- 1. General
- 2. Determining whether a building has been substantially renovated
- 3. Examples
- 1. Multiple unit buildings
- 2. Mixed-use buildings
- 3. Examples
- Examples
- Examples
- Examples
- Example
Introduction
This bulletin sets out the Canada Revenue Agency’s (CRA) interpretation of the term “substantial renovation” as it relates to the GST/HST new housing rebate. It examines the meaning of the terms “substantial renovation” and “major addition” as they relate to the eligibility of individuals to claim the GST/HST new housing rebate. It also reviews how the concept of substantial renovation applies to various types of residential complexes, how the CRA views a building that is converted to a residential complex, and how to treat a major addition to a residential complex. Finally, this publication sets out the time limitations for claiming the GST/HST new housing rebate.
Even though the rebate is called the “new” housing rebate, individuals who substantially renovate their existing homes may be eligible to claim it (in addition to individuals who construct new homes or purchase them from builders).
It is the individual who owns the housing who is eligible to claim the rebate, whether this individual carries out the renovation him or herself, or engages a contractor to do the work. Further information on who qualifies for the new housing rebate, how to calculate the rebate amount, and how to apply for it is available in the guide (RC4028), GST/HST New Housing Rebate.
While this bulletin deals with individuals who substantially renovate or add a major addition to their existing home, or convert a non-residential property into a personal residence, the meaning of the terms “substantial renovation” and “major addition” is also significant to others who are involved in house construction and renovation such as builders and landlords. Detailed information for builders and landlords is available in GST/HST Memorandum 19.2, Residential Real Property , GST/HST Memorandum 19.3, Real Property Rebates , and the guide (RC4231), GST/HST New Residential Rental Property Rebate .
Substantial renovation
1. General
The new housing rebate applies to the purchase, construction or substantial renovation of a residential complex. A residential complex is a building or part of a building that includes one or more residential units. Examples include a detached or semi-detached house, a multi-unit apartment building, a residential condominium unit, and a bed and breakfast establishment where it is used primarily (generally meaning more than 50%) as the individual owner’s place of residence or that of a relation Footnote 1 . A residential complex does not include a hotel or motel room, a boarding house, an inn or any similar premises if all or substantially all (90% or more) of the rentals is for fewer than 60 days.
A residential complex that has been substantially renovated is generally afforded the same GST/HST treatment as a newly constructed residential complex, including eligibility for the new housing rebate. Extensive modifications must be made to meet the definition of substantial renovation.
Pursuant to subsection 123(1) of the Excise Tax Act (the Act), the term “substantial renovation” of a residential complex means:
the renovation or alteration of a building to such an extent that all or substantially all of the building that existed immediately before the renovation or alteration was begun, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced where, after completion of the renovation or alteration, the building is, or forms part of, a residential complex.
In other words, a substantial renovation is considered to have taken place where all or substantially all of the interior of a building, with the exception of certain structural components (the foundation, external walls, interior supporting walls, roof, floors and staircases), has been removed or replaced.
Only certain renovations are taken into account when determining whether a building has been substantially renovated. Once this determination is made, certain other costs may be included in the rebate claim. To qualify for the rebate, such expenditures:
- must relate to the renovation project that resulted in the substantial renovation of the building; and
- must relate to an improvement to the building. An improvement to a residential complex is generally anything that is affixed to the land or the building. An improvement would include, for example, a door, shelving or an attached deck, but would not include furniture, freestanding appliances or throw rugs.
2. Determining whether a building has been substantially renovated
The definition of substantial renovation sets out the following requirements that must be met before a residential complex is considered to be substantially renovated (these requirements are explained in detail below):
(i) all or substantially all,
(ii) of the existing building,
(iii) must be removed or replaced.
This definition also lists certain structural elements (foundation, external walls, etc.) that are not required to be removed or replaced. These structural elements are discussed under the subheading “excluded elements”.
(i) all or substantially all
This requirement addresses how much of the building has to be renovated. The definition of substantial renovation describes this as “all or substantially all of the building that existed immediately before the renovation or alteration was begun”.
Generally, all or substantially all is interpreted as meaning 90% or more. To meet this requirement, at least 90% of the building that existed before the renovations began must be renovated to some minimum degree. This determination applies to the interior area of the building.
Any fair and reasonable method is acceptable for determining whether all or substantially all of a building has been renovated. The following are typical methods:
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Square footage of floor space of the areas renovated compared to the total floor space of the building
For example, a house has 2000 square feet of floor space and renovations took place in all areas except for one 200 square foot room. Since the renovated area of 1800 square feet is 90% of the total area, the “all or substantially all” requirement has been met.
For example, a house has 2000 square feet of floor space and 5000 square feet of interior wall space, for a total of 7000 square feet. Renovations took place throughout the building except for one room that has 300 square feet of floor space and 800 square feet of wall space for a total of 1100 square feet. Therefore, 5900 square feet (7000 – 1100), or 84% of the 7000 square foot house, was renovated. This does not meet the “all or substantially all” requirement.
The method used must be fair and reasonable in the circumstances. For instance, if one room represented half the area of the building and it was not renovated, it would not be fair and reasonable to use the number of rooms as a method. This does not mean that the rooms have to be the same size, but the size of any one room should not distort the result.
