Rental Property Income Tax in Ontario: What Landlords Must Report

If you rent out a unit, a basement apartment or a whole house in Ontario, the CRA expects you to report the income and lets you deduct the costs of earning it. The details matter, especially for repairs, shared homes and depreciation.

This article covers how rent is reported, which expenses can be deducted, how capital cost allowance (CCA) works, and why claiming it can affect your tax on a later sale. Your situation may involve facts not covered here, so a lawyer or accountant can confirm the details.

How rental income is reported

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

Reporting is 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.

The person who owns the property reports the income or loss. Co-owners report their share in proportion to their ownership.

Expenses you can and cannot deduct

A landlord can deduct any reasonable expenses incurred to earn rental income. These include 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. Multi-year premiums are spread over the years they cover.

Renting part of your home or below market rent

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.

If you rent below fair market value, the arrangement is treated as cost-sharing, and a rental loss cannot be claimed. This can come up when renting to family members, so it is worth asking before you file.

Capital cost allowance and the tax that can follow

CCA is the tax version of depreciation. It can generally be claimed on a rental property only once the property has become available for use. It is calculated on the declining-balance method, and you do not have to claim the maximum in any year.

• Land is not depreciable, so CCA is claimed only on the building.
• A rental building may fall in Class 1, 3, 6, 31 or 32 depending on what it is made of, so confirm the class for your building.
• CCA cannot be used to create or increase a rental loss, and net rental income is calculated across all rental properties before CCA is claimed.
• In the year you acquire the property, you can usually claim CCA on only one-half of net additions to a class, subject to exceptions such as accelerated investment incentive property.
• If you rent part of your home, claiming CCA on that area also requires that you are not designating the building as your principal residence.

The catch comes when you sell. If the class's undepreciated capital cost is negative at year-end, the excess is included in your income as recapture, taxed as ordinary income rather than a capital gain. If no property remains in the class, there may be a terminal loss, and usually 100% of a terminal loss is deductible, while only 50% of a capital loss is.

On a sale, dispositions of rental property are listed on Schedule 3, with land and building reported separately. Capital gain is proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale. One-half of a capital gain is the taxable portion under section 38 of the Income Tax Act.

What to do next

• Keep rent records, invoices for repairs and improvements, and statements for mortgage interest, property tax and insurance.
• Separate repairs from improvements before you file, since they are treated differently.
• If you rent part of your home, work out the split by square metres or rooms.
• Decide each year whether to claim CCA, remembering that you do not have to claim the maximum and that it may be recaptured later.
• If you moved into a former rental or started renting your home, ask a lawyer or accountant about change-in-use rules, because a change in use is treated as a sale at fair market value unless an election applies.

Frequently asked questions