- CRA compares your reported rental income against expectations for the property — market rent, unit count, and any third-party information available to it.
- If you rent out part of your home, or use a rental property personally for part of the year (a cottage you rent out for some months and use yourself for others), CRA expects your expense…
If you own a rental property in Ontario — a basement apartment, a condo you rent out, a small multi-unit building — you report the rental income and expenses on your tax return every year, the same way you report employment or business income. That reporting is a common audit target because rental properties involve large numbers, mixed personal and business use, and expense categories that are easy to get wrong even without meaning to.
A CRA audit of a rental property owner looks closely at what you claimed, how you calculated it, and whether the paper trail backs it up.
Three Things CRA Almost Always Checks
1. Is the reported income complete? CRA compares your reported rental income against expectations for the property — market rent, unit count, and any third-party information available to it. Unreported cash rent, or income from a portion of the property you didn't disclose (like a basement unit), is a frequent finding.
2. Are the expenses actually deductible, and in the right category? Ordinary, recurring costs of earning rental income — property management fees, insurance, utilities you pay, advertising for tenants, and reasonable repairs — are generally deductible in the year incurred. But not everything you spend money on falls into that category, which brings up the audit's most common technical issue:
3. Capital vs. current expense classification This is where landlord audits most often go wrong. A current expense restores something to its original condition — patching a roof leak, repainting a unit. A capital expense improves or extends the useful life of the property beyond its original condition — replacing the whole roof, a major renovation, an addition. Current expenses are deducted in the year you pay them; capital expenses generally have to be added to the property's cost and recovered gradually, not written off all at once. Auditors routinely reclassify claims from one category to the other, which can significantly change the amount you can deduct in a given year.
Personal Use and Mixed-Use Properties
If you rent out part of your home, or use a rental property personally for part of the year (a cottage you rent out for some months and use yourself for others), CRA expects your expense claims to be prorated to reflect actual rental use. Claiming 100% of expenses on a property that also served as your personal residence or vacation home for part of the year is a common trigger for reassessment.
Where a portion of your principal residence has been used to earn rental income, be aware that claiming capital cost allowance on that portion can affect the principal residence exemption on a future sale — this is a good conversation to have with an accountant or lawyer before claiming CCA on any part of your home.
Documentation That Supports a Rental Claim
| Category | What to keep |
|---|---|
| Rental income | Lease agreements, rent ledgers, e-transfer or deposit records for every payment received |
| Repairs and maintenance | Invoices describing the work, before/after context if relevant, proof of payment |
| Capital improvements | Contracts, invoices, and a clear description of what was replaced or added |
| Mortgage interest | Lender statements separating interest from principal |
| Property management and professional fees | Invoices and agreements with any property manager, accountant, or contractor |
| Personal vs. rental use | A record of days/months rented vs. personally used, for any mixed-use property |
What Happens if the Audit Finds a Problem
- Reclassified expenses — a claimed current expense is treated as capital, reducing your deduction for that year
- Denied deductions for costs without adequate supporting documentation
- Added unreported income, with corresponding tax owing
- Interest on any resulting balance, and potentially a penalty if the CRA views the error as more than an honest mistake
- In serious cases involving significant unreported income, a referral toward more serious enforcement — though this is not the typical outcome of a rental property audit
If you disagree with the result, you can file a Notice of Objection with the CRA before any further appeal becomes available.
Frequently asked questions
Can CRA audit a rental property I sold years ago?
Yes, within the applicable reassessment period for the tax year in which you reported the rental income, expenses, or the sale itself. Keep rental and sale-related records for as long as your return for that year remains open to reassessment.
I rent out my basement but live in the rest of the house — does that change how I'm audited?
It doesn't change whether you can be audited, but it does change what CRA looks at: expenses need to be prorated between the rental portion and your personal living space, and this proration is exactly the kind of claim auditors scrutinize closely.
Is claiming a rental loss automatically a red flag?
Not automatically, but a pattern of consistent losses over several years — especially without a credible path to profitability — draws more scrutiny than a single loss year tied to a specific event like a major repair or vacancy.
What's the difference between an audit and CRA just asking a question about my return?
A brief request for a specific receipt or clarification is typically a review, a lighter check than a full audit. A full audit examines your records and filing more broadly and can involve direct contact with an auditor. Don't assume every CRA letter is the start of a full audit, but don't ignore either kind.
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