Rental Property Expenses You Can Deduct in Canada

You can deduct reasonable expenses you incur to earn rental income, but when you deduct them depends on what they are: current expenses come off in the year you incur them, others are capital costs claimed over several years as capital cost allowance (CCA), and some can’t be deducted at all. This page goes through the CRA’s rules line by line as they appear on Form T776, Statement of Real Estate Rentals. It is part of WealthNorth’s guide to real estate taxes; for the form itself see how to report rental income, and for depreciation see CCA on rental property.

The rules here come from the CRA’s Guide T4036, Rental Income (T4036(E) Rev. 25), unless another source is named.

Current or capital?

Guide T4036 divides rental expenses into two kinds. Current expenses recur and give a short-term benefit, and you deduct them in the year you incur them; capital expenses, such as the cost to buy or improve the property, are claimed over several years as CCA. The CRA’s tests:

• An expense that gives a lasting benefit is usually capital; one that recurs after a short period, such as repainting, is usually current.
• A repair that improves the property beyond its original condition is usually capital; one that simply restores it to its original condition is usually current.
• Replacing a separate asset, such as a refrigerator, is capital; replacing a part of the building, such as its wiring, is usually current.
• A cost that is large compared with the property's value is usually capital, though that test alone doesn't decide it.
• Repairs to a used property you bought, to put it in a suitable condition to rent, are capital.
• Repairs made in anticipation of selling the property, or as a condition of the sale, are capital.
• Whether the expense raises the property's market value is not a major factor.

The examples the guide itself gives:

Two special cases in the guide: you can deduct eligible disability-related modifications to a building (such as ramps, hand-activated door openers, or changes to a bathroom, elevator or doorway) in the year you pay for them instead of adding them to the building’s cost; and costs such as interest, legal and accounting fees and property taxes during construction or renovation (soft costs) may be deductible or may have to be added to the building’s cost, depending on the period they relate to.

Expenses you can deduct, by T776 line

Interest and financing costs

The CRA’s interest rule, which decides whether interest is deductible at all: Interest is deductible when the borrowed money is used to earn income from a business or property, such as rent, interest or dividends, whatever secures the loan; it follows the money's current use, which you must be able to trace, and it isn't deductible on money used personally, on money borrowed for an RRSP, TFSA or FHSA contribution, or on an investment that can only produce capital gains.

For financing costs, T4036 sets these timing rules:

• Fees to get a mortgage or loan to buy or improve the rental. Loan fees include mortgage application, appraisal, processing and insurance fees, mortgage guarantee fees, mortgage brokerage and finder's fees, and legal fees related to the mortgage financing. They are deducted over five years, 20% in the year and 20% in each following year, whatever the term of the loan. If you repay the loan before the end of that period, you deduct the remaining fees in the year you repay it.
• A lump-sum interest payment, a fee to lower the rate, or a penalty to pay off the mortgage early is prorated over the rest of the original term of the mortgage or loan, not deducted in full in the year paid.
• Mortgage principal is not deductible.
• You can choose to treat financing fees and interest on money borrowed to acquire depreciable property as capital, adding them to its cost.

Vehicle and travel costs

Guide T4036 allows motor vehicle expenses (line 9281) and travel (line 9200) only under these conditions:

• With one rental property, it is in the general area where you live.
• With one rental property, you do some or all of the repairs and maintenance yourself and use the vehicle to carry tools and materials to the property.
• With one rental property, driving to collect rent is a personal expense and can't be deducted.
• With two or more rental properties, you can also deduct vehicle costs to collect rent, supervise repairs and manage the properties, whether or not they are in the general area where you live.
• For the two-or-more rule, the properties have to be at two or more different sites, away from your principal residence.
• Only a reasonable amount is deductible, which depends on your circumstances.
• Other travel to a rental property follows the same conditions, and board and lodging are personal expenses.

Prepaid expenses

Other deductible costs

• Condominium fees: your share of the upkeep, repairs, maintenance and other current expenses of the common property.
• Landscaping: deductible only in the year you pay for it, even under the accrual method.
• Lease cancellation payments: amounts paid to a tenant to cancel a lease are deducted over the days left on the lease, using T4036’s formula.
• Telephone: long-distance calls for the rental, or the basic rate of a separate line used for it; not the basic monthly rate of your home phone.

Expenses you can’t deduct

Short-term rentals face a further limit: For a short-term rental (rented or offered for rent for less than 90 consecutive days), expenses and capital cost allowance for the days it doesn't comply with provincial or municipal rules (it isn't permitted at that location, or it lacks a required registration, licence or permit) can't be deducted.

Capital costs: claimed as CCA

The purchase price of the building, the legal fees and other costs of buying it, and the furniture and equipment you rent with it are capital expenses. Furniture, household appliances and other equipment used in the rental are Class 8, at 20%. Land isn't depreciable: only the building's share of the price, and of the buying costs, goes in a class. CCA has its own limit: Capital cost allowance (CCA) is optional and is worked out after combining the net income or loss of all your rental properties: it can bring that net rental income down to zero, but it can't create or increase a rental loss. The rates, the first-year rules and a worked schedule are in CCA on rental property, and how CCA claimed now is treated when you sell is in undepreciated capital cost.

Renting part of your home

When you rent out part of the home you live in, you deduct the expenses that relate only to the rented area in full and a share of the expenses for the whole property, split by square metres or by the number of rooms you rent. The full rules are in renting out part of your home.

Claiming CCA on the rented part can affect the principal residence exemption: Renting out part of your home keeps the whole home a principal residence only if the rental is ancillary to your use of it as a home, you make no structural change to it, and you claim no capital cost allowance on it; otherwise the rented part is treated as changed to a rental, and only the home part of the gain is exempt when you sell.

Renting to family or below market

Renting to family covers the rest of the rules for that situation.

Records

T4036 says to keep invoices, receipts, contracts and other documents supporting your purchases and operating expenses, and warns that the CRA may disallow expenses you can’t support. Keep records for six years from the end of the last tax year they relate to.

Related guides

• How to report rental income in Canada
• CCA on rental property in Canada
• Undepreciated capital cost (UCC)
• Landlord tax guide
• Real estate taxes in Canada