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Get My Free Estimate →Rental income is reported on Form T776, with gross rent at line 12599 and net at line 12600. You may deduct any reasonable expense incurred to earn the rent, but not land transfer tax paid on the purchase, repayments of mortgage principal (only the interest), or the value of your own labour. CRA distinguishes current from capital expenses on six tests — and repairs made in anticipation of selling are capital. Capital cost allowance is usually a trap on appreciating property: it cannot create or increase a rental loss, and it is recaptured on sale as fully taxable ordinary income rather than a half-included capital gain, in the year your income is already highest. Claiming it also rescinds a subsection 45(2) election, the election that protects principal residence status when you move out and rent your home. Long-term residential rent is GST/HST exempt; short-term is not, and under s. 67.7 a short-term rental that breaches municipal licensing loses its deductions while the income stays taxable.
Every cash-flow model on this site, and on every other real estate site, reports a pre-tax number. Rent minus mortgage minus fees minus taxes minus insurance equals a figure that nobody actually receives, because the Canada Revenue Agency takes a share of it at your marginal rate.
This page is the tax half of the calculation: what Form T776 is, which expenses come off and which do not, and why the deduction that looks most attractive — capital cost allowance — is the one most likely to cost an Etobicoke landlord money in the end.
Form T776, and where the numbers land
T776 is the “Statement of Real Estate Rentals”. CRA’s instruction is short: “You only have to fill in this form if you have a rental operation and you are reporting a rental income or loss.” The gross rent goes to line 12599 of your return and the net figure to line 12600. The companion guide is T4036, Rental Income.
Rental income or business income?
This determines which form you file and how the income is treated. T4036 draws the line by services:
“In most cases, you are earning an income from your property if you rent space and provide basic services only. Basic services include heat, light, parking, and laundry facilities. If you provide additional services to tenants, such as cleaning, security, and meals, you may be carrying on a business.”
An ordinary condo rental with heat and a parking spot is rental income. A furnished short-stay operation with cleaning between guests is heading toward business income, with different consequences.
Current expense or capital expense: CRA’s six tests
A current expense comes off this year’s rental income. A capital expense does not — it is added to the cost of the property and, at best, depreciated slowly. Getting this wrong in your favour is the most common way a rental return gets reassessed. CRA sets out six tests.
| Test | Capital | Current |
|---|---|---|
| 1. Lasting benefit | “A capital expense generally gives a lasting benefit or advantage” | “A current expense is one that usually recurs after a short period” |
| 2. Maintenance or improvement | “The cost of a repair that improves a property beyond its original condition is probably a capital expense” | “An expense that simply restores a property to its original condition is usually a current expense” |
| 3. Separate asset or part of a property | “The cost of replacing a separate asset within a property is a capital expense” | “The cost of repairing a property by replacing one of its parts is usually a current expense” |
| 4. Value relative to the property | “Generally, if the cost is of considerable value in relation to the property, it is a capital expense” — but CRA adds this “is not a determining factor by itself” | |
| 5. Repairs to used property just acquired | “The cost of repairing used property you acquired to put it in a suitable condition for use in your business is considered a capital expense” | |
| 6. Repairs made in anticipation of sale | “The cost of repairs made in anticipation of selling a property … is regarded as a capital expense” | “Where the repairs would have been made anyway, but a sale was negotiated … the expense is considered current” |
Test 6 is the one that catches sellers. The paint, the flooring and the staging prep you do to get a rental listed are capital, not a deduction against the year’s rent. The carve-out is narrow: it applies where the work would have been done anyway and a sale then happened. Document the timing and the reason at the time, not afterwards.
Test 3 is the practical one for condo landlords. Replacing the dishwasher is a separate asset — capital. Repairing the dishwasher is a part — current. Same appliance, different answer.
