How rental income is taxed in Canada
Rental income is ordinary income — it gets added to your employment income, investment income, and all other income on your tax return and taxed at your marginal rate.
| Combined income level (Ontario) | Approx. marginal tax rate | Tax on $15,000 net rental income |
|---|---|---|
| $55,000 | 29.65% | $4,448 |
| $80,000 | 31.48% | $4,722 |
| $110,000 | 33.89% | $5,084 |
| $150,000 | 43.41% | $6,512 |
| $220,000+ | 53.53% | $8,030 |
The key to minimizing your rental tax bill is maximizing legitimate deductions — which is what the rest of this guide covers.
Reporting rental income: the T776 form
All rental income and expenses are reported on Form T776 — Statement of Real Estate Rentals, which you attach to your T1 personal tax return.
T776 structure
| Section | What you report |
|---|---|
| Identification | Property address, your ownership percentage, rental start date |
| Income | Gross rent received for the year |
| Expenses | All deductible expenses (detailed below) |
| Net income (loss) | Income minus expenses |
| Capital Cost Allowance (CCA) | Optional depreciation claim |
| Final net rental income | Flows to your T1 return |
You file a separate T776 for each property (or one T776 with multiple properties listed).
Co-ownership
If you co-own a rental property (with a spouse, family member, or business partner), each owner reports their proportional share of income and expenses based on their ownership percentage.
Eligible rental expenses
Current expenses (deductible in the year incurred)
| Expense | Deductible? | Notes |
|---|---|---|
| Mortgage interest | Yes | Interest only — principal repayment is NOT deductible |
| Property tax | Yes | Fully deductible for rental property |
| Insurance | Yes | Landlord / rental property insurance |
| Repairs and maintenance | Yes | Must be to restore, not improve (see below) |
| Property management fees | Yes | If you hire a management company |
| Advertising | Yes | Listing fees, online ads, signage |
| Legal fees | Yes | Lease preparation, eviction proceedings, tenant disputes |
| Accounting fees | Yes | Tax preparation for rental portion |
| Utilities | Yes | If you pay (electricity, gas, water, internet) |
| Condo fees | Yes | Including special assessments for current repairs |
| Travel to property | Yes | Vehicle expenses or mileage at CRA rate to inspect, collect rent, manage |
| Office supplies | Yes | Reasonable amounts for record-keeping |
| Landscaping / snow removal | Yes | If you pay |
Capital expenses (not immediately deductible — depreciated via CCA)
| Expense | Treatment | CCA class |
|---|---|---|
| Building purchase price | Depreciated over years via CCA | Class 1 (4% declining balance) |
| Appliances | CCA | Class 8 (20%) |
| Furniture | CCA | Class 8 (20%) |
| Renovations that improve the property | CCA | Class 1 (4%) or Class 8 depending on asset type |
| Paving / parking lot | CCA | Class 17 (8%) |
| Fencing | CCA | Class 6 (10%) |
Repairs vs. improvements — the critical distinction
| Type | Deductible as current expense? | Examples |
|---|---|---|
| Repair — restores to original condition | Yes | Fixing a leaky roof, replacing a broken window, patching drywall, painting |
| Improvement — betters the property beyond original condition | No (capitalize and depreciate) | Adding a deck, renovating a kitchen, finishing a basement, new addition |
| Replacement — like-for-like replacement | Depends | Replacing a furnace with equivalent = repair. Upgrading to high-efficiency = may be improvement |
When in doubt, CRA looks at whether the expenditure restores the property (current expense) or enhances it (capital expense). In practice, many items fall in a grey zone — document your reasoning.
Capital Cost Allowance (CCA) explained
What is CCA?
CCA is the tax term for depreciation. You can claim a portion of the building’s cost (and furnishings, appliances, etc.) as a deduction each year, reducing your rental income for tax purposes.
How it works
CCA uses the declining balance method:
| Year | Undepreciated Capital Cost (UCC) | CCA at 4% (Class 1) | New UCC |
|---|---|---|---|
| 1 | $300,000 | $6,000* | $294,000 |
| 2 | $294,000 | $11,760 | $282,240 |
| 3 | $282,240 | $11,290 | $270,950 |
| 4 | $270,950 | $10,838 | $260,112 |
| 5 | $260,112 | $10,404 | $249,708 |
Half-year rule: in the first year, you can only claim CCA on 50% of the net addition.
Over 10 years, you could claim approximately $90,000 in CCA, saving ~$27,000–$45,000 in tax (at 30–50% marginal rates).
The CCA trap: recapture on sale
Here’s why many tax advisors are cautious about CCA:
When you sell the property, any CCA you claimed is recaptured and added back to your income. This means the tax savings are temporary — you’ve deferred the tax, not eliminated it.
Example:
| Item | Amount |
|---|---|
| Building purchase price | $300,000 |
| Total CCA claimed over 10 years | $90,000 |
| Undepreciated Capital Cost (UCC) | $210,000 |
| Sale price of building | $400,000 |
| CCA recapture (taxable as income) | $90,000 |
| Capital gain ($400K − $300K) | $100,000 (50% taxable = $50,000) |
You’d owe tax on $90,000 (recapture) + $50,000 (taxable capital gain) = $140,000 of taxable income in the year of sale.
