Rental Property Tax Guide

The T776, and Who Reports What

Rental income goes on a T776, Statement of Real Estate Rentals, filed with your T1. You report the gross rent, the expenses against it, and you're taxed on the difference.

The split between owners follows ownership, not effort. If you own a property 50/50 with your spouse, the income and expenses are reported 50/50, no matter which of you fields the 2am call about the furnace. Deciding to report it differently because one spouse is in a lower bracket is the kind of thing that unravels on review.

There's also a line between co-ownership and a partnership, and most small landlords are the former. Simply owning property together is co-ownership. A partnership implies carrying on business in common with a view to profit, and it carries different reporting. If you're unsure which you are, it's worth settling early rather than at the point of sale.

Repairs or Improvements

This is the line that generates more corrections than anything else on a rental return. A current expense comes off this year's income in full. A capital expense doesn't — it gets added to the cost of the building and recovered slowly, or on sale.

The test isn't what you spent. It's whether the work restored the property to its previous condition or made it better than it was. Replacing a broken window with a comparable one is a repair. Replacing every window in the house with better ones is an improvement. Patching a section of roof is a repair; a new roof is usually not. Repainting between tenants is a repair; a renovated kitchen is capital.

The instinct is always to call everything a repair, because the deduction is immediate. Resist it in the obvious cases. An improvement claimed as a repair is the single easiest thing for CRA to find, and it tends to be found in the year you sell, when the numbers are largest.

CCA, and the Trap in It

You're allowed to depreciate the building — capital cost allowance, Class 1, at 4% a year on a declining balance for buildings acquired after 1987, with only half the usual claim available in the year you buy. The land is never depreciable, so the purchase price has to be split between land and building first, and that split matters.

Two rules constrain it. CCA cannot create or increase a rental loss — if the property is already losing money, there's nothing to claim against. And the claim is optional every year, which is where the trap lives.

Here it is: CCA reduces the building's undepreciated cost. When you sell for more than that reduced amount, everything you depreciated comes back as recapture — taxed as ordinary income, in full, in the year of sale. Not as a capital gain at half inclusion. Ordinary income, at your top rate, in a year you may also be reporting a large gain.

So the real question is never "can I claim CCA" but "do I want to". Deferring tax at 30% today to pay it at 50% later, in a single spike, is a bad trade for a lot of landlords. Sometimes it's the right call. It should be a decision, not a default that a software package made for you.

Interest, and What Isn't Deductible

Mortgage interest is deductible. Mortgage principal is not. This trips up more first-year landlords than any other single item — the bank statement shows one payment, and only part of it is an expense.

The costs of buying aren't expenses either. Land transfer tax, legal fees on the purchase, and title insurance get added to the property's cost base, where they reduce your capital gain years later rather than your income now. Ongoing property tax, insurance, utilities you pay, advertising for tenants, condo fees, and reasonable management or repair costs are all deductible against the rent in the year you incur them.

Short-Term Rentals: a Rule With Teeth

If you rent on a short-term basis, there's a rule from 2024 that landlords are still being caught by. Under section 67.7, expenses on a short-term rental — a residential property offered for rent for under 90 consecutive days — are denied entirely where the operation is prohibited by the province or municipality, or doesn't comply with local registration, licensing, and permit requirements.

Denied means denied. Not reduced. You'd report the rent as income and deduct nothing against it. And there's no normal reassessment window on this one, so a non-compliant year stays open to CRA indefinitely.

Whether your municipality licenses short-term rentals, and whether your unit is registered, is therefore now a tax question and not just a bylaw one. If you're listing on Airbnb or VRBO, confirming your registration is in order is the cheapest tax planning available to you.

HST works differently here too. Long-term residential rent — a month or more — is exempt, and most landlords never think about it. Short-term accommodation is taxable, which means the $30,000 small-supplier threshold applies to it and registration becomes mandatory past that line. Our Self-Employed Tax Guide covers how the threshold is measured.