How rental income is taxed in Canada

The basic mechanics

You report gross rent minus deductible expenses on form T776 with your personal return, and the net amount stacks on top of your other income at your marginal rate. An Ontario landlord earning $95,000 at work who nets $10,000 from a rental pays roughly $3,000 to $4,000 of tax on it, depending on province. There is no separate landlord tax rate, no withholding, and no way around the marginal stacking short of genuinely different ownership. That is why the deductions below matter: every legitimate expense you fail to claim is taxed as if it were profit.

What you can deduct, and what you cannot

The interest deduction is the big one, and it shrinks every year as your payments shift from interest to principal. The amortization schedule in our rental property calculator shows the exact interest-versus-principal split for each year of a Canadian mortgage, which is the number your accountant needs. Land transfer tax is the other trap: it is not deductible, but it is not lost either. It joins your adjusted cost base and reduces your capital gain at sale, which is one more reason to know the exact figure from our land transfer tax calculator.

Repair or improvement: the current-versus-capital test

A current expense restores the property to its original condition and is deducted in full this year: fixing a leak, replacing rotten deck boards, repainting between tenants. A capital expense improves the property beyond what it was or extends its life: a new roof where shingles were original, a renovated kitchen, a basement suite conversion. Capital costs are not deducted now; they are added to the building's cost and recovered slowly through CCA, or at sale. The CRA looks at substance, not invoice wording, and the pattern matters: a $30,000 "repair" done the month you bought a rundown property is usually part of the acquisition cost, not a year-one deduction.

CCA: the deduction that comes back

Capital cost allowance is the tax system's version of depreciation. A residential rental building is normally Class 1, deductible at up to 4% of the undepreciated balance per year on a declining basis, and only the building depreciates: land does not, so a $500,000 purchase with $100,000 of land value gives you a $400,000 building and a maximum first-full-year claim around $16,000. Two hard rules shape everything. First, CCA is optional each year, and you can claim any amount from zero to the maximum. Second, CCA cannot create or increase a rental loss: it can take your net rental income to zero and no further.

The catch is recapture. When you sell for more than the depreciated value, every dollar of CCA you ever claimed is added back to your income in the year of sale, fully taxable at your marginal rate. Say you claimed $50,000 of CCA over ten years, writing the building down from $400,000 to $350,000, then sold with the building portion worth $450,000. You would report $50,000 of recapture as ordinary income plus a $50,000 capital gain over your original cost, of which half is taxable. CCA is therefore a loan from the CRA at your marginal rate, worth taking when your rate today beats your expected rate at sale. The rare opposite case, selling below the depreciated value, produces a terminal loss you can deduct in full.

One 2026 wrinkle worth knowing: new purpose-built rental projects (four or more units, at least 90% held for long-term rental) that began construction after April 15, 2024 and before 2031 qualify for an accelerated 10% CCA rate instead of 4%. First-year claims are also affected by the half-year rule and its temporary suspensions, which depend on when the property became available for use; that detail is squarely accountant territory.

Selling: what 2026's capital gains rules actually say

The 2024 proposal to raise the capital gains inclusion rate to two-thirds was deferred and then cancelled outright in March 2025, so in 2026 the inclusion rate remains 50%: half your gain is added to income, taxed at your marginal rate. Your gain is the sale price minus selling costs minus your adjusted cost base, which includes the purchase price, land transfer tax, legal fees on purchase, and every capital improvement you kept receipts for. Recapture of CCA is calculated separately and is 100% taxable, which regularly surprises sellers who expected everything to get the 50% treatment.

Renting out your former home: the change-of-use trap

Converting your principal residence to a rental triggers a deemed disposition: the CRA treats the property as sold at fair market value that day, though the principal residence exemption usually shelters the gain to that point. Get an appraisal at conversion, because it becomes your cost base for the rental era. Filing a subsection 45(2) election with that year's return can defer the deemed disposition and let you designate the property as your principal residence for up to four more years while renting it, but only if you claim no CCA during the election. Miss the election and rent for a decade, and the appreciation over those years is taxable when you sell.