When CCA makes sense
| Situation | Claim CCA? |
|---|---|
| High income now, expect lower income later (retirement) | Yes — defer tax from high-rate years to low-rate years |
| Plan to hold property indefinitely | Yes — defer tax for decades |
| Rental income is creating large tax bills | Yes — reduces current tax |
| Plan to sell within 5–10 years | Caution — recapture will create a tax spike |
| Already in a low tax bracket | Probably not — the deferral benefit is minimal |
Rental income scenarios
Scenario 1: Dedicated rental property
$400,000 property renting for $2,200/month
| Income | Annual |
|---|---|
| Gross rent | $26,400 |
| Expenses: | |
| Mortgage interest | $14,000 |
| Property tax | $4,000 |
| Insurance | $1,500 |
| Repairs & maintenance | $2,500 |
| Property management (8%) | $2,112 |
| Advertising | $200 |
| Legal / accounting | $500 |
| Total expenses | $24,812 |
| Net rental income | $1,588 |
| CCA (optional, Class 1 @ 4%) | $12,000 |
| Net rental income after CCA | ($10,412) loss |
Without CCA, you report $1,588 in income. With CCA, you create a $10,412 rental loss that can offset other income (within limits — rental losses cannot be used to create a non-capital loss greater than your rental income from all properties combined if the loss is from CCA alone).
Important rule: CCA can only reduce your net rental income to zero — it cannot create or increase a rental loss. The $10,412 loss above would only be allowed if $10,412 of it comes from non-CCA expenses.
Scenario 2: Room rental in your principal residence
Renting one room (15% of home) for $1,000/month
| Item | Full household cost | Rental share (15%) |
|---|---|---|
| Gross rental income | $12,000 | |
| Mortgage interest | $18,000 | $2,700 |
| Property tax | $5,000 | $750 |
| Insurance | $1,800 | $270 |
| Utilities | $4,800 | $720 |
| Maintenance | $2,000 | $300 |
| Total deductions | $4,740 | |
| Net rental income | $7,260 |
This $7,260 is added to your other income and taxed at your marginal rate.
Principal residence caution: If you claim CCA on the rental portion, CRA may consider that portion as no longer part of your principal residence for capital gains exemption purposes. Most advisors strongly recommend not claiming CCA on a room rental within your principal residence.
Scenario 3: Basement suite
Legal basement suite (30% of home) renting for $1,500/month
| Item | Full household cost | Rental share (30%) |
|---|---|---|
| Gross rental income | $18,000 | |
| Mortgage interest | $18,000 | $5,400 |
| Property tax | $5,000 | $1,500 |
| Insurance | $2,200 | $660 |
| Utilities | $5,400 | $1,620 |
| Maintenance | $3,000 | $900 |
| Suite-specific costs (100%) | $1,200 | $1,200 |
| Total deductions | $11,280 | |
| Net rental income | $6,720 |
Tax strategies for landlords
1. Track every expense
Keep receipts and records for everything. A $50 plumbing repair or $30 in advertising is deductible. Over a year, small expenses add up to thousands in deductions.
2. Time repairs strategically
If you have a high-income year, accelerate discretionary repairs into that year to maximize the deduction value. If next year will be lower income, defer non-urgent work.
3. Split rental income with a spouse
If your spouse co-owns the property (on title), you can split rental income based on ownership percentage. If your spouse is in a lower tax bracket, transferring ownership can reduce the family tax bill — but the ownership must be genuine and documented.
4. Maximize the principal residence exemption
If you live in part of the property (owner-occupied with a suite), do NOT claim CCA on the rental portion to preserve the full principal residence capital gains exemption.
5. Consider incorporation for multiple properties
If you own 3+ rental properties generating significant income, incorporating a holding company may provide:
- Income splitting opportunities (dividends to lower-income family members).
- Tax deferral at the small business rate (~12–15% vs. 30–53% personal).
- Liability protection.
- Transition/estate planning benefits.
Incorporation adds cost and complexity — consult an accountant before proceeding.
6. Claim vehicle expenses for property management
If you drive to your rental property for inspections, maintenance, or tenant management, you can deduct vehicle costs using either:
- Simplified method: CRA rate per km (currently 70¢ for first 5,000 km, 64¢ thereafter).
- Detailed method: Proportion of actual vehicle costs (gas, insurance, maintenance) based on rental-related km / total km.
Keep a mileage log — CRA auditors always ask for one.
Common mistakes landlords make
| Mistake | Consequence | How to avoid |
|---|---|---|
| Deducting mortgage principal | Assessment, penalties, interest | Only deduct the interest portion |
| Not reporting rental income | Penalties + gross negligence penalty (50% of tax owed) | Report all income, even cash rent |
| Claiming CCA on principal residence portion | Partial loss of principal residence exemption | Avoid CCA if you live in the property |
| Treating improvements as repairs | CRA reassessment | Capitalize improvements, expense repairs |
| No receipts or records | Deductions denied on audit | Keep everything for 6 years minimum |
| Ignoring GST/HST on short-term rentals | CRA assessment for uncollected HST | Register for GST/HST if STR revenue exceeds $30,000 |
| Not separating personal and rental expenses | Mixed expenses disallowed | Use clear proportional calculations |
When CRA audits rental income
Rental properties are a high-audit-risk area for CRA. Common audit triggers:
- Reporting rental losses for multiple consecutive years.
- Large repairs expense relative to rental income.
- CCA claims on principal residence.
- Inconsistent gross rent vs. comparable market rates (below-market rent to family = possible shareholder benefit or income attribution issue).
- Selling a property without reporting the disposition.
Record retention: Keep all rental records (receipts, bank statements, leases, T776 forms) for a minimum of 6 years after the tax year.