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How to File Your Rental Income Taxes

If you’re a landlord, it’s important to understand how to file your rental income come tax time. Whether you’re renting out a basement apartment or an investment property, you’ll need to report your rental income. This is done by completing Form T776, Statement of Real Estate Rentals.

If you’re filing your own income tax, you’ll need to fully understand the form to properly file your taxes; the last thing you want to do is get audited by Canada Revenue Agency (CRA).

Tax Treatment of Rental Income

Similar to income earned from self-employment, you’ll need to report rental income earned in a calendar year. If you work a regular 9 to 5 job, you’re probably used to taxes being deducted at source by your employer. However, since taxes aren’t deducted from each rent cheque received from your tenants, you’ll need to pay your fair share of taxes come April 30th. The advantage of rental income is that you’re able to write off a percentage of the expenses related to your rental property.

Completing Form T776, Statement of Real Estate Rentals

If you’re the sole owner of a rental property, completing the first part of Form T776 is pretty straight forward. After you’ve completed your basic personal information, you’ll start by entering your gross rents under the income section. For example, if you receive rental income of $700 per month for your basement apartment from January to December, your gross rental income for the year would be $8,400.

Claiming Your Expenses

The next section of the form is for claiming your expenses related to your rental property. Expenses are claimed on a cash basis (not an accrual basis). That means your expenses are claimed when you actually paid for them. For example, if you paid your hydro bill in December 15, 2012, you’d claim the expense on your 2012 income tax return, but if you paid your water bill on January 25, 2013, you’d wait until your 2013 income tax return to claim it.

Before completing your expenses, it’s important to understand there are two columns you’ll need to complete: total expenses and personal portion. If you have a rental property that’s 100% rented out to tenants you won’t have any personal portion, but if you live in your principal residence and rent out the basement, you’ll need to enter your total expenses for the year and allocate the amount for your personal portion. You can estimate the percentage of your house rented out. For example, if you rent out the basement in a bungalow, it’s probably reasonable to claim 50% to 60% as personal.

Here are the most common expenses you’ll claim:

  • Advertising – For example, if you put an advertisement in the local newspaper to attract tenants, you can claim 100% of the expense.
  • Insurance – This is for home insurance paid on your property.
  • Interest – You can claim mortgage interest (not principal) paid.
  • Property Taxes – Even if your property taxes were prepaid by the seller when you purchased your house, you can claim a portion here.
  • Utilities – Heat, hydro, water, etc.

Maintenance and Repairs vs. Capital Cost Allowance (CCA)

It’s important to understand whether an expense is current or capital. Canada Revenue Agency’s (CRA) website has a helpful questionnaire to determine where an expense should fall under.

According to CRA, renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. For example, painting your rental unit is probably considered current and should be claimed under maintenance and repairs, since it’s an expense that usually recurs after a short period. Meanwhile, a capital expense generally gives a lasting benefit, such as reroofing your house. Another important decision is whether to claim CCA at all. Although claiming CCA reduces your taxable income for that year, when you sell your property previous CCA claims will be recaptured and taxed accordingly.  Here is more information on how capital cost allowance works.

Once you’ve entered your expenses, at the bottom of the form is your net income (or loss). This final amount is reported on line 126 of your income tax and benefit return. Once you’ve completed the form the first time you’ll get the hang of it. As long as you keep your receipts and bills organized, you should have no problem filing your rental income taxes every year.

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

{ 27 comments… add one }
  • bandana May 8, 2013, 9:24 pm

    Thanks for the article. If you rent out a property in full and do major repairs, I presume you can deduct those expenses. But what would happen, if say six months after doing the repairs, the tenant moves out – and you occupy the house. Are the initial repair expenses still deductible?

  • Kooritsuki May 9, 2013, 7:10 am

    Probably important to note that for those who rent out part of their principle residence that if they deducted CCA for that rental, they will have to pay some taxes on CCA recapture capital gain when they sell their home. I believe it is in proportion to the percentage of your house designated to the rental.

    Since your principle residence is exempted from being taxed on capital gains when it is sold (some rules apply), it may not be a very good idea to take CCA on these rentals. And note that even if you have taken CCA for only one year, you’ll still have to pay tax on a portion of the capital gains from selling your principle residence… not fun.

  • Ciceron May 9, 2013, 1:13 pm

    @bandana

    “If you rent out a property in full and do major repairs, I presume you can deduct those expenses.”

    Not exactly. These major repairs will usually count as capitalizable expenses. In other words, it is not deducted directly against revenue, but rather added to the cost of acquiring the property. If you do not claim CCA, this will decrease the capital gains tax to be paid when the house is sold.

    “But what would happen, if say six months after doing the repairs, the tenant moves out – and you occupy the house. Are the initial repair expenses still deductible?”

    I believe the costs will be capitalized in this case as well (but check with a professional first!). By moving in, the property becomes your principal residence. It will thus become partly exempt from capital gains tax. For example, if you buy the house, rent it out for 7 years, move in, and live in it for 3 years, 30% of the capital gains will not be taxed at all.

