Rental Income Tax Guide: How to Report & What You Can Deduct

Calculating Net Rental Income

Your taxable rental income is calculated as:

Deductible Rental Expenses

You can deduct expenses incurred to earn rental income. These fall into two categories:

Current Expenses (Fully Deductible)

• Advertising: Costs to advertise your rental property
• Insurance: Property insurance premiums
• Interest: Mortgage interest (but not principal payments)
• Property taxes: Municipal property taxes
• Repairs and maintenance: Fixing or maintaining the property
• Utilities: If you pay heat, water, electricity
• Property management fees: Fees paid to manage your property
• Legal and accounting fees: For rental income matters
• Office expenses: Supplies, phone calls related to rental

Capital Expenses (Depreciated Over Time)

Capital expenses that improve or extend the life of the property cannot be fully deducted in the year incurred. Instead, you claim Capital Cost Allowance (CCA):

• Building structure
• Major renovations (new roof, furnace, windows)
• Appliances and furniture provided to tenants
• Paving, landscaping structures

Capital Cost Allowance (CCA)

CCA lets you deduct the cost of capital assets over several years. Common CCA classes for rental properties:

Current vs Capital Expense

This distinction is crucial. The CRA looks at whether the expense:

Current Expense (Fully Deductible Now)

• Restores property to original condition
• Maintains current value
• Recurring in nature
• Example: Repainting, fixing a leaky faucet, replacing broken windows

Capital Expense (CCA Over Time)

• Improves the property beyond original condition
• Extends the useful life
• Provides lasting benefit
• Example: Adding a deck, replacing the roof, major kitchen renovation

Rental Losses and the "Reasonable Expectation of Profit"

If your rental expenses exceed your rental income, you have a rental loss. You can use this loss to offset other income, BUT:

• You must have a reasonable expectation of profit
• The property must be genuinely for rent (not personal use disguised as rental)
• CRA may deny losses if you're related to tenants paying below-market rent

Co-owned Rental Properties

If you co-own a rental property:

• Each owner reports their share of income/expenses based on ownership percentage
• Each owner files their own T776
• Losses can only be claimed by the person who incurred them

Renting Part of Your Home

If you rent part of your principal residence:

• Allocate expenses based on the rental portion (usually square footage)
• Example: Rent 20% of your home = deduct 20% of utilities, property tax, insurance
• Warning: Claiming CCA on part of your home may affect your principal residence exemption when you sell

Short-Term Rentals (Airbnb)

Income from Airbnb or similar platforms is rental income and must be reported. Additionally:

• If you provide services similar to a hotel, it may be considered business income
• GST/HST may apply if your rental income exceeds $30,000
• Municipal regulations may affect what you can deduct

Soft Costs on New Construction

If you build a rental property, certain "soft costs" can be deducted or capitalized:

• Interest during construction - must be capitalized
• Legal fees for land purchase - capitalize to land cost
• Property taxes during construction - can deduct or capitalize

Record Keeping Requirements

Keep records for 6 years from the end of the tax year:

• All receipts for expenses claimed
• Rental agreements/leases
• Bank statements showing rental deposits
• Mortgage statements showing interest paid
• Property tax bills
• Records of any capital improvements

Key Takeaways

• Rental income is taxed at your marginal rate
• You can deduct reasonable expenses to earn rental income
• Current expenses are fully deductible; capital expenses use CCA
• Mortgage interest is deductible, principal payments are not
• Be careful with CCA on your home - it may affect your principal residence exemption
• Report all rental income including short-term rentals