Rental income tax in Canada: what investors should know

Reporting rental income

• Report gross rents and expenses on Form T776, Statement of Real Estate Rentals, filed with your personal return.
• Rental income is generally reported on an accrual basis: rent belongs to the year it is earned, even if paid later. A cash method is allowed only in limited cases.
• A rental loss can generally be deducted against your other income. It cannot be claimed where you rent below market value to someone you know or simply share costs.
• Net rental income is taxed at your marginal rate, together with your employment and other income.

Deductible expenses

Not deductible: mortgage principal, land transfer tax, and your own labour. Legal fees to buy the property are added to the cost of the land and building instead. Renting part of your home? Deduct only the rented area’s share of shared costs, by floor space or number of rooms.

Current expense or capital expense?

A current expense is deducted in full in the year you pay it. A capital expense gives a lasting benefit and is claimed gradually through capital cost allowance. The CRA looks at whether the work restores the property or improves it beyond its original condition.

Building a new basement unit is an improvement, so its cost is generally capital. Keep the invoices and permits together; they also help on resale.

Capital cost allowance basics

Capital cost allowance (CCA) is tax depreciation. You claim a percentage of the undepreciated cost each year, on a declining balance. You may claim any amount from zero up to the maximum.

• Land is not depreciable. Split the purchase price and related fees between land and building; only the building goes into CCA.
• Separate class: each rental property that cost $50,000 or more goes in its own class.
• No loss from CCA: CCA cannot create or increase a rental loss.
• First year: in the year you buy, you can usually claim CCA on only half of the net addition (the half-year rule), unless an investment incentive applies. Ask your accountant which applies to your purchase.

Hypothetical example

Take the two-unit house from the rental numbers guide. Assume $360,000 of the $900,000 price is allocated to the building. In year one it earns $41,092 of net operating income and pays about $31,775 of mortgage interest. That leaves $9,317 of rental income before CCA.

A full year of Class 1 CCA would be $14,400 (4% of $360,000). First-year rules change that amount in the year you buy, so ask your accountant for the first-year figure. In any year, CCA cannot create a loss, so the claim here could not exceed $9,317, the income before CCA. Whether to claim it at all depends on recapture, below.

Recapture and terminal loss

• Recapture: sell the building for more than its undepreciated capital cost, and the CCA you claimed is generally added back to income. It is taxed in full in the year of sale.
• Terminal loss: if no property is left in the class and some undepreciated cost remains, you can usually deduct it as a terminal loss.
• No capital loss on a building: depreciable property cannot produce a capital loss, though a terminal loss may apply.

Hypothetical example An owner claims $40,000 of CCA over several years, then sells the building portion above its original cost. The $40,000 is recaptured and taxed as income in the year of sale, on top of any capital gain. CCA often defers tax rather than eliminating it.

Selling: capital gains on a rental

A capital gain is the sale price minus the adjusted cost base (purchase price plus purchase costs and capital improvements) and selling costs. Report it on Schedule 3.

The inclusion rate is one-half: half the gain is added to your income. The 2024 federal budget proposed raising it, but the government confirmed in Budget 2025 that it would not proceed.

Hypothetical example A rental bought for $900,000 (with $17,475 of purchase costs) sells for $1,100,000 with $55,000 of selling costs. The capital gain is $127,525, of which $63,763 is taxable at your marginal rate. Any recapture is added separately.

Your home, a rental, or both?

The principal residence exemption can remove tax on the gain from selling your home. A family can designate only one home per year, and you must report the sale and designation on your return (Form T2091).

• Renting part of your home: usually not a change in use, if three things are true. The rental is ancillary (secondary) to your own use of the home. You make no structural changes for it. You claim no CCA on it.
• Turning your home into a rental: this is treated as selling at fair market value and buying back, unless you file an election. With the election you cannot claim CCA, and you may keep designating it as your principal residence for up to four years.
• Turning a rental into your home: without an election, any gain from the rental years is generally taxable.
• Mixed use on sale: if part of the home earned income, the gain is split, and only the income-producing part is reported.

A legal basement unit is often a structural change. Talk to an accountant before you build one in the home you live in. See legal basement investments.

The residential property flipping rule

Sell a housing unit, including a rental, within 365 consecutive days of buying it, and the gain is generally business income. That means it is fully taxable, and the principal residence exemption does not shelter it.

Exceptions apply when the sale results from a life event. These include a death, a relationship breakdown, serious illness or disability, or a threat to personal safety. Others are an eligible relocation at least 40 km closer to work or school, involuntary job loss, insolvency, or loss of the property. This matters for quick value-add projects.

HST on new rental homes

Resale homes generally have no HST. A new home bought from a builder does. A landlord who leases it long term usually cannot claim that HST back as an input tax credit. The GST/HST new residential rental property rebate may return part of it.

• Who: a purchaser who bought from a builder, paid all the tax, and holds the unit to lease to someone as their primary residence. The first use must generally be as someone’s primary residence for at least a year.
• Federal part: reduced for units valued between $350,000 and $450,000; not available at $450,000 or more.
• Ontario part: a provincial rebate may be available even at $450,000 or more, subject to a maximum. An enhanced Ontario rebate can cover up to the full 8% provincial part for eligible units. It generally needs construction to start between 1 April 2026 and 31 March 2027. It shrinks from $1.5 million and ends at $1.85 million.
• Deadline: generally two years after the end of the month the tax became payable. Use Form GST524 with the Ontario schedule RC7524-ON.

These rules are detailed and recently changed. Have your lawyer and accountant review the purchase agreement and the rebate before you sign. See pre-construction advice.

Records to keep

• Purchase agreement, statement of adjustments and your lawyer’s reporting letter.
• How you split the price between land and building, and why.
• Every lease, rent receipt and deposit record.
• Invoices for every repair and improvement, marked current or capital.
• Mortgage statements showing interest separately from principal.
• Property tax bills, insurance policies and utility bills.
• Your CCA schedule each year, by class.
• Permits and inspection records for any unit you build.

Next: Ontario landlord rules, or back to the Investor Knowledge Centre.

Questions investors ask

Sources

• Canada Revenue Agency: Guide T4036, Rental Income (2025 edition)
• Canada Revenue Agency: Guide T4037, Capital Gains (2025 edition, one-half inclusion rate)
• Department of Finance: Report on Federal Tax Expenditures 2026 (Budget 2025 confirmed the inclusion rate increase would not proceed)
• Canada Revenue Agency: principal residence and other real estate (change in use and the flipping rule)
• Canada Revenue Agency: Guide RC4231, GST/HST New Residential Rental Property Rebate