Owning a rental property can be a reliable way to build wealth, but it also brings a layer of tax responsibility that catches many new landlords off guard. The Canada Revenue Agency treats your rental income as taxable, expects you to report it properly, and has clear rules about what you can and cannot deduct. Getting it right keeps you onside and, just as importantly, makes sure you claim every dollar you are entitled to.
Whether you rent out a basement suite, a condo, or a portfolio of homes, the basic framework is the same. This guide walks through how rental income is taxed in 2026, which expenses you can deduct, the tricky rules around capital costs, and what happens when you eventually sell.
How Rental Income Is Taxed
Rental income is added to your other income and taxed at your marginal rate, the rate that applies to your top dollar of earnings. There is no special low rate for rental profit the way there is for capital gains or dividends. If you earn $20,000 in net rental profit and you are in a 40% combined bracket, you will owe roughly $8,000 in tax on it.
The key word is net. You are taxed on your profit, which is your rent collected minus your allowable expenses, not on the gross rent. This is why careful record-keeping matters so much: every legitimate expense you track lowers your taxable profit.
You report rental income on a specific form with your annual return, listing your gross rents and then itemising your expenses. To get a sense of how rental profit stacks onto your overall tax bill, you can model it with our rental property tax calculator alongside the salary calculator for your employment income.
What You Can Deduct
This is where landlords either save money or leave it on the table. The CRA allows you to deduct the reasonable expenses you incur to earn rental income. The common ones include:
- Mortgage interest (the interest portion only, not the principal repayment)
- Property taxes and condo or strata fees
- Insurance on the rental property
- Utilities you pay on behalf of tenants
- Property management and advertising costs
- Repairs and maintenance that keep the property in its current state
- Reasonable accounting, legal, and bookkeeping fees
One point trips up many landlords: the difference between a repair and an improvement. Fixing a broken furnace is a current repair you can deduct in full this year. Replacing the furnace with a far better system, or renovating to add lasting value, is a capital cost that must be deducted slowly over many years instead. Painting a wall is a repair; building an extension is capital.
Capital Cost Allowance: Use It With Care
For capital costs, you cannot deduct the whole amount at once. Instead you claim a portion each year through capital cost allowance, or CCA, which is the tax version of depreciation. A building, appliances, and major equipment all fall into CCA classes with set annual rates.
CCA is optional, and there is a catch that makes many landlords cautious. When you sell the property for more than its depreciated value, the CRA can recapture the CCA you claimed, adding it back to your income in the year of sale. Claiming CCA can also affect the principal residence exemption if part of your home is involved. For these reasons, many landlords choose not to claim CCA on the building itself, using it instead to defer tax only when it clearly makes sense. This is a good area to get advice on.
Renting Part of Your Own Home
If you rent out a portion of the home you live in, such as a basement apartment, you split your expenses between personal and rental use. A common method is by floor area: if the rented space is 30% of your home, you can deduct 30% of shared costs like property taxes, insurance, and utilities.
Be careful here, because claiming CCA on the rented portion can jeopardise the principal residence exemption on that part of your home when you sell. Many homeowners deliberately avoid claiming CCA on a rented portion of their own home to protect that exemption. The home office calculator uses similar proportional logic and can help you think through how to split shared costs fairly.
GST/HST and Residential Rent
Here is some good news: long-term residential rent is generally exempt from GST/HST. You do not charge tax on the rent you collect from a residential tenant, and you do not register for or remit GST/HST on that income. Short-term rentals, such as nightly vacation lets, are treated differently and can be taxable once your revenues pass the small-supplier threshold. If you run short-term lets, check the rules carefully and see our GST/HST calculator.
What Happens When You Sell
When you sell a rental property for more than you paid, the profit is a capital gain. Unlike your principal residence, a pure rental property does not qualify for the principal residence exemption, so the gain is taxable. Under the current rules, a portion of the gain is included in your income, and larger gains can face a higher inclusion rate.
On top of any capital gain, if you claimed CCA over the years, the recapture mentioned earlier can apply, adding back those past deductions as income in the year of sale. Because a sale can produce a large one-time spike in income, it is worth planning the timing carefully. Estimate the tax before you list with our capital gains tax calculator.
Record-Keeping and Common Mistakes
Good records are your best protection. Keep every receipt, invoice, and statement, and hold them for at least six years in case the CRA reviews your return. The mistakes that cause landlords the most trouble are:
- Failing to report rental income at all, which the CRA increasingly catches through data matching
- Deducting the full mortgage payment instead of just the interest
- Treating a major improvement as a current repair
- Forgetting to split expenses correctly when renting part of a home
- Claiming CCA without understanding the recapture consequences at sale
The Bottom Line
Being a landlord in Canada is manageable once you understand the tax basics: report your net rental profit, deduct every legitimate expense, handle capital costs and CCA thoughtfully, and plan ahead for the tax hit when you sell. The landlords who keep the most are the ones who track their numbers carefully all year, not just at tax time.
Start by running your expected rental profit and tax through our rental property tax calculator, keep tidy records of every expense, and bring anything complicated, especially CCA and the eventual sale, to a tax professional who knows real estate.