Rental Income Tax in Canada: What You Must Report

Reporting rental income: Schedule T776

All rental income from residential property in Canada must be reported on Schedule T776 (Statement of Real Estate Rentals), which forms part of your T1 personal income tax return. There is no separate business return for rental income unless your rental activity rises to the level of a business (explained below).

What counts as rental income?

Rental income includes everything a tenant pays you in connection with occupying your property:

• Monthly rent payments
• Advance rent (prepaid rent — included in income in the year received unless it is a deposit held in trust)
• Security deposits you keep at the end of tenancy
• Payments for lease cancellation
• Any services or expenses a tenant pays on your behalf in lieu of rent

Refundable damage deposits are not income — they are liabilities until you either return them or apply them to damages. Once applied, they become income.

Multiple properties

File one T776 form per rental property. If you own three rental units at three different addresses, you complete three separate Schedule T776 forms. CRA needs address-level information because each property can have its own CCA class and its own income/loss calculation.

Co-ownership

If you and a partner (spouse, friend, business associate) co-own a rental property, each owner reports their proportional share of income and expenses on their own T776. For a 50/50 ownership, each person reports 50% of gross rent and 50% of eligible expenses.

Expenses you can deduct

You can deduct the following expenses against your rental income, provided they are reasonable and incurred to earn the rental income:

Expenses you cannot deduct

Worked example

To see how Schedule T776 works in practice, consider this straightforward scenario:

Now change one assumption: suppose the property manager charged 12% instead of 8% ($2,880) and you had an unexpected furnace replacement ($2,400, which qualifies as a capital improvement to the heating system and goes onto the CCA schedule, not as a current expense). Even so, net rental income would be $8,020 before CCA. The CCA on the furnace would reduce that further in future years as you claim annual depreciation.

Capital Cost Allowance (CCA) on rental property

CCA is the tax system's equivalent of depreciation for the building portion of rental property. Buildings fall under CRA's Class 1 (most residential rental buildings, at a 4% declining balance rate) or Class 3 (older buildings, at 5%). Land is never depreciable.

How CCA works

Suppose you buy a rental property for $500,000. CRA allows you to allocate the purchase price between land and building. If you determine the building is worth $350,000 and the land is $150,000, you can claim CCA on the $350,000 building value. At 4% on a declining balance:

• Year 1 CCA (half-year rule applies: 2% in the first year): $350,000 × 2% = $7,000
• Year 2 CCA: ($350,000 − $7,000) × 4% = $13,720
• And so on, declining each year

The CCA restriction

CCA can reduce your net rental income to zero, but it cannot create or increase a rental loss. If your net rental income before CCA is $5,000, you can claim at most $5,000 in CCA. You cannot claim $10,000 in CCA to generate a $5,000 rental loss.

The recapture risk at sale

When you sell the property, CRA compares the proceeds allocated to the building against its undepreciated capital cost (UCC). If proceeds exceed the UCC, the difference (up to the original cost) is recaptured CCA — it is added back to your income in the year of sale as fully taxable income (not at capital gains rates). Only the amount above the original building cost triggers a capital gain taxed at 50% inclusion.

This is why many landlords skip CCA or claim it minimally on properties they expect to sell: claiming $50,000 in CCA deductions over the years might save $16,500 in tax at a 33% rate, but recapture at sale could cost more if your income is higher then. Run the numbers before claiming CCA each year.

Rental income vs. business income

Most landlords report rental income on Schedule T776. But if your rental activity involves significant services — well beyond what a typical passive landlord provides — CRA may classify it as a business. This distinction matters because:

• Business income attracts CPP contributions (self-employed rate on net income)
• Business losses can be carried back or forward differently
• Expenses and CCA classes differ for business vs. rental property

Indicators CRA uses

The line between rental and business income is drawn based on the nature and extent of services provided:

• Basic services included in rent (parking, laundry, basic utilities): rental income
• Significant additional services (meals, maid service, linens changed regularly, concierge, front desk): may constitute business income
• Number of units and frequency of transactions: operating a large multi-unit building with on-site staff leans toward business
• Bed and breakfast operations: CRA generally treats B&Bs as businesses when the owner lives on-site and provides services like breakfast

Short-term rentals (Airbnb, VRBO) with frequent guest turnover and services like cleaning between stays sit in a grey zone. Most short-term rental income is reported as rental income unless the host provides substantial hotel-like services. When in doubt, consult a tax professional.

Short-term rentals (Airbnb and similar)

The tax treatment of short-term rental income (rentals of less than 30 days per guest) follows the same basic rules as long-term rentals — report on T776, deduct eligible expenses — with some important additional considerations.

GST/HST registration

Short-term residential rental income is not exempt from GST/HST the way long-term residential rentals are. If your short-term rental revenue exceeds $30,000 in the last four consecutive calendar quarters (or in any single calendar quarter), you must register for and collect GST/HST. This $30,000 threshold applies across all your commercial activities combined — not just the rental.

