With the stage set for a fall federal election on October 19, 2015, the government has wasted no time in announcing election goodies to woo voters. Prime Minister Stephen Harper has promised to introduce a new renovation tax credit should he be re-elected. If you think the home renovation tax credit sounds familiar, you’re right: the Conservatives introduced a similar tax break (albeit on a temporary basis) back in 2009.
These days, a perfect storm of low interest rates and rising real estate values has Canadians spending money on home renovations like never before. In fact, we spent a record $63.4 billion in 2013 on home renovations. To put this into perspective, this is equal to 3.7 per cent of total Canadian GDP.
Check out our infographic: The Renovation Rookie’s Cheat Sheet>
How the Renovation Tax Credit Would Work
This tax credit would let taxpayers claim up to 15 per cent of costs related to permanent “substantial” renovations to homes, condos and cottages. Taxpayers would be able to claim renovation costs between $1,000 and $5,000, saving up to $600 a year.
Unlike previous tax breaks like income splitting and upping the TFSA contribution limit, which are argued to help only wealthier families, the Conservatives claims the home renovation tax credit will help every homeowner regardless of income. However, while the home renovation tax credit sounds great on paper, it does little to address the lack of affordable housing in big cities like Toronto and Vancouver. Renters who can’t afford to buy a home won’t be able to take advantage of this tax credit.
Can the Government Afford this Tax Break?
The Conservatives are introducing the renovation tax credit at a time when the Canadian economy is heading towards a mild recession. The Tories are hoping the tax credit will help jump start the economy and get Canadians spending again. While the tax credit will create jobs for professional trades people, it comes at a cost: the federal government is expected to take in $1.5 billion a year less in tax revenue.
With the Tories already bleeding red from previously introduced tax credits, don’t expect this tax break to come into effect anytime soon. Harper shied away from specifying a specific date the tax break would go live, but hinted that it would likely be in the middle of his next mandate (provided he gets re-elected). Despite a pledge to balance the budget, the federal government is expected to run a deficit this year. Our economy is still dealing with the aftermath of low oil prices.
Re-Introducing the Renovation Tax Credit
The last time this tax break was introduced was shortly after the sub-prime mortgage fiasco in the U.S., which saw markets plunge worldwide. The tax credit was aimed at boosting spending and creating jobs during the last recession. Over three million Canadians took advantage of the tax credit last time. This time, the Tories want to introduce the tax credit on a permanent basis. While it could help boost spending now, will it be worth less tax revenue over the long haul? That’s the real question voters need to ask themselves before heading to the polls this fall.
There is some concern from experts that the home renovation tax credit could add more fuel to the fire of red hot real estate markets like Toronto and Vancouver. The tax credit could encourage house flipping, although the tax savings won’t amount to much if you’re spending $100,000 or more on renovations (since the tax credit only provides tax savings on the first $5,000 spent).
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/