How is rental income taxed in Canada?

Net rental income (gross rent minus expenses) is added to your other income and taxed at your marginal rate. You can deduct expenses like mortgage interest, property tax, insurance, repairs, and utilities.

Can I deduct mortgage payments on rental property in Canada?

You can deduct the interest portion of mortgage payments, not the principal. Principal repayment is not an expense—it builds equity. Track interest separately from principal payments.

Should I claim CCA on my rental property?

Consider carefully. CCA reduces taxes now but is recaptured on sale, potentially at a higher rate. Many small landlords choose not to claim CCA to avoid this complexity.

Small Landlord Tax Guide Canada 2026

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

Multiple Properties

Each Property

Treatment	Options
Report separately	On T776
Or combined	If similar type
Track each	For gains later

Pooling CCA

For CCA	Rule
Similar properties	Can pool
Different classes	Separate
Track for sale	ACB of each

Incorporating

When to Consider

Situation	Consider Corp
Many properties	May benefit
Income >$150K	Tax deferral
Liability protection	Corporate veil
Estate planning	Freeze, etc.

Why Most Don’t

Disadvantage	Impact
Refundable tax	On passive income
No principal residence	At all
Complexity	Admin burden
Rental = passive	Not active business

Tax Planning Tips

Time Expenses

If Possible	When
Major repairs	Higher income years
Delay	If income lower next year
Bunch expenses	For better timing

Year-End Review

Action	Benefit
Pay expenses before Dec 31	2027 deduction
Invoice repairs	Before year-end
Review records	Catch missed items

Summary

Landlord Tax Checklist

Item	Done
Track all rent received	☐
Keep expense receipts	☐
Separate interest from principal	☐
Complete T776	☐
Decide on CCA	☐
Keep 6 year records	☐

Key Deductions

Always Deduct	Track Carefully
Property tax	Mortgage interest
Insurance	Repairs vs capital
Utilities	Personal use
Maintenance	CCA if claiming