3 February 2010 Internal T.I. 2009-0343591I7 - Home renovation tax credit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Do expenditures for the cost of the rebuilding of a new cottage after the old cottage has been demolished qualify as eligible expenditures for the home renovation tax credit (HRTC)?

2. Do expenditures for the cost of renovations to a house that is on an Indian reserve qualify as eligible expenditures for the HRTC?

Position: 1. No. 2 . Eligible expenditures for the house qualify, but not expenditures for the land that is not owned.

Reasons: 1.In this fact situation there is no housing unit that is owned by the individual and ordinarily inhabited by the individual, his or her current or former spouse or current or former common-law partner, or his or her children at any time after January 27, 2009, and before February 1, 2010, therefore, there is no eligible dwelling for a qualifying renovation to take place. 2. Land whether on an Indian reserve or elsewhere, that is not owned by the individual is not part of the eligible dwelling. This fact alone does not disqualify a housing unit from qualifying as an eligible dwelling.

February 3, 2010

	Vancouver Island TSO            		Income Tax Rulings Directorate
	1415 Vancouver St.              		Ontario Corporate Tax Division
	Victoria, B.C. V8V 3W4                   	Nancy Shea-Farrow
                                                905-721-5226
	Attention : Michael Strangeway
                  Outreach Coordinator		2009-034359
	      Taxpayer Services and Debt Management

Home Renovation Tax Credit

This is in response to your e-mail that was received on September 28, 2009 regarding the home renovation tax credit (HRTC). You have two enquiries which are listed below.

1. An individual demolished his cottage and has been slowly rebuilding it. In 2008 he poured a new foundation. In 2009 he is doing the framing. This year he will finish the inside of the cottage. You ask if any of the expenditures for the renovations of the cottage qualify as eligible expenditures for the HRTC?

2. An individual lives on an Indian reserve. Your understanding is that the individual owns the house but not the land that it sits on. Your question is can expenditures for renovations to a house that is on an Indian reserve qualify as eligible expenditures for the HRTC?

OUR COMMENTS:

The legislation regarding the new HRTC has been enacted and is contained in section 118.04 of the Income Tax Act (ITA). The HRTC provides individuals with a temporary 15% non-refundable income tax credit on eligible home renovation expenditures for services received or goods acquired, after January 27, 2009, and before February 1, 2010. However, expenditures for services received or goods acquired under agreements entered into before January 28, 2009, do not qualify for the HRTC. Taxpayers can claim this credit for the 2009 tax year on eligible expenditures exceeding $1,000, but not more than $10,000, which will result in a non-refundable tax credit of up to $1,350.

Under section 118.04 of the ITA, expenditures qualify for the HRTC if they are directly attributable to a renovation or an alteration of an eligible dwelling, including land that forms part of the eligible dwelling, and if the renovation or alteration is of an enduring nature and is integral to the eligible dwelling. Such expenditures include the cost of labour and professional services, building materials, fixtures, equipment rentals, and permits.

An eligible dwelling is a housing unit located in Canada that is owned by the individual, at the time of the renovation, and ordinarily inhabited by the individual, his or her current or former spouse or current or former common-law partner, or his or her children at any time after January 27, 2009, and before February 1, 2010. Therefore, any housing unit that an individual owns and uses personally, including a home and a cottage, qualifies for the HRTC.

The determination of whether a particular expenditure will meet the criteria outlined in section 118.04 of the ITA is a question of fact.

Rebuilding a cottage

An eligible dwelling must exist at the time of the renovation or alteration in order for expenditures to qualify for the HRTC. To be an eligible dwelling a housing unit must be owned by an individual and ordinarily inhabited by the individual, his or her current or former spouse or current or former common-law partner, or his or her children at any time after January 27, 2009, and before February 1, 2010.

Paragraph 5 of Interpretation Bulletin IT-120R6, Principal Residence, dated July 20, 2003, discusses the requirement of ordinarily inhabited.

Paragraph 11 of IT 120R6 also discusses the issue of ordinarily inhabited with respect to the construction of a housing unit on vacant land with respect to the term principal residence. It states that, "If a taxpayer acquires land in one taxation year and constructs a housing unit on it in a subsequent year, the property may not be designated as the taxpayer's principal residence for the years that are prior to the year in which the taxpayer, his or her spouse or common-law partner, former spouse or common-law partner, or child commences to ordinarily inhabit the housing unit...."

A qualifying renovation by an individual, at any time, is defined to be a renovation or alteration, of a property that is at that time an eligible dwelling of the individual or of a qualifying relation in respect of the individual, that is of an enduring nature and that is integral to the eligible dwelling.

In the case of a cottage that has been demolished, the housing unit has been disposed of. This is supported by the Supreme Court of Canada decision in The Queen v. Compagnie Immobiliere BCN Limitee 79 DTC 5068 that stated that the demolition of a building constitutes a disposition. In the present case, a new housing unit is in the process of being built, it is not a renovation or alteration of an existing housing unit.

In this fact situation there is no housing unit that is owned by the individual and ordinarily inhabited by the individual, his or her current or former spouse or current or former common-law partner, or his or her children at any time after January 27, 2009, and before February 1, 2010, therefore, there is no eligible dwelling for a qualifying renovation to take place.

Home on land not owned

Section 118.04 of the ITA states that an eligible dwelling includes the land upon which the housing unit stands and any portion of the adjoining land to the extent that the land is less than 1/2 hectare (1.24 acres). Any portion of the land in excess of 1/2 hectare may also be considered part of the eligible dwelling if the individual establishes that the respective portion is necessary for the use and enjoyment of the housing unit. However, land, whether on an Indian reserve or elsewhere that is not owned by the individual is not part of the eligible dwelling. This fact alone does not disqualify a housing unit from qualifying as an eligible dwelling.

A housing unit that it is owned by the individual, at the time of the renovation, and ordinarily inhabited by the individual, his or her current or former spouse or current or former common-law partner, or his or her children at any time after January 27, 2009, and before February 1, 2010 would qualify as an eligible dwelling for HRTC purposes. Thus eligible expenditures incurred or made for a qualifying renovation to the housing unit would qualify for the HRTC. However, any expenditures made to renovate or alter the land would not qualify for the HRTC since it is not owned by the individual and is not part of the eligible dwelling.

We hope that these comments will be of assistance to you.

Nerill Thomas-Wilkinson
Acting Manager
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate