- Rental income is every amount you receive for the use of, or the right to use, your property.
- The Income Tax Act allows landlords to deduct expenses incurred to earn rental income.
- Current Expenses A current expense restores the property to its original condition without adding lasting value or extending its useful life.
If you rent out a property in Ontario — whether it is a basement apartment, a second home, or a condo you no longer occupy — the Canada Revenue Agency (CRA) expects you to report that income. Many landlords are caught off guard by what counts as income, what they can deduct, and the hidden risks of certain tax elections. This guide walks through the key concepts so you know what questions to bring to your accountant and, when legal issues arise, to a tax lawyer.
Rental income is taxed as ordinary income at your marginal rate. There is no flat "rental income tax rate in Ontario" — what you owe depends on your total income for the year, combined from all sources. As of writing, that means both federal and Ontario provincial tax apply. Check CRA's website and consult a tax professional for current rate tables, because rates and brackets change.
What Counts as Rental Income
Rental income is every amount you receive for the use of, or the right to use, your property. This includes:
- Monthly rent payments
- Advance rent and rent deposits (subject to specific CRA rules on timing)
- Amounts paid by a tenant to cancel a lease
- Payments for services you provide alongside the rental (parking, laundry, storage)
Incidental receipts — say, a one-time payment from a tenant to make a minor alteration — may also count depending on the circumstances. When in doubt, assume CRA will want to see it reported.
Deductible Expenses: What You Can Claim
The Income Tax Act allows landlords to deduct expenses incurred to earn rental income. You cannot deduct personal expenses or the cost of the property itself (that is handled separately through capital cost allowance, discussed below).
Common deductible rental expenses include:
- Mortgage interest (not the principal repayment — only the interest portion)
- Property taxes
- Insurance premiums
- Advertising costs to find tenants
- Property management fees
- Accounting and legal fees related to the rental
- Repairs and maintenance (subject to the current vs. capital distinction below)
- Utilities you pay as the landlord
- A reasonable portion of home expenses if you rent part of your own residence
Keep receipts for everything. CRA audits of rental income are not uncommon, and documentation is your defence.
Current Expenses vs. Capital Expenses
This distinction trips up many landlords, and getting it wrong can mean claiming deductions you are not entitled to — or missing ones you are.
Current Expenses
A current expense restores the property to its original condition without adding lasting value or extending its useful life. You can deduct it in full in the year you paid it.
Examples: repainting walls, fixing a broken furnace, replacing a cracked window, patching a roof.
Capital Expenses
A capital expense improves the property beyond its original state, adds a new feature, or significantly extends the life of a component. You cannot deduct the full cost in one year. Instead, it becomes part of the property's cost base or is subject to capital cost allowance (CCA).
Examples: adding a new bathroom, replacing all original windows with a superior product, building a deck that did not previously exist.
The line between the two is not always clear. A furnace replacement, for instance, could be current or capital depending on whether you are restoring what was there or upgrading to something substantially better. When the amounts are significant, ask your accountant before you file.
Capital Cost Allowance (CCA): Proceed with Caution
CCA lets you deduct a portion of the cost of depreciable property — the building itself and certain improvements — over time, using CRA's prescribed rates for each asset class. It is optional: you are not required to claim it.
Why Landlords Skip CCA
Many tax advisors recommend caution with rental property CCA for one reason: recapture. When you sell the property, any CCA you claimed that brought the property's undepreciated capital cost below its proceeds of disposition is added back into your income in the year of sale. That can create a large, unexpected tax hit at exactly the moment you are receiving sale proceeds.
In short, CCA defers tax today but can concentrate a larger bill at sale. Whether the deferral is worth it depends on your overall situation, plans for the property, and expectations about your future tax rates. This is a conversation to have with a qualified accountant — not a decision to make based on general articles like this one.
Converting Your Principal Residence to a Rental
If you move out of your home and start renting it, you trigger what the Income Tax Act calls a deemed disposition — CRA treats you as if you sold the property at fair market value on the day it changed use. This can create a capital gain even though no actual sale occurred.
The Principal Residence Exemption
If the property was your principal residence during the years you lived there, you may be able to shelter some or all of that deemed gain using the principal residence exemption. The exemption calculation is based on the number of years the property qualified as your principal residence relative to total years of ownership.
The Section 45(2) Election
The Income Tax Act includes a provision (commonly referred to by its section number, though you should confirm current numbering with CRA or a tax professional) that allows you to elect to defer the deemed disposition for up to four additional years after you vacate — without actually renting the property to an arm's-length tenant during that time in some circumstances. The rules here are nuanced and time-sensitive. Missing the election deadline means losing the option permanently.
If you are thinking about converting your home to a rental, speak with a tax lawyer or accountant before you move out. The election and the principal residence designation are filed on your tax return — getting this wrong is costly and difficult to unwind.
Frequently asked questions
Do I have to report rental income if I only rent part of my home?
Yes. If you earn income from renting even one room, a basement apartment, or a garage suite in your primary residence, CRA expects you to report it. You can deduct a proportionate share of eligible home expenses (mortgage interest, property taxes, utilities, insurance) based on the rented area as a percentage of total home space.
Is rental income subject to HST in Ontario?
Long-term residential rentals (typically leases of one month or more for use as a primary residence) are generally exempt from HST. Short-term rentals — such as vacation rentals or platforms like Airbnb for stays of less than 30 days — may attract HST obligations. The rules differ significantly between long-term and short-term, and the HST status of your rental should be confirmed with a tax professional.
What records should I keep for my rental property?
Keep all receipts, invoices, bank statements, and lease agreements for at least six years. CRA can reassess returns within that window. For capital expenditures, your records may need to go back even further to support the adjusted cost base of the property on eventual sale.
What happens if I under-report rental income?
CRA can reassess your return, charge arrears interest, and impose penalties. Repeated or deliberate under-reporting can attract gross-negligence penalties, which are substantial. If you have unreported income from prior years, a tax lawyer can advise on CRA's Voluntary Disclosures Program, which may reduce penalties if you come forward before CRA contacts you.
This is a tax question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.