What comes off, by line
The governing principle from CRA is broad: “You can deduct any reasonable expenses you incur to earn rental income.” The T776 lines:
| Line | Category |
|---|---|
| 8521 | Advertising |
| 8690 | Insurance |
| 8710 | Interest and bank charges — note this is the interest portion of the mortgage, not the payment |
| 8810 | Office expenses |
| 8860 | Professional fees, including legal and accounting |
| 8871 | Management and administration fees |
| 8960 | Repairs and maintenance |
| 9060 | Salaries, wages and benefits |
| 9180 | Property taxes |
| 9200 | Travel |
| 9220 | Utilities |
| 9281 | Motor vehicle expenses |
| 9270 | Other rental expenses |
What does not come off
| Not deductible | Why it surprises people |
|---|---|
| Land transfer tax paid on the purchase | It feels like a cost of getting into the rental. It is a cost of acquiring the property — it goes to the adjusted cost base, and you get it back as a smaller capital gain on sale |
| Repayments of mortgage or loan principal | The cheque leaves your account every month. Only the interest portion is deductible; the principal is you buying equity |
| Penalties shown on a notice of assessment or reassessment | |
| “The value of your own services or labour” | The weekend you spent painting the unit is worth nothing on the return, however much it was worth in fact |
| The personal-use portion | Renting the basement means apportioning, not deducting the whole house |
| Non-compliant short-term rental expenses | See below — this is new and it is severe |
Capital cost allowance: the deduction that bills you later
CCA lets you depreciate the building — not the land, which is never depreciable — against rental income. Rental buildings are generally Class 1 at 4 per cent. It looks like free money. Here is what it actually is.
Rule one: it cannot create a loss
“You cannot use CCA (capital cost allowance) to create or increase a rental loss.”
CCA can take your rental income to zero. It cannot take it below zero. With more than one property you must calculate the overall net income or loss across all of them before claiming any CCA at all.
Rule two: half in the first year
In the year you acquire the property you can “usually claim CCA only on one-half of your net additions to a class.”
Rule three — the one that matters: recapture
“A recapture of capital cost allowance (CCA) can occur when the proceeds from the sale of depreciable rental property are more than the total of both: the undepreciated capital cost (UCC) of the class at the start of the year [and] the capital cost of any additions during the year.”
Recapture goes to line 9947. A terminal loss, where proceeds fall below UCC, goes to line 9948. And here is the asymmetry that makes CCA a poor bet on appreciating Toronto property:
| When you claim CCA | When it comes back | |
|---|---|---|
| What it is | A deduction against rental income | Recaptured income |
| How it is taxed | Saves tax at your marginal rate that year | Fully taxable ordinary income — not a capital gain, so not half-included |
| When | Spread across the holding years, often when income is moderate | All at once, in the year of sale — typically the year your income is already highest, and often the year you have a capital gain too |
So CCA on a property you expect to appreciate is a deferral, at best, and a rate arbitrage running against you at worst: you deduct against ordinary income now and repay it as ordinary income later, in a single lump, stacked on top of the capital gain from the same sale. On an Etobicoke condo bought a decade ago, that stack can be brutal. Talk to an accountant before claiming a dollar of it. Some landlords should. Many should not.
There is a second reason to be careful, and it is worse than the first. Claiming CCA rescinds a subsection 45(2) election — the election that protects your principal residence status when you move out and rent your home. CRA’s folio states that if CCA is claimed, the election “is considered to be rescinded on the first day of the year in which that claim is made.” See the change-of-use section below.
Co-owner or partner? They are not the same
CRA is explicit: “If you own the rental property with one or more persons, the CRA considers you to be a co-owner” — and, importantly, “co-ownership of a rental property as an investment does not make a partnership.” A partnership is “a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit”, determined under provincial partnership law.
The practical difference for a couple who own a rental together: co-owners each claim CCA independently on their own share; partners claim it at the partnership level. Co-owners and partners who do not receive a T5013 complete all applicable parts of T776 plus Part 2, Details of other co-owners and partners.