Neither the cost of the renovations nor the fair market value of the improvements made is an acceptable basis for determining whether the “all or substantially all” requirement is met. This requirement is based on the actual physical renovations to the building rather than the cost or value of such renovations.
(ii) of the existing building
As the definition of substantial renovation stipulates, it is the “building that existed immediately before the renovation or alteration was begun” that must be substantially renovated. This means that additions to the existing building are generally not taken into account in determining whether there is substantial renovation. More detailed information on this topic is found under the heading Major additions.
For example, a 2000 square foot bungalow is being renovated and part of the project involves adding an attached 300 square foot bedroom. In determining whether all or substantially all of the building has been renovated, the addition is ignored. The test is whether 90% of the existing 2000 square foot bungalow has been substantially renovated. If it is determined that the existing building has been substantially renovated, any tax related to the costs of the addition will be eligible for the new housing rebate.
Only habitable areas of a building should be taken into account when determining whether the building has been substantially renovated. In addition to the main floor(s) living areas, habitable areas include finished basements and finished attics. A guest bedroom over a detached garage is also an example of a habitable area.
Habitable areas do not include garages, parking areas, crawl spaces, or any areas set aside for the placement of equipment for the heating of, or the supply of water, gas, or electricity to, the complex. Such areas are ignored in determining whether the minimum requirements of the definition of substantial renovation are met.
The CRA would not consider a partially completed basement that has, for example, roughed-in plumbing and partially completed walls to be habitable. While it may be used for some purposes, the CRA would not consider it to be habitable, and therefore, it would not be included in determining whether the building has been substantially renovated.
While a basement would not necessarily require the same standard of comfort and amenities as the main floor of a house, to be considered habitable, it should at least have finished walls, a ceiling, flooring and electrical wiring. Similarly, to be considered habitable, an attic should have a permanent means of access such as a staircase or ramp as well as finished walls, a ceiling, flooring, and electrical wiring.
Work done in the above-noted areas so that they are partially complete (but not yet habitable) should be ignored in determining whether the minimum requirements of the definition of substantial renovation are met. For example, the main floor of a house measures 1000 square feet and 90% of this space is sufficiently renovated. In addition, this house has a 1000 square foot partially finished basement. In this situation the CRA would accept that all or substantially all of the building has been renovated. The 1000 square foot basement may be ignored since it is not yet habitable.
If, as part of a renovation project, a section of an unfinished basement were enclosed with finished walls and used, for example, as a family room, this area could be treated as a habitable area and taken into account in determining whether a sufficient area of the house has been substantially renovated.
Example
The area of the main floor of a house measures 1000 square feet, which is the same area as that of the unfinished basement. For the renovation project, 850 square feet of the main floor are completely replaced. As well, 700 square feet of the basement are completely renovated (finished walls, ceiling, flooring, electrical outlets) for use as a family room. In this example, the finished part of the basement may be used in determining whether all or substantially all of the house has been renovated as follows:
Area renovated : 850 + 700 = 1550 sq. ft.
Total area considered : 1000 + 700 = 1700 sq. ft.
Percentage renovated : 1550 ÷ 1700 = 91%
In summary in this example, whereas only 85% of the main floor was renovated, substantially all of the house has been renovated when the finished area of the basement is taken into account.
(iii) must be removed or replaced
This requirement addresses the type or nature of the renovations required to satisfy the definition of substantial renovation. According to this definition, at least 90% of the existing building must be removed or replaced with the exception of the foundation, external walls, interior supporting walls, floors, roof and staircases (referred to as the excluded elements).
Although the excluded elements may be ignored in determining whether there is a substantial renovation, under some circumstances removing or replacing excluded elements may be taken into account in determining that a substantial renovation has taken place. For example, it is not necessary to replace the floors since the floors are an excluded element. However, if the floors are replaced, this may be taken into account in determining that a building has been substantially renovated.
In a major renovation project, the interior of a building is essentially gutted. For example, the interior walls (other than supporting walls) are completely removed and the ceilings and floors are replaced; the heating, electrical and plumbing systems are replaced, including the ductwork; and the wiring and plumbing connections and all fixtures (e.g., plumbing and lighting fixtures and fixed appliances) are replaced as are the kitchen counters and cabinets. This type of renovation project constitutes a substantial renovation.
The following addresses what, at a minimum, must be removed or replaced to meet the requirements of the definition of substantial renovation. Generally, all interior walls (e.g., drywall) throughout the subject area (at least 90% of the building) would have to be removed or replaced (i.e., the walls stripped to the studs and refinished and replaced with drywall). In the case of older homes with plaster walls, covering the walls with new drywall would suffice. However, it would not be sufficient to remove or replace only the walls. The removal or replacement of the walls together with the removal or replacement of either the ceiling or floors throughout the subject area would be sufficient to meet the minimum requirement. It would not be necessary to replace the entire heating, electrical or plumbing systems to meet the minimum requirements for a substantial renovation.
