Renovating a property can be an exciting endeavor, whether it’s for personal enjoyment or as an investment. However, when it comes to tax implications, particularly under the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in Canada, understanding what constitutes a substantial renovation is crucial. The reason is because if you complete a substantial renovation, you now must charge GST/HST on the sale of the property unless an exemption applies. Let’s delve into the key criteria that define a substantial renovation for GST/HST purposes.
The Law
The Excise Tax Act defines substantial renovation in subsection 123(1) as renovating or altering a building to such an extent that all or substantially all of the building that existed before the renovation or alteration started, other than the foundation, external walls, interior supporting walls, floors, roof, and staircases (Excluded Elements) were removed or replaced, and after finishing the renovation or alteration the building is a residential complex.
All or Substantially All
The term “all or substantially all” is pivotal in determining the extent of renovation needed to qualify for GST/HST considerations. Essentially, it refers to the proportion of the existing building that must undergo renovation. While there’s no strict definition, it’s commonly interpreted as ninety percent or more. This percentage pertains to the interior space of the building before renovations commence. Methods for assessing this threshold may vary, but typically involve comparing the number of renovated rooms or calculating the renovated square footage against the total property area.
Canada Revenue Agency (CRA) provides examples which can be found here .
Of the Existing Building
When evaluating whether the ninety percent threshold has been met, the focus is on the existing building. This was underscored by Justice Hershfeld’s observation in Whittal v. Her Majesty The Queen, 2017 TCC 122, that substantial renovation, for tax purposes, necessitates a near-total overhaul of the premises.
Must be Removed or Replaced
For a renovation to qualify as substantial, at least ninety percent of the existing building must undergo removal or replacement. Notably, the Excluded Elements are exempted from this calculation. However, there are instances where these Excluded Elements might factor in, such as if they are themselves removed or replaced during the renovation process.
Major Additions
In some cases, adding to an existing property can contribute to its classification as substantially renovated. However, this requires the addition to significantly augment the size and functionality of the existing structure. The resulting complex should essentially be perceived as a new residential entity, with the original residence integrated into the expanded framework.
Conclusion
Navigating the nuances of GST/HST regulations concerning substantial renovations is essential for property owners and investors alike. By understanding the criteria outlined by the Canada Revenue Agency (CRA), individuals can ensure compliance while maximizing potential tax benefits. Whether embarking on a renovation project or considering the tax implications of property investments or sales, clarity on substantial renovation guidelines is important.
If you are being audited for a property sale or have already received a notice of assessment, call us today . We’re here to help!
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.