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As the resale housing market goes, so does the renovation industry. For most of the last decade, existing homes sold at record levels. Since people tend to renovate their homes within the first three years of moving in, that meant residential renovation spending also set new records.

Last year the resale market finally slowed down, and so did renovation activity. For the first time in 10 years, Canada Mortgage and Housing Corp. (CMHC) is predicting that renovation spending will drop – a dip of three per cent in 2009. That's still a $51.3 billion industry, and surprisingly strong summer resale numbers could push renovation spending higher too.

But there's another problem on the horizon, according to the Canadian Home Builders' Association (CHBA).

On July 1, 2010, Ontario and British Columbia will harmonize their provincial sales taxes with the federal Goods and Services Tax. Currently the provincial taxes apply to goods like building materials but not to services, but under the harmonized sales taxes (HST), services such as those provided by building contractors will be included. It means the cost of a renovation by a contractor in Ontario will increase from 2.6 per cent to eight per cent, and in B.C. from 2.3 per cent to seven per cent.

"The HST proposals in Ontario and British Columbia represent a massive tax increase on renovation activity," says CHBA president Gary Friendly.

The association recently commissioned Altus Group Economic Consulting to prepare a report on the topic. It says renovations by contractors represent about two-thirds of all renovation investment (the remainder is by do-it-yourself homeowners). The HST will increase the tax burden on homeowners and rental housing investors in Ontario and B.C. by almost $1 billion annually, says the report. Altus says the tax will encourage more cheating by contractors who will do the work "under the table" for cash, and will not collect or report taxes for the work. That leads to more problems for homeowners, it says, because these contractors may not be insured for the work they are doing and there is no warranty.

"Sales tax is primarily considered a 'consumption tax'. Most renovations such as kitchen cabinet upgrades and plumbing replacements last many years, and can add substantial value to the home. Residential renovations are, in large part, a capital investment in housing, and thus should not be subject to a consumption tax," says the Altus report.

The CMHC forecast is based mostly on its expectations of the resale housing market. It says renovation activity will rise again in 2010, posting a four per cent rebound. The forecast does not take the HST proposals into account, although Ontario spends $20 billion and B.C. $7 billion each year on renovations -- altogether, that's more than half of the nation's total renovation expenditures.

CMHC does note that several provincial and federal government programs encourage renovation. The ecoENERGY Retrofit program will provide $300 million in funding during the next two years to encourage energy-efficient renovations. Details of the program are explained by my Real Estate-Realtor Times colleague P.J. Wade here ( House Exterior Other Sidings and Issues, Soffits and Fascia, Windows and Doors, Trim, Flashings and Caulking, Exterior Structures ).

In the January budget this year, the federal government also introduced the Home Renovation Tax Credit. It provides for a tax credit of up to $1,350 on renovation expenditures for work performed, or goods acquired, between January 27, 2009 and February 1, 2010. It's a 15 per cent credit for eligible expenses exceeding $1,000 to a maximum of $10,000. Eligible renovations include everything from installing a new hardwood floor to painting a home. Ineligible expenditures include maintenance contracts, furniture, electronics, appliances and tools.

Ontario has its Home Energy Retrofit Program, which provides rebates of up to $5,000 for home energy improvements, matching the federal ecoENERGY program for a total of $10,000. In B.C., the LiveSmart BC program is similar. Some municipalities also offer renovation incentives.

But the Altus report says the proposed HST will negate these initiatives. "For every dollar that the federal and provincial governments is providing to Ontario homeowners undertaking renovations to improve housing energy efficiency, the Ontario government proposes to increase its taxes by over $3 dollars," says the report.

Altus says that, "While these proposed tax reform measures are said to be 'revenue neutral' (raise generally the same amount of provincial tax as their predecessors), they are unequivocally not revenue neutral in the important area of housing investment." It says to truly be revenue neutral, the tax for renovations should be 2.6 per cent for the provincial component of the proposed HST in Ontario, and 2.3 per cent in British Columbia.

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