How to Report Rental Income on Your Canadian Tax Return

Introduction

If you earn rental income in Canada, it’s essential to report it accurately on your tax return. Whether you rent out a property part-time or own multiple rental units, the Canada Revenue Agency (CRA) requires you to declare all rental earnings. Understanding how to report rental income, what expenses you can deduct, and how capital gains tax applies when selling a rental property can help you maximize deductions and stay compliant with Canadian tax laws.

What is Rental Income?

Rental income is the money earned from renting out a property, such as a house, apartment, condo, or commercial space. This income is taxable, and you must report it on your personal or corporate tax return, depending on your ownership structure.

Rental income is reported in the year it is received, and landlords must also track and report deductible expenses associated with maintaining and managing the property.

How to Report Rental Income in Canada

Individuals and businesses must report rental income on their tax returns using different methods based on their ownership structure.

1. For Individual Property Owners:
   • Report rental income on Form T776 - Statement of Real Estate Rentals along with your personal tax return (T1).
   • Income is reported on a calendar-year basis, from January 1 to December 31.
   • Claim eligible expenses to reduce taxable rental income.
2. For Partnerships or Co-Owners:
   • If you own a rental property with others, you report only your share of the income and expenses.
   • Each partner or co-owner reports their portion of the rental income based on their ownership percentage.
3. For Corporations:
   • If a rental property is owned through a corporation, the income is reported as business income on the corporate tax return (T2).
   • The tax treatment and deductions may vary depending on how the corporation is structured.

Deductible Expenses for Rental Income

To lower your taxable rental income, the CRA allows landlords to deduct certain eligible expenses incurred for maintaining and operating the rental property. These expenses fall into two categories: current expenses (day-to-day costs) and capital expenses (long-term improvements).

Current Expenses (Fully Deductible in the Year Incurred)

These are regular, ongoing costs necessary to maintain the property, including:

• Property taxes – Municipal and provincial property taxes related to the rental unit.
• Mortgage interest – The interest portion of mortgage payments is deductible (but not the principal).
• Utilities – Electricity, gas, water, and other utility expenses if paid by the landlord.
• Repairs and maintenance – Costs for necessary repairs (e.g., plumbing, painting, appliance servicing).
• Condo fees – Monthly maintenance fees paid to a condominium corporation.
• Advertising and marketing – Costs for listing rental properties online or in newspapers.
• Property management fees – Fees paid to a property management company or real estate agent.
• Insurance premiums – Property insurance related to the rental unit.
• Legal and accounting fees – Fees related to managing the rental business, such as lease agreements and bookkeeping.

Capital Expenses (Depreciated Over Time via CCA)

Capital expenses refer to costs that add long-term value to the property, such as:

• Renovations and major improvements – Structural work, additions, new appliances, or extensive remodeling.
• New roofing, windows, or HVAC systems – These qualify as capital expenses since they extend the property’s useful life.
• Furniture and appliances – Purchases such as stoves, refrigerators, and washing machines are considered capital assets.

Capital expenses cannot be deducted in full in the year they are incurred. Instead, they are depreciated over time using the Capital Cost Allowance (CCA), which allows landlords to claim a portion of the cost each year.

Capital Cost Allowance (CCA) for Rental Properties

The CCA is a tax deduction that allows landlords to recover the cost of depreciable rental property assets over time. The percentage of depreciation depends on the asset class:

• Buildings (Class 1) – 4% CCA per year
• Appliances and furniture (Class 8) – 20% CCA per year
• Computer equipment (Class 50) – 55% CCA per year

While CCA can reduce rental income taxes, claiming it may trigger recapture tax if you sell the property in the future at a profit. Landlords should evaluate the long-term impact of claiming CCA before using it.

Reporting Rental Income from Short-Term Rentals (Airbnb, VRBO, etc.)

If you rent out a property on platforms like Airbnb or VRBO, your rental income must still be reported to the CRA. The tax treatment depends on how the rental is structured:

• Short-term rentals (less than 30 days) may be subject to GST/HST if rental income exceeds $30,000 per year.
• Occasional rentals (e.g., renting a basement suite or vacation home occasionally) are still taxable, but expenses can be deducted.
• If the rental includes services (e.g., cleaning, meals, or concierge services), the CRA may consider it business income rather than rental income.

Landlords should track their Airbnb or VRBO earnings and expenses carefully to ensure proper tax reporting.

Capital Gains Tax When Selling a Rental Property

When you sell a rental property, you may be subject to capital gains tax if the property has appreciated in value. The gain is calculated as:

Capital Gain = Selling Price – (Original Purchase Price + Selling Expenses + Capital Improvements)

• 50% of the capital gain is taxable.
• If you previously claimed CCA, you may also be subject to recapture tax on any depreciation claimed.

To minimize capital gains tax, landlords can consider strategies such as:

• Using capital losses – Offsetting gains with capital losses from other investments.
• Spreading gains over multiple years – Selling in stages or utilizing tax deferral methods.
• Principal residence exemption – If the property was your primary residence for some years, a portion of the gain may be exempt.

Common Mistakes to Avoid When Reporting Rental Income

1. Failing to report all rental income – The CRA has increased its focus on rental income compliance, including Airbnb rentals.
2. Incorrectly classifying expenses – Differentiating between current expenses and capital expenses is crucial to avoid audits.
3. Neglecting GST/HST obligations – If your rental income exceeds the threshold, you may need to charge and remit GST/HST.
4. Overclaiming personal-use expenses – If part of your property is personal-use (e.g., renting out a basement in your primary home), expenses must be allocated proportionally.

Conclusion

Properly reporting rental income in Canada is essential to stay compliant with tax laws and maximize deductions. By understanding the allowable expenses, capital gains implications, and tax planning strategies, landlords can efficiently manage their rental income tax obligations.

Tax Partners can help ensure that you report rental income correctly and take advantage of all available tax deductions.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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