11 February 2011 External T.I. 2010-0364121E5 - HRTC - Bankruptcy

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. Can a bankrupt individual claim the HRTC on certain expenditures incurred in renovating a house which he owned jointly with his mother for a part of the HRTC eligible period?
2. Can an individual claim the HRTC for the home renovation work he did and the expenses he incurred?

Position: 1. Yes, if all of the requirements for the HRTC are met by the bankrupt individual.
2. Yes for the cost of building materials, fixtures, equipment rentals, and building plans and permits, but no for the value of homeowner's labour.

Reasons: 1. Generally, paragraph 128(2)(f) of the ITA permits the bankrupt individual to claim the personal tax credits available in sections 118 to 118.9 of the ITA.
2. Section 118.04

XXXXXXXXXX 				2010-036412
					A. Mahendran
February 11, 2011 

Dear XXXXXXXXXX :

Re: Eligibility for the Home Renovation Tax Credit (HRTC)

We are responding to your correspondence, which we received on April 19, 2010, regarding the HRTC. In particular, you would like to know whether you or your spouse can claim the HRTC on certain expenditures incurred in renovating a house which you owned jointly with your mother during a part of the HRTC period. You have stated that you owned 10% of the house prior to transferring sole ownership to your mother.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we offer the following general comments regarding the HRTC.

The legislation regarding the 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 qualifying 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 is 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 qualifies for the HRTC.

In order for expenditures to qualify for the HRTC, pursuant to subsection 118.04(1) of the ITA, an eligible dwelling must exist at the time of the renovation or alteration. To be an eligible dwelling, among other things, a housing unit must be owned by an individual at the time of the renovation. The term "owned" is not defined in the ITA. In the common law jurisdictions, two forms of property ownership are recognized - legal and beneficial. Normally, "legal ownership" exists when title is transferred to, recorded in, registered in or otherwise carried in the name of a person. In contrast, the term "beneficial ownership" is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. Useful comments relating to the concepts of "beneficial ownership" and "legal ownership" can be found in Interpretation Bulletins IT-437R, Ownership of Property (Principal Residence), and IT-170R, Sale of Property - When Included in Income Computation. These publications are available on the Canada Revenue Agency (CRA) website at www.cra.gc.ca.

In determining whether a person has beneficial ownership, the CRA takes the position that possession, use and risk are primary attributes of beneficial ownership and considers such factors as the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations. Accordingly, the determination of whether a person beneficially owns a property is a question of fact that can only be determined after a review of all the documents and the circumstances applicable to a particular situation. In this regard, the intent of the parties as expressed in documents, their actions and handling of the property is vital for determining ownership.

Based solely on the information provided, we are of the view that prior to the transfer of your ownership, if your partly owned house was ordinarily inhabited by you, your spouse or your children, it will qualify as an eligible dwelling. However, after the transfer of sole ownership to your mother, the determination of whether you beneficially owned this property during the HRTC period is a question of fact that can only be made after a review of all the surrounding facts and circumstances. If you had either the legal ownership or the beneficial ownership of this property during the HRTC period, you would be eligible to claim the HRTC on any qualifying expenditures incurred in renovating this property. However, if you determine that you did not have beneficial ownership after the transfer of legal ownership to your mother then no expenditures incurred after this date will be eligible for you to claim the HRTC.

You also have indicated that you did four home renovation projects during the eligible period consisting of landscaping, addition of a garden shed, hardwood flooring, and enhanced heat distribution from a gas stove. These home renovation projects will generally be considered qualifying expenditures for the HRTC, if the other requirements of the HRTC are met.

You also mentioned that you installed the hardwood flooring yourself in December 2009. If the hardwood flooring was done while the house was your eligible dwelling, then the expenditures will qualify provided they are supported by acceptable documentation as outlined on the CRA web site at www.cra.gc.ca/HRTC. Such expenditures would include the cost of building materials, fixtures, equipment rentals, and building plans and permits, but would not include the value of your labour. Also, expenditures will not qualify if the related goods or services are provided by a person not dealing at arm's length with you, such as a brother, unless that person is registered for the goods and services tax/harmonized sales tax (GST/HST) under the Excise Tax Act.

Furthermore, you asked whether your spouse can claim the tax credit for the expenses you incurred in the eligible period. Eligibility for the HRTC is family based. Eligible family members include you and your spouse or common-law partner, and your children who are under 18 years of age at the end of 2009. The HRTC can be split among eligible family members but the total amount claimed cannot exceed the maximum allowable. If two or more families share the ownership of an eligible dwelling, each family can claim its own credit (i.e., each up to $1,350) that is calculated on its respective eligible expenses.

In your correspondence, you also stated that due to a XXXXXXXXXX , you were forced to declare bankruptcy on XXXXXXXXXX , and you fulfilled the terms of your bankruptcy and were discharged in 2009. You want to know whether a bankrupt individual can claim the HRTC. Subsection 128(2) of the ITA and section 118.95 of the ITA contain a number of special rules that apply in cases of personal bankruptcy. Pursuant to sub-paragraph 128(2)(f)(iv) of the ITA, a bankrupt individual can claim the HRTC. However, please note that pursuant to clause 128(2)(e)(iii)(A) of the ITA, a trustee in bankruptcy cannot claim the HRTC in the return filed which reports income arising from the dealings of the estate of the bankrupt individual.

We trust that the information provided is helpful.

Yours truly,

Steve Fron
Acting Manager
for Assistant Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch