Short Answer
Canadian landlords are subject to income tax on net rental income, capital gains on property appreciation, and potential CCA recapture on sale. Proper record-keeping and understanding which expenses are deductible — and which are not — is the foundation of rental tax compliance.
The T776: Your Core Filing Document
All rental income and expenses are reported on CRA Form T776, Statement of Real Estate Rentals. Key sections:
| T776 section | What you report |
|---|---|
| Part 1 — Rental income | Gross rents received from all units |
| Part 2 — Expenses | All deductible operating expenses |
| Part 3 — Net income/loss | Gross income minus expenses |
| Part 4 — CCA | Optional depreciation claim |
| Line 12600 on T1 | Net rental income (or loss) carried forward |
If you co-own the property, each co-owner files their own T776 reporting their proportionate share.
What Counts as Rental Income
| Income type | Taxable? |
|---|---|
| Monthly rent payments | Yes |
| Security deposits kept (damage, unpaid rent) | Yes — in year applied or forfeited |
| Security deposits (refundable, held) | No — until forfeited or applied |
| First and last month’s rent upfront | Yes — in year received |
| Payment for laundry, parking, storage | Yes |
| Insurance proceeds for lost rent | Yes |
| Tenant-paid utilities (if included in rent or reimbursed) | Yes |
Deductible Expenses: What You Can Claim
| Expense | Notes |
|---|---|
| Mortgage interest | Only the interest portion, not principal repayment |
| Property taxes | City/municipal taxes paid during the year |
| Insurance premiums | Landlord/rental property insurance |
| Maintenance and repairs | Routine upkeep — not improvements (see below) |
| Property management fees | Third-party management company fees |
| Advertising | Rental listing costs, signage |
| Legal and accounting | Lawyer fees for lease disputes, accountant fees for T776 prep |
| Utilities | Heat, electricity, water — only if you pay them |
| Travel costs | Reasonable costs to manage/inspect property |
| Office expenses | A portion of general administrative costs |
| Capital cost allowance (CCA) | Optional depreciation — see CCA section |
Repairs vs. Capital Improvements: A Critical Distinction
CRA draws a hard line between repairs (currently deductible) and capital improvements (added to adjusted cost base):
| Item | Repair or capital? | Treatment |
|---|---|---|
| Patching a roof leak | Repair | Deduct in year incurred |
| Replacing the entire roof | Capital improvement | Add to ACB; depreciate via CCA |
| Repainting walls | Repair | Deduct in year incurred |
| Adding a new bathroom | Capital improvement | Add to ACB |
| Replacing a broken window | Repair | Deduct in year incurred |
| Adding new windows throughout | Capital improvement | Add to ACB |
| Fixing a furnace | Repair | Deduct in year incurred |
| Installing a new HVAC system | Capital improvement | Add to ACB |
Rule of thumb: If the work restores something to its original condition, it is a repair. If it upgrades, improves, or adds to the property, it is a capital improvement.
Mortgage Interest: What You Can (and Cannot) Claim
| Claimable | Not claimable |
|---|---|
| Interest on mortgage for the rental property | Principal repayment |
| Interest on a loan used to purchase or improve the rental property | Interest on personal borrowing |
| HELOC interest — only the portion used for rental investment | Mixed-use HELOC interest (personal portion) |
If you refinanced and pulled cash out for personal use, only the portion of interest attributable to the rental investment is deductible. Keep detailed records of loan purpose.
Capital Cost Allowance (CCA)
CCA is depreciation on the building portion of your rental property (land is not depreciable):
| CCA class | Asset type | CCA rate |
|---|---|---|
| Class 1 | Most residential buildings | 4% (declining balance) |
| Class 8 | Appliances, fixtures, equipment | 20% |
| Class 10 | Vehicles used for rental property | 30% |
| Class 12 | Small tools, video equipment | 100% |
Half-year rule: In the year of acquisition, you can only claim half the normal CCA rate.
CCA cannot create a rental loss — you can only claim CCA up to the point where net rental income reaches $0.
Recapture risk on sale: If you sell the building for more than its undepreciated capital cost (UCC), the difference is recaptured as income (not capital gains) in the year of sale. Under the 2024 capital gains changes, recapture is particularly expensive at higher marginal rates.
Rental Losses
A rental loss occurs when your expenses exceed your income. Losses are generally deductible against your other income (employment, business, etc.) — but CRA scrutinizes losses closely.
| CRA concern | What they look for |
|---|---|
| Reasonable expectation of profit (REOP) | If CRA concludes there is no profit motive, losses may be denied |
| Consistent year-after-year losses | Raises questions about genuine rental activity |
| Below-market rent to family/friends | CRA may only allow expenses up to the revenue earned |
| Personal-use mixed property | Loss claimed on a property you also use personally |
Common CRA Audit Triggers for Landlords
| Trigger | Why CRA notices |
|---|---|
| Rental losses claimed multiple years in a row | Questions profit motive |
| 100% of mortgage interest claimed on mixed-use property | Suggests personal use portion not excluded |
| No rental income reported despite advertising a unit | CRA matches property listings with T1 data |
| Airbnb income not reported | CRA has data-sharing with platforms |
| Large CCA claims that eliminate all rental income | Suggests filing strategy rather than genuine depreciation |
| Expenses that appear unusually high relative to revenue | Triggers review |
Record-Keeping Requirements
CRA requires records to be kept for at least six years after the later of the tax return filing deadline or the date the return was filed.
| Keep these records | Duration |
|---|---|
| All rental income receipts and lease agreements | 6+ years |
| All expense receipts (repairs, insurance, mortgage statements) | 6+ years |
| Capital improvement invoices | Life of property + 6 years (for ACB) |
| Mortgage statements showing interest vs principal split | 6+ years |
| Property purchase and sale documents | Life of property + 6 years |
| CCA schedule | As long as property is owned + 6 years |
Bottom Line
Rental income in Canada is taxed as regular income, but the full range of deductible expenses — especially mortgage interest, property tax, insurance, and maintenance — can substantially reduce the tax hit. The two most important planning decisions are whether to claim CCA (given recapture risk) and how to document the repair vs capital improvement distinction. Keep all receipts from day one of ownership.