“Removing or replacing” does not include repairing. For instance, patching drywall, painting surface areas, sanding a hardwood floor, or adding varnish or a plastic coating would not qualify as removing or replacing. Repairs are not taken into consideration in determining whether a substantial renovation has taken place and may not be included in a new housing rebate claim.
The renovations required to meet the minimum requirements of the definition of substantial renovation may vary depending on the type of room being renovated. As noted above, removing or replacing the walls together with either the ceilings or floors would qualify, regardless of the room being considered. For particular rooms, however, other possibilities may lead to a determination that a room has been substantially renovated. For example:
- In a typical kitchen, a large part of the wall area may be covered by cupboards and cabinets (i.e. cabinetry). The removal or replacement of the cabinetry (without removing the walls behind it) as well as the ceiling or floor and remaining wall area would generally be sufficient.
- In a typical bathroom, removing or replacing the walls and the fixtures (the toilet, tub, vanity) would be sufficient. Since the requirement is to remove or replace, it may be sufficient to remove and then reinstall the same fixtures in the bathroom in addition to removing or replacing the walls.
- In a typical bedroom or hallway, removing or replacing the drywall (or covering the plaster with drywall) and either the floor or the ceiling would usually be sufficient.
In determining whether substantially all of the building has been removed or replaced, much may depend on the method used in making the “all or substantially all” determination.
Example
A house has 10 rooms. Eight of the rooms are completely gutted and rebuilt. Of the remaining two rooms, the flooring in Bedroom A is replaced and the flooring and one wall are replaced in Bedroom B. Including these two bedrooms, over 90% of the total wall and floor space in the house is removed or replaced.
In this example, if the method used in determining the “all or substantially all” requirement is based on the number of rooms renovated, neither bedroom would have met the “removed or replaced” requirement (i.e., only eight of the 10 rooms would have met this requirement, short of the 90% requirement). However, if the method used is based on the percentage of the total floor and wall area of the house that is removed or replaced, the renovations to the floors in both bedrooms and the one wall in Bedroom B would be included in the area that is removed or replaced. Taking these areas into account, over 90% of the total wall plus floor space in the house is removed and replaced. Therefore, it is now reasonable to determine that the house has been substantially renovated.
If the amount of work done in a particular area is less than the minimum requirement described above, then the area may be treated as falling outside the “all or substantially all” subject area described above. Again, a building may be substantially renovated even though up to 10% of the building may undergo little or no renovation.
Example
A 5000 square foot house is undergoing renovations. In one room measuring 250 square feet, there are no renovations. In another room measuring 200 square feet, the renovations carried out do not meet the “removed or replaced” test. The remaining 4550 square feet of the house do, however, meet this test.
As a result, the house in this example is substantially renovated because at least 90% of it (i.e., at least 4500 square feet) is removed or replaced. This example illustrates that little or no renovation is required in these two rooms since they make up 10% or less of the area of the house.
(iv) excluded elements
The term “substantial renovation” means the renovation of a building to such an extent that all or substantially all of the building is removed or replaced, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, which are referred to as the excluded elements.
The excluded elements include the basic structural elements of the building. Since these elements are excluded from the definition of substantial renovation, it is possible to renovate a building substantially without modifying these elements (i.e., the parts or areas of the building that must be removed or replaced do not include these elements).
Although the excluded elements may be ignored when determining whether there is substantial renovation, the removal or replacement of these elements may sometimes be taken into account in determining that a substantial renovation has taken place. For instance, although the floors are an excluded element, replacing the floors may be taken into account in determining that a building has been substantially renovated. For example, if the walls and floors of a room are removed or replaced, this would be sufficient to consider that this area has met the minimum requirement. Similarly, the removal or replacement of the supporting walls and interior staircase areas may be taken into account.
3. Examples
Gordon T.
Mr. T.’s bungalow has a 2000 square foot main floor together with a 2000 square foot unfinished basement. Recently, Mr. T. carried out renovation work. He completely gutted and replaced three of the five rooms on the main floor as well as the hallways. The hallways are about the area of an average room. This renovated area totals 1400 square feet. The main floor had total wall space of 5500 square feet of which 3600 square feet were replaced. He also constructed a 900 square foot finished addition to the main floor, which included a 400 square foot dining room and a 500 square foot attached garage.
In the basement, he installed studs and drywall along the exterior walls, and added wiring and roughed-in plumbing. He framed in one 600 square foot room that had 800 square feet of wall area, and in this room, he finished the walls and ceiling, and added carpet so that it could be used as a family room. The rest of the basement is unfinished.
Gordon T. may use any fair and reasonable method in determining whether all or substantially all of the building that existed at the time the renovations began was removed or replaced. Generally, it would not be necessary to use more than one method. Here are examples of three different methods.
- Square footage of floor space of the areas renovated compared to the total floor space of the building
Area renovated:
Main floor + basement: 1400 sq. ft. + 600 sq. ft. = 2000 sq. ft.
Total floor space:
Main floor + basement: 2000 sq. ft. + 600 sq. ft. = 2600 sq. ft.
% of the building removed or replaced : 2000 ÷ 2600, which equals 77%
- Square footage of floor and wall space of the areas renovated compared to the total floor and wall space of the building
Main floor:
