Rental income is taxable in Canada, but many expenses are deductible. Understanding what you can and can't deduct can mean thousands of dollars in tax savings every year. This guide covers the main deductions available to Canadian landlords reporting rental income.
Reporting rental income
Rental income is reported on Form T776 of your federal tax return, and on Schedule L for Québec. If you own multiple properties, file a separate form for each. Income includes base rent, parking fees, lease-break penalties, and any other amounts received in exchange for occupying the unit.
Personal ownership vs. corporation
Holding properties personally or through a corporation has significant tax implications. The optimal structure depends on your marginal tax rate, number of properties, and retirement plan. Consult a real estate accountant before making this decision.
Deductible expenses
To be deductible, an expense must be reasonable, incurred to earn rental income, and supported by a receipt or invoice.
- Mortgage interest: the interest portion of your mortgage payment (not principal repayment)
- Property taxes (municipal and school): 100% deductible
- Insurance: non-owner-occupied landlord insurance, liability coverage
- Management fees: property manager or agency fees
- Advertising: costs to list a vacant unit
- Repairs and routine maintenance: painting, minor repairs, snow removal, landscaping
- Accounting and legal fees related to rental income
- Travel to visit or manage your properties
- Utilities paid by the landlord (water, heat, common area electricity)
The crucial distinction: repair vs. improvement
This is the most important distinction in rental property taxation. A repair keeps the property in its current condition and is deductible in the year it's made. An improvement increases the value or extends the useful life of the property and must be capitalized and depreciated over several years.
- Repair (deductible): patching a leaking roof, replacing a broken window, fixing damaged flooring
- Improvement (capitalize): replacing an entire roof, adding a new window, renovating a kitchen or bathroom
- Grey area: replacing a worn appliance with an equivalent model is generally a repair; upgrading to a superior model may be an improvement
Capital Cost Allowance (CCA)
CCA lets you deduct a portion of your building's capital cost each year. For residential rental buildings, the rate is 4% (Class 1) on the building's value (not the land). CCA is optional — you can choose not to claim it in a given year to preserve future claims. Note: CCA cannot create or increase a rental loss.
Capital gains tax on sale
When you sell a rental property, the capital gain (sale price minus adjusted cost base) is partially taxable. In Canada, 50% of capital gains up to $250,000/year are included in taxable income, and 66.67% for amounts above that threshold (2024 rules). If you claimed CCA, the CRA may also recapture some of those deductions on sale.
Keeping your records in order
The CRA requires you to keep supporting documents for at least 6 years after the year they relate to. For documents related to the purchase of a property, keep them until 6 years after the year you sell it.
- Keep all invoices and receipts related to the property
- Retain bank statements from the dedicated property account
- Archive work contracts and building permits
- Save annual mortgage interest statements from your lender
A solid filing system maintained throughout the year saves hours of searching at tax time and protects you in case of an audit.