Canada Rental Property Expenses Guide
the rental property expenses in Canada. The taxpayer who owns the rental property in Canada can deduct the expenses incurred to earn the rental income. The deductible expenses include: the mortgage interest (the interest on the loan used to purchase the rental property), the property taxes (the municipal property tax and the school tax), the insurance (the landlord insurance), the repairs and the maintenance (the "current repairs" — not the capital improvements), the property management fees (the fees paid to the property manager), the utilities (the electricity, the gas, the water, the internet), the advertising (the rental listing fees), the legal and the accounting fees, the travel expenses (the "landlord's travel" for the property management), and the condo fees (the condominium fees for the rental condo). The Capital Cost Allowance (CCA) — the depreciation on the rental building (the Class 1 at 4% declining balance) and the rental appliances (the Class 8 at 20% declining balance). The CCA cannot create the rental loss (the "CCA restriction" — the CCA is limited to the net rental income before the CCA). The CCA recapture is triggered when the rental property is sold (the CCA claimed reduces the cost base, increasing the gain). The T776 (the "Statement of Real Estate Rentals") is the form used to report the rental income and the expenses. The rental loss — the rental loss can offset the taxpayer's other income (the "active business income" or the "employment income"). The non-resident rental income — the non-resident with the Canadian rental income must file the s. 216 return (the "elective return") and report the net rental income.
Deductible Expenses
- Mortgage interest: The interest on the mortgage (the loan used to purchase the rental property) is fully deductible. The principal repayments (the "mortgage amortization") are NOT deductible. The taxpayer must track the interest paid (the "interest calculation" — the monthly or the annual interest).
- Property taxes: The municipal property tax and the school tax are fully deductible. The property tax is allocated to the rental period (the "pro-rated deduction" — the tax for the months the property is available for the rent).
- Insurance: The landlord insurance premium (the "rental property insurance") is deductible. The personal home insurance for the tenant-occupied unit can be allocated between the personal and the rental use.
- Repairs vs improvements: The "current repairs" (the fixing of the damage, the painting, the plumbing repairs) are fully deductible in the year of the expense. The "capital improvements" (the new roof, the new furnace, the new windows, the new flooring) must be capitalized and depreciated through the CCA at the 4% rate (for the building improvements) or the 20% rate (for the appliances and the other Class 8 assets).
- Property management fees: The fees paid to the licensed property manager (the "management company") are deductible. The fees are typically 5% to 10% of the monthly rent.
- Legal and accounting fees: The legal fees for the tenant disputes (the "eviction proceedings", the "lease disputes") are deductible. The legal fees for the property purchase (the "acquisition costs") are NOT deductible (they are added to the cost base). The accounting fees for the rental property tax return preparation are deductible.
- Travel expenses: The "landlord's travel" to the rental property (the "management travel") — the transportation costs (the fuel, the parking, the tolls) are deductible if the taxpayer travels to the property for the management, the repairs, or the inspection. The CRA limits the travel to the "reasonable" amount.
Capital Cost Allowance (CCA)
- Class 1 (building): 4% declining balance (the "4% CCA"). The CCA is calculated on the "undepreciated capital cost" (the "UCC" — the cost of the building minus the CCA claimed in the prior years). The building CCA cannot exceed the net rental income before the CCA (the "CCA restriction" — the CCA cannot create or increase the rental loss).
- Class 8 (appliances, furniture, equipment): 20% declining balance. The Class 8 includes the rental appliances (the stove, the fridge, the washer, the dryer), the furniture (the beds, the sofas, the tables), and the equipment (the lawn mowers, the snow blowers).
- Class 13 (leasehold improvements): 5-year straight-line (the "linear CCA" — the lesser of 20% or the lease term). The Class 13 includes the improvements to the leasehold property (the renovations to the rental unit that are paid by the landlord).
- CCA recapture: When the rental property is sold, the CCA claimed is "recaptured" — the UCC is reduced by the CCA, and the sale proceeds above the UCC trigger the recapture (the "CCA recapture" is included in the income). The recapture is taxed as the ordinary income (not the capital gain).
Rental Income Reporting
- T776 form: The "Statement of Real Estate Rentals" — the form reports the gross rental income, the deductible expenses, and the net rental income (or the loss). The T776 is filed with the T1 General return.
- Rental loss: The rental loss (the expenses exceeding the gross rental income) can offset the other income of the taxpayer. The rental loss is the "non-capital loss" and can be carried forward for 20 years or carried back for 3 years.
- Personal use allocation: If the taxpayer uses the rental property for the personal use (the "personal use of the vacation property"), the expenses must be allocated between the personal and the rental use. The CRA requires the "reasonable allocation" (the "days of the rental use" divided by the "total days of the ownership" method). The taxpayer cannot claim the rental loss when the personal use exceeds the "primary rental purpose" (the "90% rental/10% personal" rule).
For the principal residence exemption and the home sale rules, see our Principal Residence Exemption Guide →. For the non-resident rental income and the s. 216 return, see our Non-Resident Taxation Guide →.