2016 Ontario Budget
Chapter II: A Balanced Path to a Balanced Budget

Section C: Addressing the Underground Economy and Maintaining Tax Fairness

Underground Economy

Participation in the underground economy creates an unfair advantage for illegitimate businesses. When businesses fail to report their income for tax purposes or avoid meeting other regulatory obligations, consumer and worker safety is put at risk.

Since 2013–14, the government has made progress in fighting underground economic activities:

  • The Province held consultations with high-risk sectors, with a view to partnering with industry and gaining insight into how best to tackle the underground economy.

    The Tax Verification Program has been successful in verifying compliance with tax obligations for corporations seeking to do business with the provincial government. The government was able to work with non-compliant businesses to help them satisfy their tax obligations before starting work.

  • Through ongoing enhanced compliance-focused measures, including those that address underground economy activity in high-risk sectors, Ontario has generated over $930 million to date — a $330 million increase over the amount reported in the 2015 Budget.
  • The Province requires corporations to demonstrate compliance with federal and provincial taxes before receiving government procurement contracts. Since February 2014, the government has verified compliance for more than 2,200 contracts.
  • The Taxation Act, 2007, was amended to make the sale, use or distribution of electronic sales suppression devices an offence.

The Province is continuing to focus on underground economy activities in all high-risk sectors, and will continue to take concrete action to better support consumer and worker safety, as well as provide a level playing field for legitimate businesses.

Going Forward

As committed to in the 2015 Ontario Economic Outlook and Fiscal Review, Parliamentary Assistant Laura Albanese has been holding consultations with the residential construction industry on issues related to the underground economy. Ontario remains committed to continuing the conversation with this important sector with a view to supporting legitimate contractors and uncovering illegitimate activity.

Stemming from these consultations, Parliamentary Assistant Albanese has submitted a draft interim report to the Minister of Finance, “Addressing Ontario’s Underground Economy in the Residential Construction Sector,” recommending actions the Province could take to achieve a level playing field where all businesses play by the rules.

In line with these recommendations, the Province is prepared to move forward with:

  • Extending its residential roofing pilot project for an additional two years and examining opportunities to expand its scope beyond roofing to other areas of residential construction. The residential construction sector has taken note of the pilot’s efficacy in delivering an integrated government approach.
  • Developing a public awareness campaign that will seek to educate the public on the risks and potential liabilities associated with participation in the underground economy.
  • Launching specialized audit teams to focus on sectors that are at high risk of underground economic activity, in partnership with the Canada Revenue Agency. These teams will consist of specialized auditors who will use advanced analytics and innovative enforcement tools to ensure everyone plays by the rules.
  • 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.
  • Enable 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.

Since 2014, the Province has undertaken a successful underground economy-focused pilot project in the residential roofing sector.

This pilot project included multiple ministries and resulted in significant action to address unsafe activities typically associated with the underground economy, including:

  • Over 1,700 orders for compliance;
  • Nearly 250 prosecutions initiated; and
  • Over 550 information packages sent to homeowners and employers.

This pilot project also included a series of parallel, targeted inspections with the Canada Revenue Agency in summer 2015. In addition to the significant health and safety actions taken above, the pilot was successful in identifying instances of non-compliance with tax obligations.

Electronic Sales Suppression

In the 2015 Budget, the Province made the use, possession and distribution of electronic sales suppression technologies an offence. Since then, further progress has been made. The government has concluded consultations with industry and other stakeholders on preventing electronic sales suppression and identified possible actions the Province can take to address this concern without being overly burdensome to legitimate businesses.

Ontario remains committed to working with industry and other interested parties over the coming months as it considers solutions, including software-based approaches that ensure sales integrity without the need for a physical device at the point of sale.

Collaborating with the New Federal Government

Ontario recognizes that a strong partnership in addressing the underground economy is critical to the success of initiatives at both the provincial and federal levels. To this end, the Province will continue to seek opportunities to partner with the new federal government to further ensure legitimate businesses in Ontario continue to thrive.

Contraband Tobacco

Low-cost contraband tobacco undermines the health objectives of the Province’s Smoke-Free Ontario Strategy, results in less tobacco tax revenues for critical public services, and compromises public safety through links with organized crime.

The government remains committed to addressing contraband tobacco through a balanced approach of partnerships and compliance activities. The Smoke-Free Ontario Strategy is a central component of the Province’s approach to tobacco.

Ontario has successfully delivered on a number of key initiatives outlined in the 2015 Budget, and is building on these measures to take further action to address contraband tobacco.

  • The government successfully implemented raw leaf tobacco oversight during the 2015 growing year. To date in 2015–16, approximately $19 million in raw leaf tobacco sales was reported by registered producers, accounting for approximately 20 million kilograms of raw leaf tobacco. To further enhance its oversight, the Province amended the Tobacco Tax Act in December 2015 to:
    • Require tracking labels to be affixed to bales and packages of raw leaf tobacco;
    • Include fines and penalties related to non-compliance with these tracking provisions and raw leaf tobacco registration requirements; and
    • Strengthen record-keeping and reporting requirements, and enhance information-sharing.
  • A regulation prescribing labelling requirements for bales and packages of raw leaf tobacco and other requirements will be filed in time for the harvest season. The government will continue to monitor the results of its raw leaf tobacco oversight and propose future enhancements and amendments under the Tobacco Tax Act.
  • A dedicated contraband tobacco enforcement team has been established by the Ontario Provincial Police. The team will be focused on addressing the links between organized crime and tobacco and will seek to combat and eliminate sophisticated contraband tobacco networks across Ontario. Links have been made between organizations involved in tobacco smuggling and more serious illegal activity, such as drug and weapons trafficking. The government may build on this initiative in the future, based on results.
  • The government is also enhancing tobacco retail inspections by launching pilot projects with four public health units that will focus on seizing contraband tobacco and flavoured tobacco products. Working with select public health units, the Ministry of Finance and public health unit inspectors will be cross-designated under sections of the Smoke-Free Ontario Act and the Tobacco Tax Act, respectively, to identify and seize these products during retail inspections. The pilot projects will be operational in April 2016. Based on the results, future opportunities for cross-designation and additional locations will be considered.
  • To build on its commitment to reduce the supply of key tobacco product components to unlicensed manufacturers, the government is seeking opportunities to work with its federal and provincial counterparts to regulate key components such as acetate tow, which is used to create cigarette filters.

Next Steps

In addition to building on compliance measures outlined in 2015, the government is taking further action on the distribution and purchase of contraband tobacco within the province. Ontario is proposing immediate legislative amendments that, if passed, would allow for the forfeiture of raw leaf tobacco. This initiative would create new deterrents to engaging in contraband tobacco distribution. In addition, the Province will examine the potential expansion of forfeiture provisions within the Tobacco Tax Act.