  • Dan May 9, 2013, 11:28 pm

    @bandana it depends on what exactly the repairs are. It’s one thing to fix a leaky faucet, but it’s another thing to put on a new roof. One of them is needed for the ongoing operations of the business (leaky faucet) while the other (new roof) is controlled by you (the owner) and can be used to earn future income – therefore its capital in nature and needs to be capitalized.

    I should note that whether a cost is capital or operational (expense) depends on the nature of it, not when it was incurred.

    If it’s capital in nature, you need to capitalize it rather than “deduct” it as you mentioned. Be careful of recapture on the CCA though as this could be a tax liability in the future.

    When you move back into the house CRA considers this a “change in use” of the property with a deemed disposition. At that point no costs incurred are deductible because you are no longer earning income from the house (but costs incurred when it was rented out can be expensed or capitalized)

    Hope that helps!

  • Sierra May 11, 2013, 3:09 pm

    Even if you do not take any CCA on the rental building/portion, you may still have to pay tax on the capital gains when you sell. When you sell, the calculation is in two parts- one is a recapture/or/terminal loss on the T776; the other is the capital gain calculation for schedule 3. Further, the purchase cost and the selling cost must be subdivided into the building portion and the land portion. The land portion is not subject to CCA and probably has increased in value over the years, so capital gains.

  • Max November 10, 2013, 2:46 am

    “If you’re the sole owner of a rental property, completing the first part of Form T776 is pretty straight forward”
    what if you are not the sole owner of a rental property?
    Can you split rental income 40 to 60 0r 10 to 90? any arbitary ratio?

  • Dan November 11, 2013, 8:54 pm

    @Max if you’re not the sole owner you need to recognize your share of the revenues and expenses. So if your net income was $10k and you own 50% you’d need to recognize 5k of the income and your partner who owns the other 50% would recognize the same

  • Celia December 15, 2013, 1:02 pm

    Couple of questions:
    -I own several rental properties that bring in a big income. Nice, eh? Except that every year I pay a huge tax bill that the properties don’t fully fund.
    I know I can claim many expenses but with the mortgage payments on the properties (principal) I don’t actually net much from the rents resulting in the big tax bill.
    Rather than pay out the money as tax, I would like to put it into the buildings and increase my mtce and repairs claim thus reducing my taxable income.
    However, without doing an entire ‘mock’ tax return, I have no idea how much to spend.
    Do you know of a calculation or calculator that can help me figure this out quickly without filling in a tax form?
    – Also, this year I bought a 4 plex and wonder what part of the purchasing is deductible? Are my legal fees deductible? I refinanced one property to purchase the other, are the legal fees and mortgage penalty fee deductible? Is there somewhere to find this information?
    Thanks for any help!

  • Ed Rempel December 16, 2013, 9:26 pm

    Hi Celia,

    If you spend money on legitimate expenses, such as maintenance, your taxes will be reduced based on your marginal tax bracket. For example, if you are in a 30% tax bracket, you will save 30% of what you spend. If you spend too much and push your income down to a 20% tax bracket, then you get less back.

    You need to be aware of capital expenses, though. Maintenance is tax deductible each year, but major improvements are usually capitalized as an asset, which you cannot deduct except for depreciation.

    The costs of purchasing a building are part of the capital cost of the building on which you could claim depreciation (on the building portion only – not the land portion of the cost of buying). This would include the legal fees and land transfer tax. The mortgage penalty would normally be deductible, but it depends on the reason for refinancing. If the only reason was to buy your new 4-plex, then the mortgage penalty should probably also be capitalized as part of the cost of the building.

    Taxes on rental properties tend to be high once you pay the mortgage down, because rent is fully taxable. Often the best strategy is to pay down the mortgages as slowly as possible – 30-year amortizations.

    Tax on rentals can be complicated, so it is best to get some professional advice & help with your tax return, Celia.

    Ed

  • al January 13, 2014, 1:59 pm

    can I claim the condo fees as expenses?

  • FrugalTrader FrugalTrader January 13, 2014, 2:02 pm

    @al, if you rent out your condo, then my understanding is that you can claim the condo fees.

  • Celia January 14, 2014, 1:43 am

    Thanks for the reply, Ed. I appreciate the explanation! Still looking for a professional who can help though!

  • Dan January 14, 2014, 3:08 pm

    @Celia I am an accountant and can help you with that. If you are interested message back with your email and I can let you know how you can reduce your taxes

  • Celia January 15, 2014, 7:09 pm

    How to give you my email address without posting it on the site?

  • Dan January 15, 2014, 11:51 pm

    @Celia my email is: cdntaxaccountant at hotmail.com

  • Nancy April 1, 2014, 12:10 pm

    Hi

    Really need your guidance as I am helping my daughter do her tax return for 2013. She purchased a house in 2006 with basement apartment rental unit. Remainder of the house was her primary residence until 2010. Then moved out and rented whole house ( 2 units). Then sold house in Aug 2013 and incurred a mortgage penalty. A couple of questions:
    Can the mortgage penalty be added to the cost of the house when calculating the ACB?

    Does capital gains only apply to the portion of the house that was rented and for the rental periods?