Short-term rentals: the deduction denial under s. 67.7
This is recent and it is not a minor adjustment. Section 67.7 of the Income Tax Act denies deductions for a non-compliant short-term rental, for tax years after 2023:
“no amount is deductible in computing income in respect of a short-term rental for a taxation year, to the extent the amount is a non-compliant amount for the taxation year.”
| Term | Definition in s. 67.7 |
|---|---|
| Short-term rental | A residential property rented or offered for rent for a period of less than 90 consecutive days |
| Non-compliant short-term rental | One in a jurisdiction that prohibits such rentals, or one that “does not comply with all applicable provincial or municipal registration, licensing and permit requirements” |
| Non-compliant amount | A × B ÷ C, where A is the otherwise-deductible expenses, B is the number of days non-compliant, and C is the number of days operated as a short-term rental |
Toronto licenses short-term rentals. If a Toronto operator is not registered, the formula does not reduce the deduction — it removes it for the days of non-compliance, while the rental income remains fully taxable. There was a transition rule for 2024 only: CRA stated that a short-term rental compliant with all applicable requirements by 31 December 2024 was deemed compliant for the entire 2024 tax year. That grace is gone.
GST/HST on rent
| Type of rental | Treatment | Authority |
|---|---|---|
| Long-term residential — continuous occupancy of one month or more by the same individual | Exempt | Excise Tax Act, Schedule V, Part I, paragraph 6(a) |
| Short-term — under one month | Taxable, unless the consideration is $20 or less per day of occupancy | Schedule V, Part I, paragraph 6(b) |
CRA’s memorandum adds a point that catches people: “A period of occupancy is a period of continuous occupancy by the same individual, notwithstanding that the rental may be on a daily or weekly basis.” It is the length of the stay that governs, not how the rent is quoted. Because long-term residential rent is an exempt supply, a landlord generally cannot claim input tax credits on the costs of earning it.
A sourcing caveat: the CRA memorandum on residential rentals is dated February 1998 with a date modified of January 2006. The underlying exemption in Schedule V has not changed, but the page is old. If anything turns on it in your situation, confirm with an accountant against the current statute rather than the memorandum.
When your home becomes a rental
This is the single most consequential moment in a small landlord’s tax life, and most people walk through it without knowing it happened.
The default rule. On a change of use you are “considered to have sold the property at its fair market value and have immediately reacquired the property for the same amount”. A deemed disposition, triggering a gain in the year you moved out, on a sale that never occurred and produced no cash.
The subsection 45(2) election. You may elect “not to be considered as having started to use your principal residence as a rental or business property”, and then “you do not have to report any capital gain when you change its use.”
| Feature of the 45(2) election | Detail |
|---|---|
| Designation period | While the election is in effect you can designate the property as your principal residence for up to four years, even though you are not living in it |
| The condition | “If you make this election, you cannot claim capital cost allowance on the property” |
| How to make it | “Attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply” |
| How to lose it | Claim CCA. CRA’s folio: the election “is considered to be rescinded on the first day of the year in which that claim is made” |
Going the other way — subsection 45(3). Where a rental becomes your principal residence, this election lets you “postpone reporting the disposition of your property until you actually sell it.” It is not available if CCA was claimed after 1984. The filing deadline for a 45(3) election is specific and I could not read CRA’s wording of it completely enough to state it here, so ask your accountant for the date rather than taking a number off a web page.
Six things people get wrong
| The belief | What CRA says |
|---|---|
| “My whole mortgage payment is deductible.” | Only the interest, at line 8710. Repayments of principal are expressly not deductible. |
| “Land transfer tax was a cost of setting up the rental.” | Expressly not deductible. It goes to the adjusted cost base and reduces the capital gain on sale instead. |
| “I painted it myself, so I will deduct my time.” | CRA lists “the value of your own services or labour” as not deductible. |
| “CCA is free money.” | It is a deferral. It is recaptured as fully taxable ordinary income in the year of sale, and it cannot create or increase a rental loss in the first place. |
| “I got the pre-listing renovation deducted against the rent.” | Repairs made in anticipation of selling are regarded as a capital expense, unless the work would have been done anyway. |
| “My condo is short-term but I am not registered, so I just report the income.” | Section 67.7 denies the deductions for the non-compliant days while the income stays taxable. Toronto licenses short-term rentals. |
Working out whether an Etobicoke rental actually makes money?
