- Taabish Masood
- Jul 21
- 7 min read
Updated: Jul 22
Beginner’s Guide to “Substantial Renovation” for GST/HST under Canada’s Excise Tax Act
Imagine renovating your home and then facing unexpected GST/HST liabilities. If you substantially renovate a residential property prior to selling it, renting it, or otherwise using it in a business (for example, offering it for short term rentals on AirBnB), the "substantial renovation" itself can trigger a significant GST/HST liability. This article explains how a "substantial renovation", which may result in an GST/HST liability, is different from a regular, non-substantial renovation which won't trigger the same GST/HST rules.
Take, for example, Sam’s family. Sam and his wife Jaclyn purchased a bungalow in Toronto in 2003 for $400,000. In 2022, they decided to renovate and sell the property. They added a second storey and a back addition, replaced the plumbing and electrical systems, and removed most of the interior walls. When they sold the renovated home in 2023 for $2.5 million, the Canada Revenue Agency (“CRA”) reviewed the file. If the renovation is considered a substantial renovation, Sam and Jaclyn could owe over $300,000 in GST/HST on the sale. If it is not considered substantial, their GST/HST liability would be zero.
Now consider Mohamed. He purchased an older detached home in Mississauga in 2021 and completed extensive renovations in 2022. These included replacing the kitchen, bathrooms, and all flooring and drywall on the main floor. Instead of selling, he decided to rent the home to long-term tenants. Because of the extent of the renovations, the CRA may consider the property to be substantially renovated. In that case, GST/HST may be payable under the self-supply rules, even though there was no sale. Mohamed could be required to calculate and remit tens of thousands of dollars in GST/HST to the CRA.
UNDERSTANDING SUBSTANTIAL RENOVATION
s.123(1) of Canada’s Excise Tax Act (“ETA”) defines “substantial renovation” as involving extensive work on a residential complex. It occurs when “all or substantially all” of the building’s interior (other than the foundation, external walls, floors, and certain structural elements) is either removed or replaced. The phrase “substantially all” is typically interpreted to mean at least 90% of the interior components of a residential complex.
The CRA and the courts interpret “substantial renovation” to mean a near complete gutting of the home’s interior. Essentially, this usually involves stripping the interior down to the studs in at least 90% of the pre-existing livable areas, excluding certain structural components such as the foundation and external walls.
s.123(1) of the ETA defines substantial renovation as:
“substantial renovation of a residential complex means the renovation or alteration of the whole or that part of a building, as described in whichever of paragraphs (a) to (e) of the definition ‘residential complex’ is applicable to the residential complex, in which one or more residential units are located to such an extent that all or substantially all of the building or part, as the case may be, other than the foundation, external walls, interior supporting walls, floors, roof, staircases and, in the case of that part of a building described in paragraph (b) of that definition, the common areas and other appurtenances, that existed immediately before the renovation or alteration was begun has been removed or replaced if, after completion of the renovation or alteration, the building or part, as the case may be, is, or forms part of, a residential complex;”
The definition in the ETA aims to provide clarity, however, leaves significant room for subjective interpretation.
The definition of substantial renovation is crucial for taxpayers since it determines the application of GST//HST to real property transactions. If a property undergoes substantial renovation, its sale is generally considered taxable supply, making it subject to GST/HST. This GST/HST is not an additional tax paid by the seller; rather, the buyer pays the GST/HST, and the seller collects and remits it to the CRA. However, if the buyer is an individual purchasing the property for personal use, they may be eligible for a GST/HST new housing rebate.
Conversely, if the renovation is not considered substantial renovation, its sale may be exempt from GST/HST. This classification also directly impacts other tax obligations, input tax credits, and access to certain rebates. Reach out to a Canadian tax lawyer for a better understanding of your eligibility for any of the above.
THE 90% RULE – PRACTICAL APPLICATION
At the preliminary stage, interpretation of what constitutes ‘substantial renovation’ is done by CRA auditors. The CRA’s GST/HST Technical Information Bulletin B-092 expands on this 90% threshold. According to the CRA, for a renovation to be considered substantial:
At least 90% of the property’s interior elements must be gutted or replaced.
Elements like the foundation, supporting walls, and certain structural components are excluded from this calculation.
CRA guidance further clarifies that minor cosmetic updates, such as new paint or refinishing floors, do not qualify as “removed or replaced.” To meet the threshold, the renovation must involve replacing major components, such as drywall, sub-flooring, plumbing, and electrical systems. For a room to count as renovated, CRA generally expects at least the wall surfaces and either the ceiling or flooring to have been fully replaced.
It is important to note that construction of a second story or a back extension is excluded from the calculation of the 90% threshold. Also notably excluded are spaces left untouched or cosmetically upgraded e.g., new paint, or minor flooring changes.
