I strongly suspect that the house has modifications for which there are no permits.

They admitted to it and after another inspection I gave them an option to stay with lease modifications. 

Are there any modifications to the written lease?

Bring copies of the before-and-after water bills to this sit-down and show them to your tenant.Then explain that you're willing to go forward, and that you will have the new work inspected and approved, that you recognize that this work has added value and utility to your apartment, BUT THERE CAN BE NO NEW MODIFICATIONS.

You will loose square footage because the walls will need to be 6", and you will need 6" insulated on the floor or perimeter insulation, which might necessitate raising the roof.

The two are treated differently by CRA ... so you and your mother would want to consult with an accountant to decide which approach works best for each of you (mostly for Mom) and then with an attorney to draw-up the mortgage agreement.In the first instance (mom the lender), the house would be in your name and you would be able to make any modifications (finish the basement) without it impacting your acquisition price.  

Modifications to the laundry area and some kitchen cabinets made the classic (read: old vintage!)

Modifications to the laundry area and some kitchen cabinets made the classic (read: older!)

Are there any modifications to the written lease?

It's an older duplex in northern california that my grandfather owned and made various modifications to way back when.