How Rental Income Is Taxed in Canada (2026 Complete Guide)

Introduction: Rental Income and Your Marginal Rate

Canada taxes rental income as regular income at your marginal rate. Unlike capital gains, there is no 50% inclusion — every dollar of net rental profit is added to your other income and taxed accordingly. If you earn $90,000 from employment and $10,000 in net rental income, your combined $100,000 is taxed at your marginal rate for the top slice of income.

That might sound harsh — but the flip side is that allowable deductions can substantially reduce the taxable amount. The key is understanding exactly what the Canada Revenue Agency (CRA) allows you to deduct, and what it does not. Get it right, and the tax hit on your rental operation can be far smaller than many landlords expect.

This guide covers everything: deductible expenses, Capital Cost Allowance (CCA) depreciation, GST/HST treatment, short-term rental rules, non-resident obligations, and how to actually report it all on your T1 return.

What Counts as Rental Income

Before you can calculate deductions, you need to know what income you must report. Rental income is broader than just monthly rent cheques. The CRA requires you to include all of the following:

• Rent from long-term tenants — Any payments under a lease or tenancy agreement, whether monthly, quarterly, or annual.
• Short-term rentals — Income from platforms like Airbnb and VRBO is rental income (with additional rules discussed below).
• Subletting part of your home — If you rent out a basement suite, spare bedroom, or part of your principal residence, that rental income must be reported.
• Parking, laundry, and other services — If you charge tenants separately for parking spots, coin laundry machines, or storage lockers, those payments are part of your rental income.
• Forfeited security deposits — A security deposit is not income when you receive it. It only becomes income if you keep it — for example, because a tenant damages the unit and you don't return the deposit.

Deductible Rental Expenses — The Full List

This is where landlords can recover significant ground. The CRA allows a generous list of operating expenses to be deducted against rental income. The guiding principle is that the expense must be incurred to earn rental income — personal expenses don't qualify.

Repairs vs. Capital Improvements — A Critical Distinction

One of the most important distinctions in rental tax is between a repair and a capital improvement. Repairs restore something to its original condition and are fully deductible in the year incurred. Capital improvements extend the useful life of the property or add something new — and they are not immediately deductible. Instead, they increase your property's Adjusted Cost Base (ACB) or are added to your CCA pool for depreciation over time.

Examples: replacing a broken furnace with an equivalent unit is a repair. Upgrading to a high-efficiency furnace that represents a significant improvement is a capital expenditure. Patching a leaking roof is a repair. Replacing the entire roof is capital. The line is sometimes blurry — when in doubt, document your reasoning and consult a tax professional.

CCA (Capital Cost Allowance) — Depreciation on Your Rental Property

Capital Cost Allowance is the CRA's system for deducting the cost of depreciable assets over time. For rental property, this primarily means the building itself (not land) and any furniture, appliances, or equipment you provide.

CCA Classes for Rental Property

• Class 1 (4% declining balance) — Most rental buildings, including concrete or brick residential properties built after 1987.
• Class 6 (10% declining balance) — Frame or log buildings, or structures acquired before 1988.
• Class 8 (20% declining balance) — Miscellaneous fixtures, appliances, and equipment not included in another class.
• Class 10 (30% declining balance) — Furniture and certain appliances provided to tenants.

Half-Year Rule

In the year you acquire a depreciable asset, you can only claim 50% of the normal CCA. This is known as the half-year rule (or the "available for use" rule). If you buy a rental property in August and would normally claim 4% CCA on the building, you can only claim 2% in year one. The full 4% applies from year two onward on the remaining balance.

CCA Is Optional — Use It Strategically

A critical point that many landlords miss: CCA is optional, not mandatory. You can claim anywhere from zero to the maximum CCA in any given year. More importantly, CCA cannot be used to create or increase a rental loss — it can only reduce net rental income to zero.

This makes CCA a planning tool. If you have high rental income in a particular year, you might claim maximum CCA to reduce it. In a year where your rental income is already low, claiming CCA provides no benefit and unnecessarily shrinks your CCA pool for future years.

CCA Recapture on Sale

Here is where many landlords are caught off guard. When you sell a rental property, the CRA "recaptures" all the CCA you claimed over the years. If your original building cost was $400,000 and you claimed $80,000 in CCA over the years, leaving an undepreciated capital cost (UCC) of $320,000, and you sell for $450,000, you will have $80,000 of CCA recapture — taxed as ordinary income, not as a capital gain. The capital gain calculation is separate and based on the original cost and proceeds. Recapture is fully includable in income, making large CCA claims a tax deferral, not a permanent saving.

Rental Losses

If your rental expenses exceed your rental income in a given year, you have a net rental loss. Generally, you can deduct this loss against your other sources of income — employment income, business income, investment income — reducing your overall tax payable.

However, the CRA will deny a rental loss if the rental arrangement lacks a reasonable expectation of profit. The most common scenario is renting to family members at below-market rates. If you charge your adult child 30% of market rent, the CRA may take the position that the arrangement is not commercial in nature and disallow the resulting loss. Renting at or close to fair market value is essential if you wish to claim losses.

GST/HST on Rental Income

The GST/HST treatment of rental income depends critically on the type of rental. The rules differ significantly between long-term and short-term rentals.

Long-Term Residential Rentals — GST/HST Exempt

Renting a residential unit to an individual for use as their primary place of residence, on a continuous basis for more than one month, is an exempt supply under the Excise Tax Act. This means you do not charge GST/HST to your tenant, you do not register for GST/HST (for this activity), and you cannot claim Input Tax Credits (ITCs) on expenses related to the rental. The GST you pay on repairs, management fees, and other expenses is simply a cost of the rental operation with no GST recovery available.

