"We're keeping two existing walls and the foundation because we're treating this as a substantial renovation" were the words of our builder when we were still in the early planning phases of this new home project. Substantial renovation? What does this even mean? We thought we were getting a new house?!
You may have seen this before in your neighborhood too. An older house gets taken down, some of the pre-existing structure is left in tact and integrated into the house during construction. This sounds simple enough, but there are reasons why this is being done. Let's try to understand this a little better....
What is a Substantial Renovation?
Compared to a completely new build, we already know that in a substantial renovation parts of the existing building will be reused. How much is defined by the Canada Revenue Agency: "[...] a substantial renovation is considered to have taken place where all or substantially all of the interior of a building, with the exception of certain structural components (the foundation, external walls, interior supporting walls, roof, floors and staircases), has been removed or replaced." And they go on to say that
90% or more of the old building must have been renovated to some extent to classify as a substantial renovation.
CRA further details how this can be assessed or calculated based on several characteristics of the building and the work involved.
So far so good, but why would anyone want to do this?
Reasons and Benefits of a Substantial Renovation
Tax Savings
Whenever the CRA is involved, it's all about money at first. Under the Excise Tax Act, a substantial renovation qualifies for the same new housing rebate as a new construction house. Other costs may also be claimed for tax rebates. So saving on GST/HST is part of the consideration for the builder.
Construction Savings
There are perceived practical savings, too. A new home construction requires new water and sewer connection, grading plans, etc. that can be avoided under a substantial renovation. Some of these savings may be offset during the process of demolition and integrating the existing structures into the build. However, an experienced builder / contractor may have figured out for themselves how to build most efficiently.
Easier Permitting
With a substantial renovation, there are fewer requirements and less reviews for getting a building permit. And that obviously means time and money that can be saved. Who doesn't want to get their build to start earlier and pay less fees to get started as well?
By the way, this didn't really work out for our builder or our project because the permit process was delayed due to the Covid-19 pandemic and the review period for Committee of Adjustments had to be started all over again...
Zoning Issues
By reusing parts of the existing structure, the building does not have to comply with the latest zoning requirements, such as setbacks from the property lines for example. Other benefits could apply for the utilities, driveway, etc.
Our project definitely benefits from this aspect as the existing house is pretty much just off the property line and very close to the neighbor's house on the east. Without this benefit, a completely new house designed to the latest requirements may have looked very different...
As you can see, there are a number of reasons and financial benefits why substantial renovations are frequently chosen. We also need to understand that we are building in an existing neighborhood. The majority of the homes here were built in the 50s to 70s and this is just not the same as a new subdivision or a larger empty lot.
Another reason could be the classification of the old building as a historical landmark or heritage building, in which case it may be required to maintain certain features of the old structure, e.g. the facade.
Disadvantages of a Substantial Renovation
When you look at the reasons and benefits for a substantial renovation over a new build, it stands out that most of those benefits are actually in favor of the builder. Aside from the final sales price, the builder will obviously consider any savings to become part of their profit margins. Now, if you are the builder or you are acting as the general contractor, that's great. If you are anything like us who are asking for a turnkey solution from our builder, it is not as straight forward.
First of all there is the uncertainty if things are really done right... Is the engineering done properly? Is the condition of the existing structures good enough to support the new house and infrastructure? Can all our requirements actually be accommodated (such as the insulation and air tightness for our energy efficient Passive House)?
Good news is that the existing structures won't be visible. The final house will look and feel like a completely new home would. For everything else, you just need to trust that the right people will do a good job.
Probably the biggest drawback is the warranty.
New homes in Ontario come with a new home warranty which is backed by the Tarion Warranty Corporation, and therefore also known as "Tarion Warranty". A substantial renovation does not qualify for such a warranty. It would be very surprising to find a builder that will give you an equivalent warranty, so it comes down to negotiating the best warranty terms possible before signing the contract.
This also allows builders who are not registered with Tarion to offer a building that appears to be new. These builders benefit from avoiding registration, compliance to the Tarion related rules and third party oversight.
Our tip is to check with Tarion if your builder is registered or not.
Even if you're not receiving a Tarion warranty as part of a substantial renovation project, a warranty is only as good as the company backing it up. And if you're builder is registered and has significant experience, you have a good indication that they will still be around when you're calling them to fix defects.
So do you decide if a new home build or substantial renovation is best?
The general rule of thumb would indicate that the bigger and more complex the project, the more sense it makes to start from scratch with a new build. However, all custom home projects are unique and so are the properties they are built on. For our project, the substantial renovation option makes the most sense, but it may be different for you.
So speak to your builder or architect, ask around and do your research to come to the best solution for your project!
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