Once registered, you collect GST/HST from guests and can claim Input Tax Credits on your business expenses. For an Ontario Airbnb collecting HST at 13%, a $200/night booking generates $26 in HST. You keep none of this — it belongs to CRA.

The 2024 short-term rental rule

Starting with the 2024 tax year, the federal government disallows expense deductions on short-term rentals in provinces or municipalities where such rentals are prohibited or require a municipal license and the property is non-compliant. If you operate a short-term rental without the required municipal permit in a city that mandates one, you cannot deduct expenses against that income — you are taxed on the gross rent, not the net income. Comply with local short-term rental regulations before claiming deductions.

Proportional use

If you rent your principal residence for only part of the year (for example, your cottage on weekends during summer), expenses must be prorated for the rental period and the rental area. If the cottage is rented for 60 days of the year and you use it personally for 30 days, roughly two-thirds of the year's costs are deductible — but you also trigger a partial change in use, which may have capital gains implications if you later claim the principal residence exemption.

Principal residence exemption and partial rental

The principal residence exemption (PRE) can shelter the capital gain on a home you live in from tax. However, using your home to earn rental income creates complications.

Full rental use

If you move out of your home and rent the entire property, there is a deemed disposition at fair market value on the date you convert it to a rental. You can elect to defer this deemed disposition using the "change in use" election (CRA Form T2091(IND)), but this prevents you from claiming CCA on the property for the period of rental use.

Partial rental use (basement suite)

If you rent out part of your home (e.g., a basement suite) while living in the rest, the PRE can generally still apply to the full property on sale, provided:

• The rental is incidental to the main use of the property as your home
• You have not made structural changes to make the rental portion more self-contained
• You have not claimed CCA on the rental portion

Claiming CCA on a rental suite in your home can cause a partial change in use and restrict your ability to claim the full PRE when you sell. Most homeowners with a basement suite are better off skipping CCA to preserve the PRE.

Non-resident rental income

If you are a non-resident of Canada earning rental income from Canadian property, different rules apply under Part XIII of the Income Tax Act.

Part XIII withholding tax

By default, a Canadian tenant paying rent to a non-resident must withhold 25% of the gross rent and remit it to CRA by the 15th of the month following payment. The tenant is responsible for this withholding — but if the tenant fails to do it, CRA can pursue both the tenant and the non-resident landlord.

NR6 election

A non-resident can file an NR6 (Undertaking to File a Canadian Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty) to reduce withholding from 25% of gross rent to 25% of net income — much more favorable. Under an approved NR6, withholding is based on estimated net rental income (after expenses) rather than gross rent. The non-resident must then file a Section 216 return by June 30 of the following year to report the actual net income and reconcile the withholding. Failure to file the Section 216 return means the 25% gross withholding is final and non-refundable.

Common mistakes and CRA audit triggers

CRA has a real estate compliance program. Rental properties are a frequent audit target. The most common issues:

Not reporting rental income at all

CRA's matching program cross-references property ownership data with tax returns. If you own a property that is not your principal residence and it does not appear on your return as either a capital property or a rental income source, you may receive a letter. CRA also receives tips from other sources. Unreported rental income can result in reassessments going back three to ten years, plus gross negligence penalties (25–50% of the tax owing) and interest.

Claiming personal expenses as rental expenses

The most audited item on T776 is the split between personal and rental use. Deducting 100% of property taxes, insurance, and mortgage interest on a property you live in part-time is the most common error CRA flags. Keep records of how you calculate the rental percentage.

Claiming capital improvements as repairs

Replacing a furnace, finishing a basement, or adding a bathroom are capital expenditures, not repairs. CRA distinguishes between restoring something to its original condition (repair — deductible) and improving it (capital — not immediately deductible). Misclassifying capital improvements as current expenses inflates deductions and triggers reassessments.

Missing the GST/HST registration threshold for short-term rentals

Many Airbnb hosts are unaware of the $30,000 threshold. Once crossed, registration is required from the day the threshold was exceeded, not from the next calendar year. CRA can assess unremitted HST retroactively, plus penalties and interest.

Deducting losses when there is no reasonable expectation of profit

If you charge rent well below market value — particularly to family members — CRA may deny rental losses on the basis that there is no genuine profit motive. Always charge at least fair market rent. If you rent to a relative at a discount, report the income received and deduct expenses only up to that income (no loss claim).

Record-keeping failures

CRA requires supporting documents for all expenses claimed. Keep: rental agreements, mortgage statements (showing interest vs. principal split), property tax assessments, insurance policy documents, all repair and maintenance invoices, mileage logs for property visits, and advertising receipts. The standard retention period is six years from the end of the tax year to which they relate.

Frequently asked questions