Multigenerational Home Renovation Tax Credit: A Complete Guide

In today's evolving housing landscape, multigenerational living is becoming increasingly common. Families are seeking ways to accommodate aging parents or relatives with disabilities, while also maintaining privacy and independence. The Canadian government has recognized this trend and introduced a valuable incentive to support these efforts: the Multigenerational Home Renovation Tax Credit (MHRTC).

The Multigenerational Home Renovation Tax Credit (MHRTC) is a refundable tax credit designed to assist families with the costs of renovating a home to create a self-contained secondary unit. This secondary unit must be intended for a senior or an adult eligible for the disability tax credit, allowing them to live with a qualifying relative. This article provides a comprehensive overview of the MHRTC, its eligibility requirements, and how to claim it.

What is the Multigenerational Home Renovation Tax Credit (MHRTC)?

The MHRTC is a refundable tax credit, meaning it can reduce your tax payable and potentially result in a refund. Introduced in the Federal 2022 Budget, it became effective for expenses incurred in 2023 and later. It specifically targets renovations or alterations designed to establish a secondary dwelling unit within an existing home. This unit enables a "qualifying individual" (a senior or a person with a disability) to reside with a "qualifying relation" (a close family member).

Calculate your taxes with our free tax calculator.

Use our IRPF 2024 calculator to quickly calculate your tax refund or the amount you owe.

Calculate >

Amount of the Multigenerational Home Renovation Tax Credit

The MHRTC applies to the total qualifying expenditures of an eligible individual. It covers up to $50,000 in expenses for each qualifying renovation completed within a tax year. If multiple eligible individuals contribute to the renovation, they can split the $50,000 maximum. If an agreement on the split cannot be reached, the Minister may determine the allocation.

The credit is calculated at the lowest personal tax rate, which is 15%. Therefore, the maximum tax reduction available per year is $7,500 (calculated as $50,000 x 15%). It is important to note that only one qualifying renovation can be claimed during an individual's lifetime. The MHRTC is claimed on federal Schedule 12 of your tax return.

Interaction with Other Tax Credits: Medical Expense Tax Credit (METC) and Home Accessibility Tax Credit (HATC)

It's crucial to understand that if an expense qualifies for both the MHRTC and either the Medical Expense Tax Credit (METC) or the Home Accessibility Tax Credit (HATC), you cannot claim it under both. If you've already claimed the expense under the METC or HATC, it's ineligible for the MHRTC. You must choose the credit that provides the greatest benefit.

Who Qualifies for the MHRTC?

To claim the MHRTC, specific criteria must be met by both the individual benefiting from the renovation (the "qualifying individual") and the individual claiming the credit (the "eligible individual"). Understanding these roles is essential.

Qualifying Individual

A "qualifying individual" is the person who will reside in the newly created secondary unit. This individual must meet *one* of the following conditions:

• They must be 65 years of age or older before the end of the renovation period taxation year.
• They must be 18 years of age or older before the end of the renovation period taxation year and be eligible to claim the disability tax credit at any point during that renovation period taxation year.

Eligible Individual

An "eligible individual" is the person claiming the MHRTC on their tax return. This person must meet specific conditions related to residency and relationship to the qualifying individual. An eligible individual, in relation to an eligible dwelling for a renovation period tax year, must meet one of the following:

They ordinarily reside, or intend to ordinarily reside, in the eligible dwelling within 12 months after the end of the renovation period, and who is:

• a qualifying individual;
• A qualifying individual who has no income.
• the cohabiting spouse or common-law partner of a qualifying individual at any time in the renovation period taxation year; or
• a qualifying relation of a qualifying individual.
• An individual who is a qualifying relation of a qualifying individual, and owns the eligible dwelling or is the beneficiary of a trust that owns the eligible dwelling.

Qualifying Relation

A qualifying relation is closely tied to the definition of the "eligible individual". A "qualifying relation" of a qualifying individual means an individual who:

• is at least 18 years of age before the end of the renovation period taxation year; and
• at any time in the renovation period tax year is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of either the qualifying individual or the cohabiting spouse or common-law partner of the qualifying individual.

What are Qualifying Expenditures?