2437299 ONTARIO INC. V. THE KING 2023 TCC 165
What happens when the CRA characterizes a property as substantially renovated but the Taxpayer disagrees? The matter can be objected to and subsequently appealed to the Tax Court of Canada (“Tax Court”). The Tax Court in 2437299 Ontario Inc. v. The King examined a situation in which the CRA deemed a small bungalow to be substantially renovated and therefore, subject to GST/HST. The Taxpayer had purchased a small bungalow and renovated it. The Taxpayer had replaced the drywall in certain areas, had made two additions i.e., a second story and a back extension, and had minimally altered the previously unfinished basement.
Despite these significant changes made by the Taxpayer, the Tax Court found that the renovations fell short of the 90% threshold required to be classified as substantial. The Tax Court emphasized the importance of evaluating the scope of the original structure, rather than including new additions or areas left largely intact. This case confirms that even extensive renovations can fall short of being “substantial” if key parts of the original interior – subflooring or unfinished basements – are left intact.
This case also demonstrates that there is no bright-line test for substantial renovation. To decrease your chances of being arbitrarily denied a rebate, please reach out to a tax lawyer for a review of your eligibility.
PRACTICAL EXAMPLE
Taxpayers often wonder whether additions made to their residential properties will result in them being ‘captured under substantial renovation’ rules. Suppose a Taxpayer buys a single-story small bungalow with a basement that was built 25 years ago. The Taxpayer renovates the main floor to include an open-concept kitchen and living area. He upgrades the HVAC, electrical system and adds stucco to the walls. However, he leaves the structural elements of the property intact. He adds a back extension and constructs an entirely new second story with bedrooms and bathrooms. However, the Taxpayer only makes cosmetic improvements to the basement, leaving the original drywall and flooring just as he had bought it.
The above Taxpayer will wonder whether he may be captured by the substantial renovations rule in s.123(1) of the ETA. There are no straightforward answers for the Taxpayer. Albeit, based on the above facts, if the basement accounted for a large portion of the property’s square footage and remained largely unchanged, the Taxpayer may be in luck. Additionally, as articulated in 2437299 Ontario Inc. v. The King, the second story and back extension done by the Taxpayer should not be included in the 90% threshold.
WHAT MAY CONSTITUTE SUBSTANTIAL RENOVATION
It is important for taxpayers to note that despite the existence of CRA bulletins and tax court judgments, the determination of substantial renovation remains a matter of subjective interpretation. The first step is the CRA’s assessment of specific facts against its own criteria outlined in GST/HST Technical Information Bulletin B-092. The CRA tries to apply a square footage-based approach to the 90% test. It aims to assess based on the proportion of the original building’s interior that has been removed or replaced.
If a taxpayer disagrees with the CRA’s decision and has exhausted their objection, they may appeal the decision to the Tax Court. The following have been considered by the Tax Court to meet the criteria of ‘Substantial Renovation’:
The scope of work fundamentally alters the structure, layout or functionality of the property;
The extent of changes significantly replaces or modernizes the walls, sub-flooring, roofing, plumbing, electrical, and/or HVAC system;
Physical and structural renovations that change the core elements of the property, essentially creating something entirely new;
Whether the property was nearly “gutted”
Converting a commercial unit into a residential unit, since this usually leads to a reconfiguration and upgrading of the entire infrastructure;
Taxpayers should note that conversions from commercial to residential units are always deemed substantial renovations under s.190(1) of the ETA since the property’s use fundamentally changes.
AUTHOR’S VIEW: NEED FOR CLARIFICATION
The CRA bulletins and the Tax Court of Canada have provided some guidance on the issue of what constitutes substantial renovation. However, their adjudication of the matter gives us a non-exhaustive list of what may be deemed substantial renovation. Their criterion is also contingent on the subjective interpretation of the adjudicator (a CRA officer or a judge). Tax Court judgments like Whittall v. The Queen 2017 TCC 212 demonstrates that a house simply “Looked like new” is not a sufficient criteria to characterize the renovations as Substantial renovation.
Taxpayers may also find it difficult to quantify as a percentage, concepts that are normative i.e., renovations. This is because it is unlikely to accurately attribute a percentage to a renovation with certainty. The difference between an 85% renovation and a 91% renovation may neither be apparent nor easily ascertainable unless the CRA exclusively employs the square-footage analysis.
Another issue that needs to be addressed is where a taxpayer upgrades the HVAC system or electrical wiring system simply to comply with newly implemented building codes. There should be a legal dichotomy between what a taxpayer chooses to upgrade/replace and what a taxpayer must upgrade/replace to comply with new building codes.
Consequently, Courts may have to provide a more bright-line test that helps Taxpayers determine their GST/HST liability. Although the CRA GST/HST Technical Information Bulletin B-092 does provide a square footage analysis which includes an entire floor space analysis, room-by-room analysis and a wall space analysis. This could mean that even if 901 square feet of a 1000 square foot residential unit are renovated, it may trigger the substantial renovation rules in s.123(1). However, the Tax Court in 2437299 Ontario Inc. v. The King demonstrates that if the CRA characterizes 90.6% of a property as substantially renovated, their calculation must also account for areas that are left untouched by the taxpayer in the computation of their figure. It is important for Taxpayers to receive tax advice from Canadian tax experts to minimize their tax liability to the CRA.