Q: My husband is retiring from teaching and will receive a large lump sum payment, but if he doesn’t put it into a retirement specific account he’ll have to pay about 30% in tax on this sum. Problem is: Our house is in dire need of renovation. Any work we do would go a long way to boosting the value of our home (primarily we need to update our kitchen, two bathrooms and all the floors on the main floor and upstairs). Is there any way that we can use these funds or some of these funds without paying excessive tax? For example could we say that it was an “investment” in our home and thereby get some tax back from this claim? — The Browns, Mississauga, Ont.
Answer No. 1: First, the 30% may be a touch low for an estimate of the taxes owing on a lump sum payment which is not otherwise eligible or contributed to a registered investment account. Instead, it simply could be the initial estimated withholding taxes. The final tax amount would be dependent on the taxable income for the year. For example, if the total taxable income for the year is approximately $85,000 in Ontario, the marginal tax rate (the rate of tax on the next dollar of income earned) would be approximately 40% for 2015. Thus, you may need to plan for a little more in taxes.
The Canada Revenue Agency (CRA) provides little room in considering deductible “investments” in a home to the nature I expect that you are thinking. In fairness, they provide the ability for taxpayers to sell their personal homes on a tax-free basis provided certain conditions are met. But CRA does not permit the deduction of renovation/improvement costs for the most part.
Exceptions exist though:
- Medically-oriented tax credits (and in some cases separate provincial credits for seniors) for certain expenses related to improving the accessibility of a home (and would not typically increase the value of the home),
- Repairs and maintenance for an eligible home office,
- Repairs and maintenance for a portion of the home that is rented out
In 2009 there was a home renovation tax credit, but essentially it was only good for approximately that one year. The federal Conservative party were to introduce a credit provided that they won the 2015 election. That said, in the last federal budget, the Home Accessibility Tax Credit was introduced. But this focuses on medical needs, applies only to 2016, and only to someone 65 years of age and older. Also, someone eligible for the Disability Tax Credit may receive a 15% non-refundable tax credit for qualifying expenses to a maximum of $1,500.
Overall, while some help is available to you, not nearly to the degree to give you offsetting deductions to the lump sum benefits. You can consider other deductions, such as flow through investments. But you have to use extreme caution in assuring that the investments/deductions are good for you overall and fit into your total financial plan as compared to simply investing for the sake of getting a deduction. Deductions for lost money are far less desirable than the original investment amount itself. Putting some money within any available registered investments or “retirement specific accounts” can reduce the tax burden but I expect there is little room available and this or other investments will not directly help with fixing up the house.
George E. Dube, CPA, CA is a veteran real estate investor and accountant. He is a speaker who has written various articles and co-authored two books on real estate accounting. (firstname.lastname@example.org, @georgeEdube)
Answer No. 2: Since your home is considered your principal residence you cannot deduct the renovations. The best way to offset that lump sum is to request they split the payment over two tax years. If there is no immediate need for the money, an RRSP contribution would also make sense.
Ayana Forward is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.