Rental income in Canada is taxed at your marginal rate, but the extensive list of deductible expenses — mortgage interest (not principal), property tax, insurance, repairs, management fees, and more — often reduces your taxable rental income by 40-70%. The most important distinction for landlords: repairs are immediately deductible, while capital improvements (like a new roof or new windows) must be depreciated over time through CCA. Many small landlords deliberately skip CCA entirely because it’s recaptured at 100% on sale, often at a higher tax rate than the deduction was worth.
Rental Income Basics
How Rental Income Is Taxed
Component
Treatment
Gross rent collected
Income
Minus expenses
Deductions
Net rental income
Taxable
Added to
Other income
Taxed at
Marginal rate
Example
Item
Amount
Gross rent
$24,000
Less expenses
$16,000
Net rental income
$8,000
Your marginal rate
35%
Tax owing
$2,800
Deductible Expenses
Operating Expenses
Expense
Deductible
Property tax
Yes
Insurance
Yes
Utilities (if you pay)
Yes
Advertising
Yes
Management fees
Yes
Accounting/legal
Yes
Bank charges
Yes
Maintenance and Repairs
Expense
Deductible
Repairs
Yes (if not capital)
Maintenance
Yes
Cleaning
Yes
Landscaping
Yes
Snow removal
Yes
Pest control
Yes
Repair vs Capital Expense
Repair (Deductible)
Capital (Depreciate)
Fix broken window
Replace all windows
Patch roof
New roof
Repair appliance
New appliance
Paint
Major renovation
Mortgage Costs
Deductible
Not Deductible
Interest
Principal
Mortgage insurance
Principal portion
Fees to arrange
Down payment
Tracking Interest vs Principal
Payment
How to Track
Get breakdown
From lender
Annual statement
Shows interest paid
Or amortization
Schedule
Reporting Requirements
Form T776
Form
Purpose
T776
Rental income and expenses
One per property
Or combine similar
Attach to
T1 return
Information to Report
Section
Details
Address
Of rental property
Gross rents
Annual total
Each expense
Categorized
Net income
Calculate
Record Keeping
Keep
Duration
Receipts
6 years+
Leases
Duration + 6 years
Bank statements
6 years
Purchase documents
Time owned + 6 years
Capital Cost Allowance (CCA)
What Is CCA
Concept
Details
Depreciation
On building
Deduction
Reduces income
Recapture
On sale
CCA Classes for Rental
Class
Rate
Asset
Class 1
4%
Most buildings
Class 8
20%
Appliances, furniture
Class 10
30%
Vehicles
Should You Claim CCA?
Pros
Cons
Lower taxes now
Recaptured on sale
Cash flow benefit
Lower ACB
Defer
Not eliminate
Why Many Landlords Skip CCA
Reason
Explanation
Complexity
Hard to track
Recapture
Will owe eventually
Higher tax later
May be higher rate
Convert to principal residence
Complications
If You Claim CCA
Rule
Details
Cannot create loss
With CCA
Track building vs land
Land not depreciable
Recapture on sale
Taxed as income
Terminal loss
If applicable
Land vs Building Split
Why It Matters
Reason
Details
Land not depreciable
Can’t claim CCA
Building depreciates
Can claim
Must allocate
Purchase price
Methods to Allocate
Method
How
Assessment
Use property tax assessment
Appraisal
Get professional
Reasonable estimate
Document basis
Example Split
Item
Value
Purchase price
$500,000
Land (from assessment)
$150,000 (30%)
Building
$350,000 (70%)
CCA base
$350,000
Rental Losses
Current Year Loss
Rule
Details
Can offset
Other income
Legitimate expenses
Must be reasonable
CRA scrutiny
If consistent losses
Loss Limitations
Situation
Rule
Reasonable expectation of profit
Required
Personal use
Complicates
Below market rent
CRA may question
Personal Use
Mixed Use
If You
Result
Use property sometimes
Prorate expenses
Below market rent
CRA may disallow expenses
Rent to family
Document market rate
Principal Residence Later
Concern
Details
If converting
Tax implications
CCA recapture
If claimed
Principal residence exemption
Partial
Selling Rental Property
Tax Implications
On Sale
Tax
Capital gain
50% taxable
CCA recapture
100% income
Land appreciation
Capital gain
Example Sale
Item
Amount
Sale price
$600,000
Original cost
$400,000
CCA claimed
$50,000
Capital gain
$150,000 ($200K - $50K recapture)
CCA recapture
$50,000
Taxable gain
$75,000 (50% inclusion)
Taxable recapture
$50,000 (100%)
Total taxable
$125,000
Common Mistakes
Errors to Avoid
Mistake
Problem
Deducting principal
Not allowed
Not reporting all income
CRA can check
Missing expenses
Paying too much tax
Poor records
Can’t prove deductions
Personal use mix-up
Audit risk
Red Flags for CRA
Concern
Why
Consistent losses
Profit motive question
Below market rent
Related party concern
Excessive expenses
Reasonability
Personal use deductions
Not allowed
The Bottom Line
Report all rental income on Form T776, deduct every legitimate expense, and keep receipts for at least six years. The mortgage interest (not principal) is your biggest deduction — get the annual breakdown from your lender. Think twice before claiming CCA: it reduces taxes today but gets fully recaptured on sale. If you plan to convert the rental to a principal residence later, skipping CCA avoids complications. For capital gains on sale, track your adjusted cost base from day one, including the land-building split.