How to manage tax on rental income

Renting out property can be a great source of income, but it also comes with tax responsibilities that many landlords find confusing or easy to overlook. Miss a deduction, and you’re leaving money on the table. Misreport your income, and you could face penalties from the CRA. This guide breaks down everything you need to know about tax on rental income, so you can avoid costly mistakes.

What is rental income?

Rental income is the payment (in the form of cash, cheques, goods/commodities, or services) you receive from renting out a property that you own or have the legal right to use and benefit from. The latter includes situations where you sublet a property to someone else or manage a property on behalf of the owner under a formal agreement.

You can earn rental income by renting out:

• Apartments
• Houses
• Individual rooms within a residence
• Spaces within office buildings

While the payments from these sources are usually classified as rental income, the Canada Revenue Agency (CRA) may sometimes categorize them as business income based on the services you provide. If you simply rent out a property and provide basic services — such as heat, light, parking and laundry — your revenue is considered rental income. However, if you offer extra services, like cleaning, meals, and concierge, your income may be treated as business income, which carries different tax implications. 

How to calculate taxable rental income

Here’s a simple step-by-step guide to help you accurately calculate and report real estate taxes on rental property.

Step 1: Select your accounting method

Start by selecting a reporting method for the calendar year (January 1 to December 31). In most cases, you'll use the accrual method, which means you:

• Report rental income when it’s earned, regardless of when you receive the payment.
• Deduct expenses in the period they are incurred, even if you haven’t paid yet. 

For example, if you rent out your property in December but receive payment in January, the income is still reported for December. However, if you rarely have outstanding payments or expenses at year-end, you might opt for the cash method, where you record income and expenses when they are actually received and paid.

Step 2: Calculate gross rental income

Next, sum up all the rental payments you’ve received during the tax year. This includes all forms of payment — cash, cheques, electronic transfers — and any additional revenue, like fees from extending or cancelling a lease. This total represents your gross rental income and needs to be entered on line 8141 of Form T776, Statement of Real Estate Rentals.

Step 3: Identify and deduct eligible expenses

Now, list all the eligible expenses you can deduct from your rental earnings. Common deductions include mortgage interest, property taxes, and insurance premiums. If you get a mortgage or loan to buy or improve your rental property, you can deduct additional expenses such as:

• Fees related to mortgage applications, appraisals, processing and insurance
• Mortgage guarantee fees
• Brokerage fees
• Legal fees for mortgage financing

Also read: Filing your taxes in Canada – what you need to know

If you experience losses from bad debt — where a rental payment owed to you becomes uncollectible during the year after you’ve already reported it as income — you can deduct this amount from your gross rental income. Be sure to document your efforts to recover the debt. 

Also read: Is home insurance tax deductible in Canada?

Step 4: Determine your net rental income

Finally, subtract your total eligible expenses from your gross rental income. The resulting figure is your net rental income, which is the amount you will report as taxable income. For example, if your gross rental income is $25,000 and your deductible expenses total $7,000, your net rental income would be $18,000. 

Report this amount on line 9946 of Form T776.

What expenses can you deduct from rental income?

The CRA allows you to deduct certain expenses, categorized as capital or current, that are directly related to running your rental property. Let’s take a look:

1. Current expenses: These are regular, day-to-day costs that help maintain or operate your rental property. You can deduct the full amount of current expenses in the year they occur. Examples include:

• Repairs and maintenance (e.g., fixing a leaky faucet, repainting a wall)
• Utilities (if you pay them on behalf of your tenants)
• Property taxes
• Insurance premiums
• Advertising costs (e.g., online listings, signage)
• Interest on loans/mortgages
• Office expenses (e.g., pen, paper, pencils)
• Legal and accounting fees

If you pay in advance for goods or services that extend into future tax years, you can only claim the portion that applies to the current year and defer the rest to subsequent years. For example, if you pay an annual home insurance premium of $2,400 starting December 1, you can deduct $200 ($2400/12) in the current tax year, deferring the rest $2,200 to the following year.

2. Capital expenses: These costs add long-term value or significantly extend the life of your property. Rather than claiming the full expense in one year, you deduct these costs over several years through Capital Cost Allowance (CCA). Examples include:

• Major renovations or improvements like replacing the roof tiles.
• Purchasing large appliances like refrigerators, that serve as significant upgrades.
• Structural additions, such as building a new garage.

Note: Make sure to keep detailed records of all current and capital expenses you claim — including receipts, invoices, and contracts — for at least six years.

How much do you pay in taxes on rental income?

In Canada, income from rent is taxable. Once you determine your net rental income (gross rental income minus allowable expenses), it is combined with your other sources of income, such as employment earnings, investments, or business income, to establish your total income. This total then determines your tax bracket and the corresponding marginal tax rate.

Since Canada’s tax system is progressive, the more income you earn, the higher the tax rate you pay on each additional dollar.

Do you pay taxes for renting a room in your house?

Yes, the income you receive from renting a room in your house is fully taxable. The CRA considers this rental income even when it’s just part of your principal residence. You also need to prorate your expenses based on the share of the space used. For example, if you rent out one room in a four-bedroom house, you can only deduct one-quarter of eligible costs, such as utilities and repairs, from your taxes.

Looking at the long-term tax implications, renting out a room may be seen as a “change of use” for that part of your home, which could affect your eligibility for the principal residence exemption when you sell. However, if the rented area is small, no major structural changes were made, and you haven’t claimed capital cost allowance (CCA) on it, you might still qualify for the exemption.

How do rental taxes work on co-owned properties?

When you co-own a rental property with someone else, the rental income and related expenses are typically split according to your ownership percentage. For example, if you and a partner own a rental property equally, each of you would report 50% of the gross rental income and 50% of the allowable expenses, such as property taxes, repairs, and maintenance costs. If the ownership split differs, allocate the income and expenses accordingly.

How to report a loss on your rental property

A rental loss happens when the expenses you incur for your rental property exceed the rental income you receive during the year. To claim a rental loss, you must be incurring expenses with the clear intent of generating income. For example, if you rent out your property below fair market value to a family member, the CRA may view this as a cost-sharing arrangement rather than a genuine rental transaction, and you may not be able to claim the loss.

Now that we know how taxation of rental income works, let’s see what happens when you sell a rental property.

Capital gains tax when selling a rental property

Any profit you make on selling a rental property is treated as a capital gain. In Canada, you have to pay capital gains tax on 50% of your profit, meaning half of the gain is added to your taxable income. Recently, Prime Minister Mark Carney cancelled the new inclusion rate proposal of 50% for gains below $250,000 and 66.67% for any gains above that threshold. So, the current inclusion rate of 50% remains in place.

If you’ve claimed depreciation on the property, you might also have to report a recapture of CCA as ordinary income. Ultimately, your tax liability when selling a rental property will depend on factors such as your total income, how long you owned the property, and any expenses incurred during the sale.

Bottom line

Managing rental income and taxes in Canada is more than just crunching numbers — you need to keep your investments profitable and taxes compliant. Whether you're earning from a single room or a multi-unit property, understanding how taxes on rental income work can help you optimize your deductions and minimize surprises when filing taxes. 

Also read:

• How to use life insurance for tax and estate planning
• 7 things to consider before filing your taxes
• Is rent-to-own a good idea?
• What is tenant insurance?
• Rent vs. buy: When is a mortgage better than rent in Canada?