Taxes for Landlords: How Taxes on Rental Income Work

Owning a rental property can be one way to build wealth and secure a steady income stream. But it also has its fair share of responsibilities—especially when it comes to taxes.

In this guide, we’ll break down how rental income tax works in Canada, what you can claim as tax deductions for a rental property, and what to expect if you decide to sell.

Let’s get started with some basics.

Who qualifies as a renter?

A renter is generally someone who enters into an agreement to pay you for the use of your property. The property can be a house, apartment, office space, single room, shed, garage, or even part of your land for storing items such as boats, cars, or RVs.

Family members or close relations may or may not qualify as renters, depending on the arrangement. For example:

• Children. If your adult child or a relative pays you to use your property and the arrangement is structured like a rental agreement—meaning they make regular payments in exchange for accommodation—they are considered renters. If payments are informal and simply cover shared household expenses (e.g., utilities and groceries), the person won't qualify as a renter.

• Common-law partners. When a common-law partner contributes toward household costs, they are typically not regarded as renters, as these payments are part of shared living expenses.

What is rental income?

Rental income is the revenue you earn from renting out a property that you either own or have the legal right to use and rent out. This includes situations where you lease a property and sublet it to someone else or manage a property on behalf of the owner under a formal agreement.

Rental payments can be in the form of cash or cheques, in-kind payments (goods or commodities), or services. The Canada Revenue Agency (CRA) classifies these payments as rental income or business income, depending on the services you provide.

• Rental income: If you are primarily renting out space and providing only basic services—such as heat, light, parking, and laundry facilities—your rental income is typically considered income from your property. 

• Business income: If you offer additional services beyond the basics—such as cleaning, security, or meals—the CRA may classify your rental operation as a business. The more involved you are in providing these services, the more likely it is that your rental activities will be considered a business. 

Understanding these differences helps you with accurate tax reporting. For instance, you need to fill out Form T776, Statement of Real Estate Rentals for rental income, and Form T2125, Statement of Business or Professional Activities for business income.

Note: If you own rental properties under a legally incorporated business, the income will be subject to corporate tax rules. This article focuses on rental income for individuals.

Do I have to report rental income?

Yes, landlords are legally required to report all rental income to the CRA. Failing to report rental income constitutes tax evasion, which can lead to serious consequences, such as hefty fines, penalties, and interest on taxes owed. In severe cases, it could trigger a tax audit.

Some landlords may mistakenly believe that if the rental amount is small, they can choose not to report it or that it may go undetected. However, this is not true. The CRA actively monitors and cross-references financial information to ensure accuracy.

How does the CRA know about rental income?

There are ways the CRA can track and verify rental income, and ensure it's accurately reported and taxed.

• Third-party reporting: The CRA receives information from banks, financial institutions, and other government agencies.

• Real estate transactions: The CRA monitors real estate transactions, including property purchases and sales. If you own multiple properties, especially those not listed as your principal residence, the CRA may investigate.

• Tenants’ tax returns: If your tenants claim tax credits or benefits that require proof of rent payments (like the Ontario Trillium Benefit), the CRA can cross-reference it with your reported income.

• Tax audits and reviews: The CRA regularly audits tax returns and may randomly review your filings, requesting documentation like lease agreements and bank statements to verify rental income.

How to calculate rental income

Here’s a simple guide on how to calculate your rental income accurately:

Step 1: Choose a reporting method
The first step is to decide on the appropriate accounting method to calculate rental income. The CRA generally requires you to use the accrual method, where you report income when it’s earned and expenses when they’re incurred, regardless of when payments are made. For example, if you rent out a property in December but don’t receive the rent until January, you still report the income for December in that tax year. 

However, if you have no significant amounts receivable or outstanding at the end of the year, you may use the cash method. Under this method, you report income in the year it is received and deduct expenses when they are paid. 

Step 2: Determine gross rental income
Add up all the rent payments received (cash, cheque, electronic transfer) and enter the total on line 8141 of Form T776. You also need to include income from other sources (like lease extensions or cancellations), under "Other income" on line 8230. 

The sum of these 2 lines is the gross rental income that you need to report on line 8299 of Form T776 and on line 12599 of your T1 General.

Step 3: Deduct allowable expenses
The CRA allows you to deduct certain eligible rental expenses to reduce the taxes for a rental property. These can include mortgage interest, property taxes, repairs, maintenance, and utilities if you cover them.

The CRA recommends keeping detailed records of all expenses you claim, including receipts, invoices, and contracts, for at least 6 years after the end of the tax year they pertain to. If the CRA asks you to provide supporting documents during audits or reviews and you fail to do so, it could result in penalties or disallowed claims.

