What does substantially renovated mean? 

For tax purposes, the Canada Revenue Agency (CRA) defines substantial renovation as, “all or substantially all of the building that existed immediately before the renovation or alteration was begun” has now been renovated as new.

Generally, “all or substantially all” is interpreted as meaning 90% or more. To meet this requirement, at least 90% of the building that existed before the renovations began must be renovated to some minimum degree. This determination applies to the interior area of the building.

Any fair and reasonable method is acceptable for determining whether “all or substantially all” of a building has been renovated. The following are typical methods:

Square footage of floor space of the areas renovated compared to the total floor space of the building

For example: A house has 2,000 square feet of floor space and renovations took place in all areas except for one 200 square foot room. Since the renovated area of 1,800 square feet is 90% of the total area, this does meet the “all or substantially all” requirement. 

Square footage of floor and wall space of the areas renovated compared to the total floor and wall space of the building

For example: A house has 2,000 square feet of floor space and 5,000 square feet of interior wall space, for a total of 7,000 square feet. Renovations took place throughout the building except for one room that has 300 square feet of floor space and 800 square feet of wall space for a total of 1,100 square feet. Therefore, 5,900 square feet (7,000 – 1,100), or 84% of the 7,000 square foot house, was renovated. This does not meet the “all or substantially all” requirement. 

Number of rooms renovated compared to the total number of rooms in the building

For example: A house has 10 rooms of which nine have been renovated. Since nine of the 10 rooms, or 90%, were renovated, this does meet the “all or substantially all” requirement. 

The method used must be fair and reasonable in the circumstances. For instance, if one room represented half the area of the building and it was not renovated, it would not be fair and reasonable to use the number of rooms as a method. This does not mean that the rooms have to be the same size, but the size of any one room should not distort the result. Neither the cost of the renovations nor the fair market value of the improvements made is an acceptable basis for determining whether the “all or substantially all” requirement is met. This requirement is based on the actual physical renovations to the building rather than the cost or value of such renovations.

Source: Government of Canada - Substantial Renovations and the GST/HST New Housing Rebate