HRTC explained

Last month I had the exterior of my home painted and took care of some much needed landscaping. But this time around, no more barefoot shoemaker; I’m following my own advice and taking advantage of a tax incentive – The Home Renovation Tax Credit (HRTC).

You too must remind your homeowner clients the home improvements they make in the next couple of months could result in tax savings.

The HRTC applies to improvements made to a property eligible for the principal residence exemption. That includes a house, condo, cottage or vacation property, as long as it isn’t primarily a rental property. Also, if a portion of the property is rented or used for business purposes (such as a home office), renovations in that portion won’t qualify.

In the case of a duplex or condominium, improvements to the owner’s unit as well as his or her share of eligible costs relating to the common areas of the building may qualify.

The credit is equal to 15% of eligible costs incurred in excess of $1,000, but not more than $10,000 [DASH] with a maximum credit of $1,350. And the costs must relate to improvements made after 27 January 2009 and before February 2010.

Eligible costs can be for materials, fixtures, equipment rentals, permits, labour, professional services and other expenditures that relate to renovations or alterations, but the improvement must be of an enduring nature and integral to the home.

As a result, regular maintenance costs such as lawn care, snow removal, sundry repairs and cleaning do not qualify; but re-shingling a roof, painting, a new furnace, updating electrical wiring, new flooring or landscaping would qualify.

The cost of new appliances, furniture, most draperies, rugs, window air conditioners or portable hot tubs don’t qualify. However, permanent shutters (and certain custom drapery), wall-to-wall carpeting, central air-conditioning systems, and permanent hot tubs or pools would qualify because these become a permanent part of home. Costs that form part of the purchase of a new home, including upgrades, will generally not qualify for the HRTC.

If you have handy clients who take care of their own home improvements, amounts paid for materials and renting equipment that might be used can likely be claimed, but the value of their personal labour and the cost of tools that may have been purchased for the jobs do not qualify for the credit. And money paid to a family member for home improvements will only qualify for the credit if that person is registered for GST or HST.

If your client owns more than one eligible property, the HRTC can be used for any or all of them, but only for total combined qualifying expenditures up to $10,000. Also remember, the credit must be shared by a family unit – the client, his or her spouse or common-law partner and any minor children.

Where a single home is owned jointly by individuals who aren’t part of the same family unit, for example a cottage owned by siblings, each owner can claim his or her own credit; so if they share $20,000 of renovation costs, they’ll each get a credit of $1,350.

The HRTC claim will be made with the 2009 tax return. Your clients will not have to submit receipts with their returns, but they should keep them in their records in case the CRA asks. The receipts should include the name and address of the vendor or contractor, the date of the agreement and the date the work was done or the product was sold, a description of the work or product, the address of the homeowner, the cost, and finally proof of payment.

Homeowners in Ontario and British Columbia have an additional incentive for taking care of home renovations in the next few months. Beginning July 1, 2010, harmonized sales tax comes into effect, and will increase the cost of various services relating to home improvements.

Gena Katz, FCA, CFP, an executive director with Ernst & Young’s National Tax Practice in Toronto. Her column appears monthly in Advisor’s Edge.