Rental Property Expenses You Can Deduct in Ontario

When you file your taxes as a landlord, the question is rarely whether you can deduct expenses. It is which ones, and whether a particular bill counts as a current expense this year or a capital cost that is handled differently.

This article goes through the usual categories: interest, property tax, insurance, repairs and improvements, and the costs that are not deductible. It describes the general approach, and the right answer for a given bill can depend on the facts.

The basic test

A landlord can deduct any reasonable expenses incurred to earn rental income. The expenses go on Form T776, and the net result is reported on line 12600 of your T1 return.

Income is reported on a calendar-year basis, and the accrual method is the default. In practice that means expenses are matched to the year they relate to, so keep invoices and dates.

Interest, property tax and insurance

• Interest: interest on money borrowed to buy or improve the property is deductible.
• Refinancing: interest on refinanced funds used for personal purposes is not deductible against rental income.
• Property taxes: deductible for the period the property was available for rent.
• Insurance: premiums for the current year are deductible, and multi-year premiums are spread over the years they cover.

If you refinance and use some of the money for something personal, such as a vacation or paying off a personal debt, keep a clear record of how the funds were used. The deductible interest follows the use of the money.

Repairs versus capital expenses

This is the area where landlords most often go wrong. A repair that simply restores a property to its original condition is generally a current expense, which means you can deduct it in the year. A capital expense generally gives a lasting benefit or advantage.

Repairs that are capital in nature cannot be deducted as repairs. Capital cost allowance (CCA) may be claimed on them instead. For the purposes of the tax you pay on a later sale, capital improvements are added to the adjusted cost base, while current expenses such as maintenance and repairs are not.

Whether a particular job is a repair or an improvement depends on the facts. Replacing a worn part is different from upgrading to something better, and a large renovation may include both. Ask your accountant to classify bigger jobs.

Costs that are not deductible as rental expenses

Mortgage principal repayments are not deductible. Land transfer taxes are added to the property's cost rather than deducted as a rental expense. Costs of selling, such as brokers' fees, legal fees and advertising, are outlays and expenses of the sale. They reduce the capital gain and cannot be deducted from other income.

Landlords sometimes assume that because the money was spent on the property it must be deductible. The tax system looks at what the money was for, not just where it went.

Renting part of a property or below market

If only part of a property is rented, you can claim only the expenses that relate to the rented area. The split can be based on square metres or number of rooms, for example 3 of 12 rooms is 25%. Expenses for renting part of a property cannot be claimed if there is no reasonable expectation of profit.

Renting below fair market value is treated as a cost-sharing arrangement, so a rental loss cannot be claimed. This can matter if you rent to a relative at a reduced rate.

What to do next

• Sort your receipts by category: interest, property tax, insurance, repairs, and capital items.
• Mark each repair as either restoring the property or giving a lasting benefit.
• Note the use of any refinanced funds.
• If you rent part of your home, calculate and document the rented share.
• Ask an accountant or lawyer about any large or unusual expense before you file.

Frequently asked questions