Investment Property Tax in Ontario: Rental Income Rules

If you have bought your first investment property in Ontario, the tax side can feel like a second job. Rent comes in, bills go out, and at tax time you have to turn all of it into numbers the Canada Revenue Agency (CRA) will accept.

This article walks through how rental income is generally taxed, what you report and where, which costs reduce the tax, and what to watch for when you sell. It explains how things usually work. Your own facts matter, so an accountant or lawyer can confirm how the rules apply to you.

What you report and where

Rental income from real estate is reported on Form T776, Statement of Real Estate Rentals. Your gross rents are shown on line 8299, and the net income or loss is carried to line 12600 of your T1 return.

Rental income is reported on a calendar-year basis, from January 1 to December 31. The accrual method is the default, and the cash method is allowed only where the results would be almost the same as under accrual.

The person who owns the rental property reports the income or loss. If you own it with someone else, each co-owner reports a share in proportion to their ownership.

Which costs reduce your rental income

A landlord can deduct any reasonable expenses incurred to earn rental income. Common examples are interest on money borrowed to buy or improve the property, property taxes for the period it was available for rent, and insurance premiums for the current year.

Some costs are not deductible as rental expenses. Mortgage principal repayments are not deductible, and land transfer taxes are added to the property's cost instead. Interest on refinanced funds used for personal purposes is also not deductible against rental income.

Our companion article on deductible rental expenses goes into repairs, improvements and the dividing line between them.

Special situations that change the numbers

• Renting part of your home: you can claim only the expenses that relate to the rented area, and the split can be based on square metres or number of rooms, for example 3 of 12 rooms is 25%.
• No reasonable expectation of profit: expenses for renting part of a property cannot be claimed in that case.
• Renting below fair market value: this is treated as a cost-sharing arrangement, so a rental loss cannot be claimed.
• Capital cost allowance (CCA): you do not have to claim the maximum in any year, it is claimed on the building rather than the land, and it cannot be used to create or increase a rental loss.

What happens when you sell

Profit on the sale of a rental property is generally reported as a capital gain. The gain is the proceeds minus the adjusted cost base and the outlays and expenses of the sale. Under the Income Tax Act, the taxable capital gain is one-half of the capital gain.

There are two common traps. First, if you claimed CCA, selling can bring a recapture of CCA, which is added to your income rather than treated as a capital gain. Second, a gain on a housing unit in Canada held for less than 365 consecutive days is deemed business income, not a capital gain, unless a listed life-event exception applies.

The CRA also looks at the type of property, how long you owned it, your history of selling similar properties, work done on it, why you sold and your intention when you bought it. A property bought with the main intention of selling it is taxed on the gain as business income.

If you convert your home into a rental, that is a change in use. Every change in use is treated as a sale at fair market value, and converting a principal residence to a rental triggers a deemed disposition and reacquisition at fair market value unless an election applies.

Foreign rental property

If you also own rental property outside Canada, extra reporting can apply. Resident individuals must file Form T1135 if the total cost of their specified foreign property was more than $100,000 at any time in the year, and the test is cost, not fair market value. Foreign property that is mainly rented out for profit is not personal-use property, so its entire cost is reported. Foreign tax credits and treaties can change the result, so get advice if this applies.

What to do next

• Keep a record of every rent payment received and every expense paid, by calendar year.
• Confirm who owns the property on title and what each owner's share is.
• Separate repairs from improvements before you file.
• Decide with your accountant whether to claim CCA, and what that could mean on a later sale.
• Get advice before converting a home to a rental, or selling within a year of buying.

Frequently asked questions