Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
There is nothing like a cottage to create memories for the family that will last a lifetime. Just ask my good friends James and Kate.
They're very generous when it comes to inviting friends and family to their summer retreat to relax. Usually things go pretty well when guests come to stay at the cottage, but not always.
Last year, James invited a co-worker - call him Hal (not his real name) - to their cottage for a weekend. Hal brought with him a few relatives visiting from overseas.
The hardest thing to deal with was the very large dog they brought, who apparently had some type of digestive tract problem.
By the end of the weekend, this motley crew knocked over the shed and destroyed the bunkie.
At any rate, James and Kate will be spending about $8,000 this summer on cottage renovations. The good news?
The new home renovation tax credit (HRTC) can apply to a cottage (or any dwelling that can qualify as your principal residence).
THE TAX CREDIT
The HRTC can be worth up to $1,350 in federal tax savings when you file your 2009 personal tax return next year. The savings come in the form of a non-refundable tax credit and is based on eligible expenditures for work performed, or goods acquired, after Jan. 27, 2009, and before Feb. 1, 2010, under an agreement entered into after Jan. 27, 2009.
The tax credit can be claimed on eligible expenditures over $1,000 in aggregate, but not more than $10,000 in total. The credit is calculated as 15 per cent of those expenditures.
The HRTC is family-based, so that James and Kate (and their children under age 18) will be subject to a single limit based on their pooled expenditures.
Now, if they shared ownership of the cottage (or city home) with another family (perhaps James' brother, for example), then each family would be entitled to their own HRTC, which would effectively double-up the total expenditures that could be claimed on that jointly owned property.
Consider James and Kate. They are spending $2,000 to repair the shed, $2,000 to repair the bunkie, and $1,000 to replace carpet in the cottage (remember the dog with the digestive problem?).
While they are at it, they decided to spend $3,000 on building a new deck and to landscape the property, for total costs of $8,000.
James will claim $7,000 of costs ($8,000 less the first $1,000) on his 2009 tax return, which will save him $1,050 in taxes ($7,000 times 15 per cent). Any family member could claim this tax credit (or they could split it).
The Canada Revenue Agency (CRA) released a fact sheet on May 27 that is helpful in understanding the types of expenditures that will qualify.
These are expenditures "for renovations and alterations of an enduring nature and that are integral to the eligible dwelling or the land that forms part of the eligible dwelling."
That's right, landscaping costs can qualify.
The CRA has listed the following as examples of eligible costs: Renovating a kitchen, bathroom, or basement; new carpet or hardwood floors; building an addition, garage, deck, garden/storage shed, or fence; re-shingling a roof; a new furnace, woodstove, boiler, fireplace, water softener, or water heater; a new driveway or resurfacing a driveway; interior or exterior painting; window coverings directly attached to the window frame and whose removal would alter the nature of the dwelling; laying new sod; permanent swimming pools; fixtures (lights, fans); associated costs such as permits, professional services, equipment rentals and incidental expenses.
The CRA also gives examples of costs that will not qualify for the HRTC: Furniture, appliances, and audio and visual electronics; purchasing of tools; carpet or house cleaning; maintenance contracts (such as furnace cleaning, snow removal, lawn care and pool cleaning); financing costs.
Keep in mind that, to claim the HRTC, you need a contract in writing if you're hiring a contractor.
If you're doing the work yourself, you can still claim the HRTC for the cost of materials, but not your own labour.