2023-0965631E5 Mental functions & home accessibility tax credit

Principal Issues: 1. Whether expenses incurred to undertake certain renovations would be eligible for the home accessibility tax credit (HATC) in a given situation where the renovations are carried out to create a safe play and therapy area in one's basement for a child with a severe and prolonged impairment in mental functions. 2. Whether occupational therapy equipment that is mounted to the basement wall would be eligible for the HATC.

Position: 1. Question of fact - depending on whether the renovation or alteration is of an enduring nature and integral to the eligible dwelling, the expenses are qualifying expenditures, and all the other requirements under section 118.041 of the Act are met. Examples of qualifying renovations are given in the context of impairments in mental functions. 2. No.

Reasons: 1. The requirements in section 118.041 .of the Act. 2. Paragraph (a) of the definition of “qualifying expenditure” in subsection 118.041(1) excludes an outlay or expense to acquire property that can be used independently of the qualifying renovation.

Author: El-Kadi, Randa
Section: 118.041

XXXXXXXXXX                                                                  2023-096563
                                                                                          R. El-Kadi

May 1, 2023

Dear XXXXXXXXXX:  

Re: Home accessibility tax credit and home alterations for individuals with a severe and prolonged impairment in mental functions

We are writing in response to your email of February 27, 2023, in which you asked for clarification as to whether a renovation of your home basement in order to create a safe play and therapy area for your children with autism would be considered a “qualifying renovation” for the purpose of the home accessibility tax credit (HATC).

More specifically, you indicated that the children in this case were eligible for the disability tax credit, and the renovations consisted of removing walls or other components (including asbestos tiles on the ceiling and floor), drywalling, installing flooring and soft carpets, adding padded walls (for the children’s safety), adding occupational therapy (OT) equipment, including equipment that is mounted to the walls, and installing a bathroom so that parents would not need to bring the children up and down the stairs during daily occupational therapy and play sessions.

Our comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act (the Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The HATC allows “qualifying individuals” or “eligible individuals” to claim “qualifying expenditures” paid for “qualifying renovations” made to the individual’s “eligible dwelling” in Canada. For the 2022 and subsequent tax years, up to $20,000 in qualifying expenditures can be claimed in a given tax year, which results in a tax credit of up to $3,000 for that year.

The terms qualifying individual, eligible individual, qualifying expenditure, qualifying renovation, and eligible dwelling are all defined in subsection 118.041(1) of the Act and explained on the Canada Revenue Agency (CRA) webpage, titled “Line 31285 – Home accessibility expenses” at canada.ca/line-31285. As explained on the CRA webpage, to be a qualifying renovation under this provision, the renovation or alteration must be of an enduring nature and integral to the eligible dwelling (including the land that forms part of the eligible dwelling). The renovation must also meet one of the following conditions:

* allow the qualifying individual to gain access to, or to be mobile or functional within, the dwelling; or

* reduce the risk of harm to the qualifying individual within the dwelling or in gaining access to the dwelling.

As a general rule, items that retain a value independent of the renovation will not be considered integral to the eligible dwelling. Also, an item is not integral to the dwelling if it is unattached to the dwelling, or if it can be plugged in and removed without any damage or alteration to the dwelling. Conversely, items that are affixed to the dwelling and cannot be moved without altering or damaging the dwelling - or without altering their value or usefulness - would generally be considered integral to the dwelling. For example, fixtures cannot simply be unplugged, and they may require the removal of screws, nails, bolts, the detachment of plumbing, or the cutting and capping of hardwire.

Expenses paid for a qualifying renovation must also meet the definition of a qualifying expenditure in order to qualify for the HATC. Qualifying expenditures must be directly attributable to a qualifying renovation of an eligible dwelling, and can include the cost of labour and professional services, building materials, fixtures, permits, and equipment rentals used in the course of the qualifying renovation. A qualifying expenditure does not include an expense that is made or incurred primarily for the purpose of increasing or maintaining the value of the eligible dwelling. Also, a qualifying expenditure does not include an outlay or expense to acquire a household appliance, an electronic home-entertainment device, or property that can be used independently of the qualifying renovation.

It is a question of fact whether a specific expenditure is incurred with the primary purpose of increasing or maintaining the value of the eligible dwelling. Where the primary purpose for incurring an expense is to undertake a qualifying renovation, the expense will not cease to be a qualifying expenditure for the sole reason that it may increase the value of the eligible dwelling. Conversely, where the primary purpose for incurring an expense is to increase or maintain the value of the eligible dwelling, such an expense would not be considered a qualifying expenditure for the purpose of the HATC.

In our view, the cost of renovating a basement and adding a bathroom is typically the type of expenditure that is made for the purpose of increasing or maintaining the value of the eligible dwelling. However, where the facts of a situation appear to support the view that the primary purpose of the expenditure is to undertake a qualifying renovation, a claim under the HATC may be allowed, provided that all the conditions of the provision are met, up to the maximum allowable amount for the year.

Where the qualifying individual has a severe and prolonged impairment in mental functions, a qualifying renovation must be aimed at accommodating the individual’s particular needs, thus allowing the individual to be functional within the dwelling or, where applicable, reducing the risk of harm to the individual within the dwelling. The following are examples of qualifying renovations that may be undertaken based on the foregoing:

* adding light fixtures to hallways, stairways and closets, if poorly-lit areas evoke anxiety in the qualifying individual or present a safety concern;

* replacing light fixtures with dimmable fixtures to alleviate a qualifying individual’s oversensitivity and reaction to light or particular light wavelengths;

* soundproofing walls or muffling sounds with soft carpets to alleviate a qualifying individual’s oversensitivity and reaction to sounds;

* adding permanent wall-padding (e.g., custom pads with cut-outs for electrical outlets) or soft carpets for the qualified individual’s safety. Removable wall-padding is unlikely to be considered integral to the dwelling and, therefore is unlikely to qualify for the HATC;

* tearing down walls to enlarge a narrow corridor or passageway that causes the qualified individual to experience an overwhelming feeling of confinement; and

* fencing to secure a dwelling’s yard, or the permanent installation of a wired home security system to address issues of elopement. Ongoing monitoring costs by a security company are not eligible.

In the situation you described, while the removal of asbestos tiles on the ceiling and floor does not on its own qualify for the HATC, it may qualify, however, if done as part of a qualifying renovation – which seems to apply to the creation of a safe play and therapy area for your children. However, adding a bathroom to the basement is unlikely to be considered a qualifying renovation if it is done solely for convenience.

In terms of the wall-mounted OT equipment, we are of the view that expenses incurred to acquire such equipment are not considered to be a qualifying expenditure, given that the latter definition specifically excludes expenses “to acquire a property that can be used independently of the qualifying renovation.”

We trust that these comments will be of assistance to you.

Yours truly,

Lita Krantz, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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