How is rental property income taxed in Canada?

In Canada, rental property income is added to your other income and taxed at your marginal rate, after you deduct reasonable expenses on Form T776, Statement of Real Estate Rentals. Current expenses such as property taxes, insurance, mortgage interest and minor repairs are deducted in the year you pay them, while capital improvements are deducted over time through capital cost allowance (CCA), which for most buildings is Class 1 at 4%. CCA cannot be used to create or increase a rental loss, and CCA you have claimed may be added back to income as recapture when you sell.

Updated October 29, 2026. Figures from the CRA Rental Income guide (T4036) linked below.

What you can deduct each year

Advertising: for tenants, including finder's fees.
Insurance: the current year's premium only. Prepaid multi-year premiums are spread over the years they cover.
Interest: on money borrowed to buy or improve the property. Mortgage principal repayments are not deductible.
Property taxes: for the period the property was available for rent.
Utilities: if your rental arrangement says you pay them.
Repairs and maintenance: labour and materials for minor repairs. You cannot deduct the value of your own labour.
Management fees: amounts paid to a manager or agent to collect rent or find tenants.

Current or capital?

Current expense: one that usually recurs after a short period, or restores the property to its original condition. The CRA's example: painting the exterior of a wooden house.
Capital expense: one that gives a lasting benefit or improves the property beyond its original condition. The CRA's examples: putting vinyl siding on a wooden house, or replacing wooden steps with concrete steps.

Capital cost allowance

Class 1 at 4%: Class 1 includes most buildings acquired after 1987, unless they belong to another class.
Land: land is not depreciable, so only the building's cost goes into the CCA class.
No loss from CCA: you cannot use CCA to create or increase a rental loss.
Half-year rule: in the year you acquire rental property, you can usually claim CCA on only one-half of your net additions to a class. The rule does not apply to accelerated investment incentive property, and the current guide says Class 1 property acquired after 2024 benefits from the reaccelerated investment incentive, so check the guide for the year you buy.

Renting part of your home

Split shared costs: divide expenses that relate to the whole property between your personal part and the rented area, using square metres or number of rooms.
Rental-only costs: expenses that relate only to the rented area, such as advertising, are fully deductible.
CCA on your home: the CRA's example allows CCA on the rented area only if it does not create or increase a rental loss and the building is not being designated as a principal residence.

When you sell

Recapture: when sale proceeds of depreciable rental property exceed the class's undepreciated capital cost (UCC), the difference shows up as recapture, reported on line 9947 of Form T776.
Terminal loss: when all property in a class is disposed of and UCC remains, that balance may be deducted as a terminal loss on line 9948.

Worked examples (estimates for illustration)

Vernon basement suite: the suite is 30% of the home's floor area. Rent $1,600 x 12 = $19,200. Shared costs: property tax $4,800 + insurance $1,800 + utilities $3,600 + mortgage interest $12,000 = $22,200. Rental share: $22,200 x 30% = $6,660. Advertising for the suite: $100. Net rental income: $19,200 - $6,660 - $100 = $12,440.
Kelowna condo and the CCA limit: rent $24,000, expenses $22,500, income before CCA $1,500. Class 1 UCC of $400,000 x 4% = $16,000 available, but CCA is capped at $1,500. Net rental income: $0.
Penticton house repairs: repainting the wood exterior for $6,000 is deducted this year. Replacing the wood with vinyl siding for $18,000 is added to the building's class and claimed over time.
West Kelowna rental sold: building cost $350,000, CCA claimed $60,000, UCC $350,000 - $60,000 = $290,000. Building portion of the sale: $330,000. Recapture: $330,000 - $290,000 = $40,000.

FAQ

Which form do I use for rental income?
Form T776, Statement of Real Estate Rentals, filed with your personal return.

Can I deduct my mortgage payments?
Only the interest portion. Principal repayments are not deductible.

Can I claim a rental loss?
A loss from current expenses may be possible, but CCA cannot create or increase it, and losses are not allowed where there is no reasonable expectation of profit.

Is a new roof a repair?
Patching leaks to restore the original condition is generally current. Work that improves the property beyond its original condition is generally capital.

Every situation is different, so talk to your accountant about your specifics.

Sources: CRA: Rental Income guide (T4036); CRA: Line 9947, recaptured capital cost allowance.

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