Guest Post By: Penelope Graham, Zoocasa
Warmer weather is finally upon us, and so too is the start of renovation season – as porches, roofs, and yards are no longer blocked by snow, Canadians jump at the opportunity to improve their humble abodes.
Renovating your home often comes with a hefty price tag; the good news is, depending on the scope of work and the end result, you could see some of the cash come back at tax time.
Here are a few tax considerations to keep in mind before you break out the tool box or call up a contractor.
Can You Use the GST / HST New Housing Rebate?
The GST / HST New Housing Rebate refunds up to $24,000 of provincial HST and $6,000 of federal GST paid on a newly-built home if the fair market value of the home is $450,000 or less upon completion. This can vary by province – in some, the rebate is only applicable to homes priced under this threshold while in Ontario it simply applies to the first $400,000 of the home’s value.
This rebate is usually utilized by buyers of brand-new builds, which, unlike resale real estate, are subjected to GST and HST. However, if you’re a homeowner who’s planning to completely overhaul your home with a gut renovation, this rebate could also work for you.
To be eligible, the renovation must be “substantial”, which the CRA defines as a minimum of 90% of the home’s interior being replaced or improved. Additions to the home, such as new rooms or porches, are not eligible for the rebate unless they increase its square footage by at least double, such as adding a second storey.
Homeowners may be wondering why they’d be taxed at all on a residence that they’re neither buying or selling. This is due to a concept called taxable self-supply: when a substantial renovation is completed, meaning either the owners have taken possession or leased it to another, the CRA considers the property to have been sold and repurchased at its market value, hence the tax bill. The rebate must be applied for within two years of the closing date or self-supply.
Deducting Expenses When Renovating for Rental
Renting out a portion of your home has increased in popularity in recent years – it can be an effective way to bring in extra income, and be used to offset the high cost of housing in Canada’s biggest cities, such as pricey houses for sale in Toronto, or Vancouver condos. For individual homeowners, this can make the prospect of converting a basement to a secondary rental suite all the more attractive – but there are some important tax pros and cons to keep in mind.
One large benefit is, as a landlord, the CRA allows you to deduct any “reasonable expense you incur to earn rental income”.
This includes the building costs to create the rental unit as well as “capital expenses” that improve its condition long-term, such as renovations. “Common expenses” such as furniture and equipment, insurance premiums, legal and accounting fees, management fees, and even loan interest can be eligible, as well as any advertising or marketing you choose to use when you sell your unit. If utilities are covered by the landlord, they can also be deducted.
However, you’ll need to report and pay income tax on all rental income earned – your net rental income will be the difference between this profit, minus any capital and common expenses deducted.
It’s also important to note that, when you change a portion of your home to a rental, it also changes the purpose of your home and its tax status upon its sale. In Canada, principal residences – homes primarily lived in by their owners – are completely sheltered from capital gains tax when they’re sold, meaning the seller gets to pocket any appreciation the property gained over time.
However, whether or not you’ll have to shell out more tax at sale time depends; if the majority of the home was used for your own living situation, the CRA will often allow you to still classify it all as a principal residence. If you move out of your home after you’ve renovated it for rental, however, you’ll need to calculate the portion of its ownership when it wasn’t considered your primary residence as well as the value it would have appreciated during that time frame, and pay tax on half of that profit, at your marginal tax rate.
The Home Accessibility Tax Credit
If you’re retrofitting your home to accommodate the needs of a senior aged 65 and up (either yourself or on behalf of another), or someone living with a disability, you can claim up to $10,000 in renovation expenses on your taxes under the Home Accessibility Tax Credit. Eligible expenses include:
- Grab bars and handrails
- Walk-in tubs or wheel-in showers
- Widening doorways for wheelchair accessibility
- Lowering cabinets
Ineligible expenses include
- Household appliances or home-entertainment devices
- Routine maintenance
- Housekeeping costs
Renovations that specifically improve mobility, such as ramps, may also be claimed under Canada’s Medical Expenses Deductions.
ENERGY STAR Rebates
Thinking of adding a few upgrades to lower your heating and AC bill? Depending on your province, there are many rebates available for replacing windows and doors, as well as upgrading to energy efficient appliances under the ENERGY STAR rebates program. Examples include the Ontario AffordAbility Program, which, depending on your household income and energy bill, will provide for free everything from LED bulbs and power bars to new kitchen appliances.
Penelope Graham is the Managing Editor of Zoocasa.com, a real estate company that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.