How Rental Income is Taxed in Canada: A Complete Guide

Investing in real estate is a popular wealth-building strategy in Canada, but the taxation of rental properties is often misunderstood. Whether you own a single basement apartment or a portfolio of multi-unit buildings, the CRA requires meticulous reporting of rental income and expenses.

Reporting rental income (Form T776)

Rental income earned by an individual is reported on Form T776, Statement of Real Estate Rentals, filed with the personal T1. The form requires gross rental income for the calendar year and allows for the deduction of eligible expenses. The resulting net rental income is added to other income and taxed at marginal rates.

Current vs. capital expenses

One of the most complex areas is distinguishing current from capital expenses.

• Current expenses restore a property to its original condition or maintain ongoing operations — minor plumbing repairs, painting, property management fees, property taxes, insurance, mortgage interest. Fully deductible in the year incurred.
• Capital expenses provide a lasting benefit or improve the property beyond its original condition — replacing a roof, adding an extension, upgrading the HVAC. Not deductible immediately; added to the cost base and depreciated over time.

Capital Cost Allowance (CCA)

CCA is the tax term for depreciation. The CRA allows landlords to deduct a percentage of the building's cost (but not the land) each year. For most residential rental buildings, the rate is 4% per year on a declining balance.

CCA must be used strategically. It cannot create or increase a rental loss. If you claim CCA and later sell the property for more than its depreciated value, the CRA "recaptures" all CCA claimed and adds it to taxable income in the year of sale. For this reason, many investors choose not to claim CCA on appreciating residential properties.

Co-ownership and partnerships

If a property is owned jointly, net rental income (or loss) must be split according to the percentage of ownership, determined by the proportion of capital contributed. Once established, this cannot be arbitrarily changed year to year to achieve a better tax result.