Short-Term Rentals — GST/HST Taxable

Renting out a property for periods of less than 30 consecutive days — Airbnb, VRBO, cottage rentals — is a taxable supply. This means:

• If your total short-term rental revenue exceeds $30,000 in any 12-month period, you must register for GST/HST.
• You must charge GST/HST to guests on top of the rental price.
• You must file GST/HST returns and remit the collected tax.
• On the positive side, you can claim Input Tax Credits on GST/HST paid for expenses related to the short-term rental (cleaning, supplies, maintenance).

Note that Airbnb and other platforms are required to collect and remit GST/HST on behalf of hosts in many situations following recent legislative changes. However, this does not eliminate your obligation to register if you exceed the threshold independently — and it does not affect your ability to claim ITCs, which requires your own GST/HST registration.

New Residential Rental Properties

If you are a builder renting out newly constructed or substantially renovated residential property, the first supply is generally a taxable transaction subject to GST/HST. However, the GST/HST New Residential Rental Property (NRRP) Rebate allows landlords to recover a portion of the GST/HST paid on the purchase or construction. This rebate is significant and often overlooked — if you have recently purchased a new condo or built a rental property, speak with a tax advisor about whether you qualify.

Short-Term Rentals (Airbnb/VRBO) — Special Rules from 2024 Onward

The 2023 Fall Economic Statement introduced a significant change that took effect in 2024 and continues into 2026: short-term rental operators who are not compliant with local municipal licensing and zoning requirements may lose the ability to deduct rental expenses against their rental income.

The practical effect: if your municipality prohibits short-term rentals without a licence, and you operate without one, CRA will deny all deductions — mortgage interest, property taxes, insurance, management fees, everything. You will pay tax on your gross rental revenue, not net income. This is a severe penalty for non-compliance.

Municipalities with active short-term rental bylaws and licensing requirements include Toronto, Vancouver, Ottawa, Calgary, Montreal, Halifax, and many smaller cities and resort communities. The list is expanding rapidly as municipalities struggle with housing supply concerns.

Renting Part of Your Home

Many Canadians rent out a basement suite, a secondary unit, or spare rooms within their principal residence. This is a common and perfectly legitimate arrangement — but the tax rules require some care.

Proration of Expenses

When a property serves both as your personal home and as a rental unit, you must allocate all expenses between the personal portion and the rental portion. The most common and CRA-accepted method is by rentable floor area. If you rent out 30% of your home's floor area as a basement suite, you can deduct 30% of property taxes, insurance, mortgage interest, maintenance, and utilities. You cannot deduct 100% of those costs simply because the property earns rental income.

Principal Residence Exemption — A Critical Trap

Claiming CCA on a property that you also use as your principal residence can have serious consequences. If you claim CCA on the building portion of your home, the CRA considers this a "change in use" of the property. This can affect — or eliminate — your principal residence exemption for the portion of the home used for rental purposes.

The practical recommendation: if you rent part of your principal residence, do not claim CCA on the building. You can still claim CCA on furniture and appliances in the rental unit (Class 10 or Class 8), but avoid Class 1 CCA on the structure itself. The tax deferral benefit of building CCA is rarely worth the potential loss of the principal residence capital gains exemption, which could save tens of thousands of dollars when you eventually sell.

Non-Resident Rental Income

If you are a non-resident of Canada who owns Canadian rental property, different withholding rules apply under Part XIII of the Income Tax Act.

Standard Withholding: 25% on Gross Rent

By default, the tenant or property manager collecting rent on behalf of a non-resident landlord must withhold and remit 25% of the gross rent to the CRA on the 15th of the month following each rental payment. This withholding is a flat rate on gross income — no deductions for expenses.

NR6 Election: Pay on Net Income

Non-residents can file Form NR6 with the CRA before the first rental payment of the year. This allows withholding to be calculated on estimated net rental income rather than gross rent. For a property with large deductible expenses, this can significantly reduce the monthly withholding burden and improve cash flow.

Section 216 Return

Even if you have paid withholding tax throughout the year, you must file a Section 216 income tax return for that year — even if no further tax is owing. The Section 216 return lets you claim actual expenses against your rental income and potentially recover excess withholding that was remitted during the year. The deadline is two years after the end of the calendar year for which the return is filed.

Non-resident landlords must also appoint a Canadian agent to collect rents, withhold tax, and remit to the CRA. A Canadian tenant who pays rent directly to a non-resident landlord without withholding is technically liable for the non-withheld amount — making proper agent arrangements important for both parties.

Reporting Rental Income — Form T776

All rental income and expenses for Canadian residents are reported on Form T776 (Statement of Real Estate Rentals), which is filed as part of your annual T1 personal income tax return.

• A separate T776 must be filed for each rental property you own.
• If you co-own the property, each owner files their own T776 for their share of the income and expenses.
• CCA is claimed on Schedule 8 (Capital Cost Allowance) and reported on the T776.
• The T776 is due by April 30 of the following year (or June 15 if you or your spouse are self-employed — but any balance owing is still due April 30).
• Retain all rental records, receipts, and lease agreements for a minimum of six years following the filing date.

Worked Example: Toronto Condo Rental

Let's walk through a realistic example to illustrate how rental income taxation works in practice.

Scenario: A one-bedroom condo in Toronto is rented on a long-term lease at $2,200 per month. The landlord pays for no utilities. The landlord's marginal tax rate is 33%.

The landlord earns $26,400 in gross rent but pays income tax on only $5,280 — less than 20% of gross receipts. This illustrates how deductions dramatically reduce the effective tax burden on rental operations. If the landlord had also claimed CCA on appliances in the unit, net income could be reduced further.

Frequently Asked Questions