How Rental Income Is Taxed in Canada: An Ontario Landlord's Guide

You bought a rental property — maybe a basement unit, a condo you're renting out while living abroad, or a duplex where you occupy one side. The rent cheques are coming in. Now the question every Ontario landlord eventually Googles: how is rental income taxed in Canada, and what exactly do I have to report to the CRA?

The short answer is that rental income is ordinary income. It gets added to your other income and taxed at your marginal rate — but only after you subtract your allowable expenses. Done right, that deduction list can meaningfully reduce your tax bill. Done wrong, it can trigger a CRA audit or reassessment. This guide walks through the basics so you know what you're dealing with before you sit down with an accountant.

Rental Income Is Ordinary Income on Your T1

Canada does not have a special flat tax rate for rental income. Whatever net rental income you earn in a year is added to your employment income, business income, and other sources, and the combined total is taxed using the federal and Ontario graduated rate tables that apply in that year.

This means the tax you pay on rental income depends entirely on your overall income level for the year. A landlord earning $50,000 from their job and $20,000 net from a rental unit will be taxed differently than one earning $180,000. Rates change from year to year, so always confirm the current brackets with the CRA or a qualified accountant rather than relying on any fixed number you read online — including this article.

What Counts as Rental Income

The CRA's definition of rental income is broader than most landlords expect. You must report:

• Monthly rent from tenants (residential or commercial)
• Advance rent — for example, first and last month collected at lease signing (reportable in the year received, unless it clearly applies to a future year)
• Lease cancellation payments received from a tenant who wants out early
• Amounts received for services included in the rent (parking, storage, coin laundry)
• Damage deposits that you ultimately keep because of actual damage

What you do not include is a security deposit you're still holding and intend to return — that's a liability, not income, until you keep it.

The Net Rental Income Formula

The CRA taxes net rental income, not gross rent. The formula is straightforward:

Net rental income = Gross rental receipts − Allowable expenses

Allowable Expenses

The following are generally deductible (as of writing — confirm current rules with the CRA or an accountant):

• Mortgage interest (not the principal repayment — only the interest portion)
• Property taxes
• Insurance premiums
• Utilities you pay as landlord (heat, hydro, water)
• Advertising costs to find tenants
• Property management fees
• Maintenance and repairs (note: improvements are treated differently — see below)
• Professional fees such as legal or accounting fees related to the rental
• Office expenses for keeping rental records
• Travel expenses to collect rent or supervise repairs (subject to limits)

Capital Expenditures vs. Repairs

This distinction trips up many landlords. A repair restores something to its original condition (patching drywall, fixing a leaky tap) and is fully deductible in the year you pay for it. A capital expenditure improves or extends the useful life of the property (adding a bathroom, replacing all the windows), and instead gets added to the property's adjusted cost base (ACB) or claimed through the Capital Cost Allowance (CCA) system over time. Mixing these up is one of the most common errors the CRA finds on rental returns.

Capital Cost Allowance (CCA)

You can claim CCA — essentially depreciation — on the building portion of a rental property (not the land). This reduces your net income in the current year. However, claiming CCA can trigger recapture when you eventually sell, meaning the deducted amounts may be added back to your income in the year of sale. Most accountants advise landlords to think carefully before claiming CCA; it is not always the slam-dunk deduction it appears to be.

The T776 — Statement of Real Estate Rentals

If you own rental property, you report your income and expenses on Form T776 — Statement of Real Estate Rentals, which gets attached to your T1 personal income tax return. The form asks for:

• Property address and description
• Gross rental income received
• Each category of allowable expenses
• CCA calculations (if applicable)
• Co-ownership or partnership details

One T776 is completed per property (or per co-ownership arrangement). If you own three rental properties, you file three T776 forms. Keep receipts and records for at least six years after the tax year they relate to — the CRA can reassess within that window.

Co-Ownership and Partnership Basics

Many Ontario landlords own rental properties with a spouse, family member, or business partner. The tax treatment depends on how the arrangement is structured:

• Co-ownership (not a partnership): Each co-owner reports their proportionate share of income and expenses on their own T776. There is no partnership return.
• Partnership: If you and another person carry on a rental activity as a business in common with a view to profit, CRA may treat this as a partnership, which requires a separate partnership information return (T5013 in some cases). The line between co-ownership and partnership can be blurry; a lawyer or accountant can help you characterize the arrangement correctly.

Income splitting with a spouse or family member is subject to attribution rules under the Income Tax Act. Simply putting a property in a spouse's name or allocating income disproportionately to a lower-income family member can attract CRA scrutiny.

Loss Years — What Happens When Expenses Exceed Income

If your allowable expenses exceed your gross rental income in a given year, you have a net rental loss. Generally, you can deduct this loss against your other income (employment, business, etc.) in the same year, subject to CRA's rules on the reasonable expectation of profit.

The CRA can challenge rental losses — especially in early years or where the property generates losses year after year — on the basis that the activity is not a genuine commercial endeavour. Keeping documented evidence that your rental is operated in a businesslike manner (market-rate rent, records of efforts to attract tenants, realistic financial projections) is important if you ever face a challenge.

Interaction with the Principal Residence Exemption

If you rent out part of your principal residence (a basement suite, for example), you must report that rental income. However, doing so can affect your ability to claim the principal residence exemption when you eventually sell the home.

The general CRA position is that renting out a portion of your home does not automatically cause you to lose the exemption for that portion, provided:

1. The rental use is ancillary to the main residential use
2. You have not made structural changes that make the rented portion a separate unit
3. You have not claimed CCA on the residential portion

If you have converted a property to primarily rental use or made significant structural changes, the principal residence rules become considerably more complex. This is an area where professional advice before you sell — not after — makes a significant difference.

Frequently asked questions