"Qualifying expenditures" are the costs directly linked to the qualifying renovation of the eligible dwelling. These costs must be incurred before the end of the renovation period. Examples include:

• Costs of goods or services directly related to the renovation.
• Costs for required permits.
• Costs of renting equipment necessary for the renovation.
• However, it's crucial to be aware of costs that are not considered qualifying expenditures. These include, but are not limited to:
• The cost of appliances.
• Home entertainment devices.
• Expenses for recurring services like housekeeping, security monitoring, gardening, or outdoor maintenance.
• Financing costs associated with the renovation.
• Goods or services provided by someone not dealing at arm's length (e.g., a close relative), unless they are registered for GST/HST.
• Costs that have been reimbursed.
• Costs that are not supported by receipts.
• Costs that have been claimed under the Medical Expense Tax Credit and/or the Home Accessibility Tax Credit.

What is a Qualifying Renovation?

A "qualifying renovation" is the core of the MHRTC. It defines the type of work that is eligible for the credit. A qualifying renovation has two key characteristics. It needs to be:

Of an enduring nature and integral to the eligible dwelling. This means the renovation must be a permanent and substantial improvement to the property, not a temporary or easily removable alteration.

It must enable the qualifying individual to live in the dwelling by creating a secondary unit within the dwelling, for the qualifying individual or the qualifying relation.

The Canada Revenue Agency (CRA) has clarified in TI 2023-0960671E5 that the MHRTC can be used for the new construction of accessory dwelling units, such as a carriage house or laneway house. Further, in September 2023, it was confirmed that the MHRTC could even be used toward the construction of a new dwelling, provided all other eligibility criteria are met.

What is an Eligible Dwelling?

An "eligible dwelling" is the property being renovated. There are specific requirements:

• It must be a housing unit located in Canada. This can include a share of the capital stock of a co-operative housing corporation if acquired solely for the right to inhabit a housing unit owned by the corporation.
• It must be the principal residence of the qualifying individual at any time in the tax year. A housing unit is generally considered a principal residence if it is ordinarily inhabited, or expected to be ordinarily inhabited, within that tax year by the qualifying individual, and it is owned (jointly or otherwise) by the qualifying individual or their spouse/common-law partner.
• Although a person can have only one principal residence at a time, there are situations, for example in the case of a move, where a person could have two principal residences in the year. In this case, the expenses apply to the total cost of qualifying expenses for both residences, not per residence.
• If the qualifying individual doesn't own a principal residence, a dwelling can still be considered eligible if it's the principal residence of an eligible individual related to the qualifying individual, *and* the qualifying individual ordinarily lives in that dwelling with the eligible individual.
• If part of the eligible dwelling is used to earn business or rental income, only the expenses related to the personal-use areas can be claimed.

Impact on Principal Residence Exemption

A critical consideration when creating a secondary unit is the potential impact on the principal residence exemption. Building an accessory dwelling, carriage house, laneway house, or a suite with a separate entrance might make that portion of the property ineligible for the principal residence exemption. This is a complex area, and it's strongly recommended to consult with a tax professional to understand the implications for your specific situation. Refer to TI 2024-1009501E5 for more information from the CRA.

Furthermore, Goods and Services Tax/Harmonized Sales Tax (GST/HST) may be payable on the value of a new laneway home when it is first rented on a long-term basis. This is another important tax implication to consider.

How to Claim the MHRTC

To claim the MHRTC, you must complete Schedule 12, "Multigenerational Home Renovation Tax Credit," which is part of your federal income tax return. The calculated credit amount from Schedule 12 is then entered on line 45355 of your return.

Conclusion

The Multigenerational Home Renovation Tax Credit (MHRTC) is a valuable financial incentive for Canadians supporting multigenerational living. By understanding the eligibility criteria, qualifying expenditures, and potential tax implications, families can effectively utilize this credit to create comfortable and accessible living spaces for their loved ones. Remember to keep detailed records of all expenses and receipts, and consult with a tax professional if you have any questions or uncertainties, especially regarding the principal residence exemption.

Are you considering a renovation to accommodate multigenerational living? Explore how the MHRTC might help you achieve your goals!

If you want to know other articles similar to Multigenerational Home Renovation Tax Credit: A Complete Guidey ou can visit the category Tax Deductions.