities

The UBC says communities and Canadians suffer as funding for essential programs and infrastructure is lost to dishonest contractors who operate in the underground economy, while evading their tax responsibilities and breaking the law.

They say dishonest employers also intentionally misclassify workers as independent contractors or pay them in cash to ensure workers do not appear on official employer payroll records and are not covered by employment insurance and workers compensation.

According to the UBC, when employers shift their tax burden onto their employees, the employees are forced to pay their employer’s employment taxes, which places a substantial financial burden on working families.

Honest firms can’t compete

The UBC says construction industry tax fraud also punishes honest, fair-minded construction firms that cannot compete with fraudulent labour costs.

Statistics Canada says the underground economy accounted for $61.2 billion in economic activity in 2018 and that the most significant slice of Canada’s underground economy activity in 2018 was in the residential construction industry (26.2 percent or $16 billion).

The United Brotherhood of Carpenters points out that this represents billions of dollars in lost tax revenue that would otherwise be used to repair roads, bridges, schools, care for veterans, and fund other essential public programs.

Statistics Canada defines the underground economy as consisting of market-based economic activities, whether legal or illegal, that escape measurement because of their hidden, illegal or informal nature.

Impact on the economy

According to figures released by the federal agency in late 2020, the estimated gross domestic product (GDP) at market prices for overall underground economic activity in Canada reached $61.2 billion, or 2.7% of total GDP, in 2018.

The underground economy is thriving in Canada, especially in the construction industry

UBC’s Jason Rowe

However, the agency goes on to say that the Canadian underground economy decreased 0.8% in real terms in 2018 on a year-over-year basis, compared with a year-over-year growth of 1.9% in 2017.

Although the underground economy data published nearly two years ago pre-dated the COVID-19 pandemic, they provided an important benchmark to measure the full effect of the pandemic on the Canadian economy.

Residential construction

In 2018, four industries accounted for more than half of underground economic activity: residential construction (26.2%), retail trade (12.3%), finance, insurance, real estate, rental and leasing and holding companies (10.3%), and accommodation and food services (9.1%). These industries have been the main contributors to underground economic activity in Canada since this study began in 1992.

Wages and undeclared tips Of the $61.2 billion in unreported income in 2018, the largest share went to employees (42.4%) in the form of labour compensation. Wages that are not accounted for in payroll records and tips on undeclared transactions were $26.0 billion, equivalent to 2.3% of official compensation of employees.

The remaining portion of underground income went to unincorporated business owners (28.6%) and incorporated business owners (26.1%).