    Additionally, please confirm there would be no capital gains for the 4 year period on the main portion of the house which was primary residence from 2006 to 2010.

    thanks in advance

  • Dan @ Our Big Fat Wallet April 1, 2014, 10:45 pm

    @Nancy in this case you’d recognize 50% of the capital gain between 2006-10 (assuming 50% was rented out) and 100% between 2010-13. So if she paid $200k in 2006 and it went up to $220k in 2010 you’d recognize $10k as a capital gain (half of which is taxable). Then if it went up to $240k in 2013 you’d recognize another $20k ($240k – 220k) and half is taxable. The mortgage penalty can be applied to the ACB. Careful about the market value in 2010 and a possible recapture on CCA (assuming she took CCA). The capital gain isn’t completely tax free because a portion of the house was always rented out. Hope that helps

  • Ed Rempel April 2, 2014, 1:28 am

    Hi Nancy,

    How much of your home is the basement apartment? If your home is mainly a home with a small portion rented, then you can reasonably have declared it as your principal residence and have the growth tax-free while you only had a basement apartment. If it was a large portion, such as half, then Dan is right that half the gain would be a capital gain.

    Once it is fully rented, then the growth after that is clearly a capital gain. The only except is temporary situation where you rent it while out of town for a temporary job, for example, an you file an election to defer considering your home a rental property. You could not claim this if you bought another home.

    At the date of any “change of use”, it is up to you to determine the fair market value, Your home did not actually sell at those points, so the price is determined by the best evidence. A professional appraisal is best, but a market opinion from a real estate agent also has some value.

    The mortgage penalty would not be part of your ACB. It would likely be a cost of selling, so it should reduce your “proceeds of disposition”, or selling price. If it is a small amount, you may be able to declare it as an expense (part of your mortgage interest).

    Dan is right that essentially any capital gain will first be considered as a “recapture”(reversal) of all the depreciation you claimed, which means that portion of the gain is fully taxable.

    Does that answer your question, Dan?

    Ed

  • Lisa April 26, 2014, 9:14 am

    Dan
    Do you do both USA and Canadian rental property income tax? Or can you recommend anyone, do I need a tax lawyer?

  • Nancy April 29, 2014, 2:27 pm

    Dan & Ed, thanks for your comments which were very helpful.

    On the previous years tax returns 33% of the home was used for the basement apartment.

    CRA states that your whole property can be considered your principal residence ( or not considered to have changed its use) if: a) rental use is relatively small in relation to use of principal residence; what constitutes relatively small? b) you do not make structural changes; None were done; and c) you do not deduct any CCA on that part of the property used for rental. CCA was claimed for new refrigerator purchased for apartment. Is this considered CCA on property? Hoping it will not be necessary to calculate capital gains on the rental portion for 2006 – 2010. Also when calculating capital gains on the actual sale of the house in 2013, is it necessary to use the T2091 IND form as well as Sch 3? Does FMV have be used in the ACB or just selling price? It’s seems complicated and a little overwhelming!

  • Dan @ Our Big Fat Wallet April 30, 2014, 12:24 am

    @Nancy without knowing specifics the CCA part would depend on the class originally used. I will assume the 33% is based on square footage. The capital gain would be on the selling price (which I’d assume is near FMV). You’re right, that is complicated, and hard to tell without specifics but you might want to double check the CCA as there could be a recapture

  • Craig April 30, 2014, 11:32 am

    Can I claim “Rentalsman arbitration penalty costs associated with losing a new tenant due to the existing tenant’s inability to vacate rental property on time

  • Dan @ Our Big Fat Wallet April 30, 2014, 10:06 pm

    @Craig I will assume you mean legal costs to evict….those costs can be claimed against the rental income for that year as long as they directly relate to the property and were paid by you

  • naina March 2, 2015, 5:08 pm

    Me and my relative(co-owner) bought 4 plex in 2014 and my relative will move in one of those 4 apartment.
    Q-Can I claim mortgage interest as an expenses? Does CRA allowed to do so? if so, will it be 100%
    Q- We paid welcome tax. Can we claim as current expenses or capital expenditure?
    Thanks for prompt answer

  • Ed Rempel March 2, 2015, 10:45 pm

    Hi Naina,

    Is your relative going to pay market rent for his/her apartment? If not, then you can probably claim 3/4 of your mortgage interest and other expenses (assuming the rent on the 4 apartments is similar).

    Your other option is to have your relative pay a market rent. The you can claim the full expenses.

    Land transfer tax is a capital cost, not a current expense. It is not deductible. It is part of your capital cost for calculating your capital gain on sale.

    I hope that’s helpful.

    Ed

  • Patrick March 19, 2015, 3:46 am

    Hi, there,

    I have bought an investment property under joint name with my wife last year. When I complete the form T776, can I split half of the income and expenses to my wife by filling 50% of ownership?

    Would appreciate anyone could give me advice.

    Thanks,
    Patrick.

  • Rick Pennefather April 26, 2015, 10:06 pm

    I sold a rental property (duplex) in 2014 after 17 years of ownership. I have always calculated but never claimed CCA. Now that property has sold I want to claim the CCA. Which amounts do I use and where do I enter them? There is capital gain. Thanks, Rick

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