Principal Issues: 1. Whether the nephew or niece's spouse or common-law partner of a qualifying individual can qualify as a qualifying relation for the purposes of the multigenerational home renovation tax credit; 2. Whether the secondary unit is a separate housing unit for the purposes of the principal residence exemption; 3. Whether a taxpayer who benefited from the MHRTC stays eligible to the tax credit if the housing unit is sold to his parents the following year.
Position: 1. No; 2. Question of fact. In the situation described, likely yes; 3. Yes.
Reasons: 1. The wording of the Act; 2. See below; 3. The wording of the Act.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 10 OCTOBER 2024
2024 APFF CONFERENCE
9. Multigenerational Home Renovation Tax Credit and principal residence exemption
The 2022 Federal Budget proposed the addition of a new tax credit for the renovation of multigenerational homes. This new refundable credit, which is provided for in section 122.92, provides tax assistance when qualifying expenditures are incurred for qualifying renovation work. In particular, the work must be undertaken to enable the qualifying individual to reside in the dwelling with a qualifying relation of the qualifying individual by establishing a secondary unit within the dwelling for occupancy by the qualifying individual or the qualifying relation. For those purposes, a secondary unit is defined as, among other things, a self-contained housing unit that has a private entrance, kitchen, bathroom and sleeping area.
Furthermore, in the Supplementary Information on the tax measures in the 2022 Budget, the Department of Finance defined a qualifying relation as follows:
“For the purposes of this credit, a qualifying relation, in respect of an eligible person, would be an individual who is 18 years of age or older at the end of the taxation year that includes the end of the renovation period and is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the eligible person (which includes the spouse or common-law partner of one of those individuals).” (footnote 1) (our emphasis)
However, the definition of “qualifying relation” in subsection 122.92(1) does not seem to reflect such a result. Instead, paragraph (b) of that definition provides that a qualifying relation is, at any time in the renovation period taxation year, 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 (as defined in section 122.6) of the qualifying individual. Even applying the deeming rules set out in subsection 252(2) with respect to relationships, it appears that the spouse of a nephew or niece would not be a qualifying relation, contrary to what was stated in the Budget.
Finally, for the purposes of the principal residence exemption, the CRA's position, notably in Technical Interpretation 2002-0143085, (footnote 2) is that only one unit in a building (for example, a duplex) can qualify as a principal residence for the purposes of that exemption, where there are separate and self-contained units.
Questions to the CRA
(a) Can the CRA confirm whether the spouse of a nephew or niece of a qualifying individual qualifies as a qualifying relation for purposes of the Multigenerational Home Renovation Tax Credit?
(b) Suppose that an individual incurs qualifying renovation expenditures to create a secondary unit (Unit B) to house a qualifying individual. When the work is completed in 2024, the secondary unit represents 20% of the area of the entire building (which includes Unit A, occupied by the individual, and Unit B, occupied by the qualifying individual). Can the CRA clarify whether 100% of the building will still qualify as a principal residence for purposes of the principal residence exemption or whether the secondary unit created will result in the individual being able to designate only one of the two units as a principal residence?
(c) A taxpayer took advantage of the Multigenerational Home Renovation Tax Credit for renovations to the individual’s home that met all the criteria, including that of a separate unit for the taxpayer’s parents. In the short term (for example, in the following year), the taxpayer sold the unit to them for its FMV. Will the taxpayer still be eligible for the credit?
CRA Response to Question 9(a)
Although the Supplementary Information on the Budget 2022 tax measures implied that the spouse or common-law partner of a nephew or niece of a qualifying individual could be covered by the expression “qualifying relation”, the current legislation does not allow for this. The expression “qualifying relation”, which is defined in subsection 122.92(1), refers only to the nephew or niece of the qualifying individual and not to their spouse or common-law partner. In addition, the expanded meaning given to the terms “nephew” and “niece” in paragraph 252(2)(g) does not include their spouse or common-law partner. Consequently, a legislative amendment would be required so that the spouse or common-law partner of the nephew or niece of a qualifying individual could qualify as a qualifying relation.
CRA Response to Question 9(b)
An immovable is normally considered to be a single property unless it is legally subdivided into two or more separate properties. An immovable may nevertheless include one or more housing units for the purposes of the principal residence exemption.
Determining the number of units in a building for the purposes of the principal residence exemption is a question of fact that can only be resolved after an analysis of all the relevant circumstances.
In the example, the immovable includes, in addition to a primary unit (Unit A), a secondary unit (Unit B) within the meaning of subsection 122.92(1), which means that it is a unit which has a private entrance, kitchen, bathroom and sleeping area in addition to meeting any local requirements to qualify as a secondary dwelling unit. In addition, we understand that Unit A is ordinarily inhabited by the individual and Unit B is ordinarily inhabited by the qualifying individual.
Consequently, in the hypothetical situation described, the taxpayer will generally be able to designate only one of the two units as a principal residence provided that all of the other requirements set out in the definition of that expression in section 54 are satisfied.
CRA Response to Question 9(c)
Any person claiming the Multigenerational Home Renovation Tax Credit must be an eligible individual for a taxation year in which the renovation period for qualifying renovation work ends. The term “eligible individual” is defined in subsection 122.92(1). According to that definition, the eligible individual, if a qualifying relation of a qualifying individual, must ordinarily reside, or intend to reside, in the eligible dwelling within 12 months after the end of the renovation period in respect of a qualifying renovation or be the owner of the eligible dwelling. In the example submitted, the taxpayer (a qualifying relation) was the owner of the eligible dwelling in the year in which the taxpayer claimed the Multigenerational Home Renovation Tax Credit. If all the other conditions of section 122.92 were satisfied, the sale of the unit to his parents would not disqualify the taxpayer from eligibility for the credit.
Éric Paquin
October 10, 2024
2024-101548
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 CANADA, Department of Finance, A Plan to Grow our Economy and Make Life More Affordable, Tax Measures: Supplementary Information, April 7, 2022, p. 7.
2 CANADA REVENUE AGENCY, Technical Interpretation 2002-0143085, June 28, 2002.