Step 4: Calculate your net rental income
Finally, subtract total deductible expenses from your gross rental income to get the net rental income. For example, if you earned $20,000 in rent over the year and had $5,000 in deductions for the rental property, your net rental income would be $15,000 ($20,000 - $5,000). You should report this amount on line 9946 of Form T776 and on line 12600 of your T1 General.

How is rental income taxed in Canada?

In Canada, your rental income is considered fully taxable. It’s added to your other sources of income, such as employment, investment, or business income, to determine your total income for the year. This total is then used to determine which tax bracket you fall into and the corresponding marginal tax rate.

Here are some special considerations for taxes on rental income.

If you rent a room in your house, is it taxable income?

Yes, if you rent a room in your house, the income is considered taxable. The CRA also considers this a "change of use" for your house, limiting your access to the principal residence exemption if you sell your house at a profit. However, you may still qualify for the exemption if the following conditions are met:

• the rental space is a small part of the house

• no structural changes were required to make the rental unit

• you didn’t claim capital cost allowance (CCA) on the portion of your rental unit

Even if you meet these 3 conditions, you can only avoid the “change of use” rules. The income from your rented room is still taxable.

What if you own a rental property with someone else?

If you own a rental property with a friend, spouse, or common-law partner, the CRA might consider you to be co-owners. You’re only considered to be in partnership if you meet one or more of the following conditions:

• the revenue and expenses exceed $2 million

• the partnership has $5 million in assets

• you’re legally considered a tiered partnership or corporation

Here’s how taxes work in both conditions.

• Co-ownership: In this scenario, you share the rental income and expenses with others according to your ownership percentages. If you’re in co-ownership with your spouse or common-law partner, the proportion is likely to be 50–50.

• Partnership: Each person in the partnership will receive a T5013 slip that details their share of the partnership’s income or loss. The rental income and expenses are divided according to this share in the agreement.

What are the key tax deductions for a rental property?

The CRA allows you to deduct the following types of expenses to lower your rental income tax:

1. Current expenses. These are everyday costs to maintain your property and operate it effectively. You can fully deduct these expenses in the year they are incurred. Examples include:

• repairs and maintenance

• utilities

• property taxes

• insurance premiums

• advertising costs

• interest on loans

Note: If you only rent out part of your property, you must prorate these expenses based on the portion of the property used for rental purposes. For example, if you rent out a single bedroom in a 4-bedroom house (one-quarter of your property), you can deduct a quarter of the expenses.

2. Capital expenses. These expenses include costs that add long-term value or extend the property’s life. Instead of a full deduction in the year incurred, they are depreciated and claimed over time using capital cost allowance (CCA). Examples include:

• major renovations or improvements

• purchase of major appliances

• structural additions

3. Prepaid expenses. These expenses are costs that you pay in advance for services or benefits that you’ll receive in future tax years. 

Prepaid expenses must be spread out over the coverage period. For example, if you pay $1,200 for an annual insurance policy starting from December 1, only $100 ($1,200 ÷ 12 month) would be deductible in the current tax year. The remaining $1,100 would be deducted in the following year.

4. Bad debts. You can accumulate bad debts if a tenant owes you rent that becomes uncollectible. You can claim it as a deduction if you previously included the unpaid rent in your reported income. You need proof, such as a notice of bankruptcy or correspondence showing that you've made reasonable efforts to collect the debt.

What rental expenses are not deductible?

Here are the rental expenses you cannot claim:

• market value of any services or labour you perform

• taxes on the personal use of property (if you live in the house or building you rent out)

• land transfer taxes you paid when purchasing the property

• principal portion of payments towards your rental property’s mortgage or loan

• penalties shown on your Notice of Assessment (NOA) from the CRA

How to claim a loss on rental property

If your rental property expenses exceed the income you earn from renting it out, you may incur rental losses. You can claim this loss on line 12600 of your T1 General to reduce your overall taxable income.

To claim a rental loss, you must rent the property at fair market value. If you rent it to a friend or relative at below-market rates, you can’t claim a loss.

Capital gains tax on selling a rental property

Now that we know how taxes on rental income work, let’s talk about what happens when you sell your rental property. 

If your selling price is more than what you paid for it, you might have a capital gain. You need to pay taxes on only 50% (one-half) of this gain. You’ll need to report these amounts using Schedule 3, Capital Gains (or Losses).

To reduce your taxable capital gains, you can deduct certain expenses, such as realtor and legal fees, that you incurred when selling the rental property.