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Home > Becoming a Landlord > Just the Facts > Before you Buy > Tax Issues

Income Tax

If you have income from rental property, you have to pay income tax. You are able to make some permitted deductions (generally your expenses) if they apply to you, and then pay tax on the net income. Revenue Canada requires you to complete a separate form (T776-Statement of Real Estate Rentals) to account for rental income.

You need to determine whether you are a co-owner or partner for income tax purposes, and whether your income from renting is rental or business income. This is important because your income will be treated differently for tax purposes depending upon which category it falls into.

Keeping records

Keep all relevant documents including invoices, receipts, and contracts. These records are not sent to Revenue Canada when you file your tax return, but you may need them if Revenue Canada asks to see them. You must keep your records for six years from the end of the tax year that they relate to.

For more guidance on keeping records see Revenue Canada publication RC4409(E) Keeping Records.

Calculating your rental income and expenses

You will be taxed on your rental income for a year from January 1st until December 31st.

  1. Income - rental income can be in the form of cash or cheques, kind or services. This means that if a tenant performs a service for you such as shovelling walks, for which they get a deduction in rent, you must include the cost of the service as part of your rental income. You also have to include as income, money from charging a premium for granting or extending a lease or sub lease, allowing a sublease, or cancelling a lease or sublease.
  2. Expenses -you can deduct any reasonable expenses you incur to earn rental income. The two basic types of expenses are: current expenses (operating expenses that recur and provide a short term benefit) and capital expenses (expenses that provide a benefit that usually lasts over several years).

Capital Cost Allowance

If you buy a property, or furniture or equipment for the rented property, you cannot deduct the cost against your rental income for that year. However you can deduct the cost over a period of years as these items depreciate in value. The amount you deduct is called the Capital Cost Allowance (CCA).

More information about CCA can be found in Revenue Canada Interpretation Bulletin IT-220 Capital Cost Allowance - Proceeds of Disposition of Depreciable Property, Interpretation Bulletin IT-478 Capital Cost Allowance - Recapture and Terminal Loss and Interpretation Bulletin IT-285 Capital Cost Allowance - General Comments.

Net Rental Income

Once you have calculated your expenses  and deduct these from your gross income, you have the net rental income. If you have a net rental loss where your expenses are more than your gross rental income, you can deduct the loss against other income if you incur the expenses to earn income. You cannot claim a rental loss if you are renting below market value to someone like a family member.

For more information, see the Canada Revenue pages about income tax and renting your home: http://www.cra-arc.gc.ca/tax/individuals/topics/gst-hst-rebate/rent_home-e.html 

May 2006