I can give you the real numbers on the property side — achievable rent from comparable leases, maintenance fees, what the building has coming, and what similar units have actually sold for. The tax side belongs with an accountant, and the CCA question in particular is worth an hour of one before you file. Send me the address and I will tell you what the property is really doing.
connect@jatindua.com · 437-987-1925 · Book a free consultation
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Free tool — AI condo value estimator
Condo Valuation
What’s your condo
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Three quick steps. Condos don’t price like houses — your floor, your view, and whether you own parking move the number more than anything else. This weighs all of them.
Reading recent condo sales…
Estimated market value
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What moved the number
Starting from what comparable units in your area sell for, here’s what your specifics added or subtracted.
Market context
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Two units, same floor plan,
$90,000 apart.
That happens constantly in condos — one has the parking, the right exposure, or a board that keeps the reserve fund healthy. A model can’t see your status certificate. I can.
Frequently asked questions
Can I deduct my mortgage payment against rental income?
Only the interest. Line 8710 of Form T776 is “interest and bank charges”, and CRA expressly lists repayments of mortgage or loan principal among the expenses you cannot deduct. The principal portion is not an expense at all — it is you acquiring equity in the property.
Is land transfer tax deductible on a rental purchase?
No. CRA lists land transfer tax paid on the purchase among the rental expenses you cannot deduct. It is added to the adjusted cost base of the property instead, which reduces the capital gain when you eventually sell. So you do get the benefit, just later and at the capital gains inclusion rate rather than against ordinary income.
Should I claim capital cost allowance on my rental condo?
Often not, and it is worth an accountant’s time to decide. Three things work against it. It cannot be used to create or increase a rental loss. It is recaptured on sale as fully taxable ordinary income rather than a half-included capital gain, and that recapture lands in a single year, typically the year your income is already highest and you also have a capital gain. And if a subsection 45(2) election is protecting the property’s principal residence status, claiming CCA rescinds that election on the first day of the year in which it is claimed. On appreciating Toronto property the arbitrage frequently runs against the landlord.
I renovated the unit before listing it for sale. Can I deduct it?
Generally no. CRA’s sixth test states that the cost of repairs made in anticipation of selling a property is regarded as a capital expense. There is a carve-out: where the repairs would have been made anyway, but a sale was then negotiated, the expense is considered current. That turns on facts and timing, so document the reason for the work when you do it rather than reconstructing it afterwards.
My spouse and I own a rental together. Are we a partnership?
Probably not. CRA states that if you own a rental property with one or more persons you are a co-owner, and that co-ownership of a rental property as an investment does not make a partnership. A partnership requires a relationship between two or more people carrying on a business to make a profit, determined under provincial partnership law. The practical difference is that co-owners each claim capital cost allowance independently on their own share, while partners claim it at the partnership level.
Do I charge HST on rent?
Not on long-term residential rent. Under Schedule V, Part I, paragraph 6(a) of the Excise Tax Act, a rental of a residential complex or unit is exempt where it is to be used as a place of residence and the rental period is continuous occupancy of one month or more by the same individual. Short-term rentals under one month are taxable under paragraph 6(b) unless the consideration is $20 or less per day. Because long-term residential rent is an exempt supply, a landlord generally cannot claim input tax credits on the costs of earning it.
What happens to my taxes when I move out and rent my home?
By default there is a deemed disposition: you are considered to have sold the property at fair market value and immediately reacquired it for the same amount, which can trigger a capital gain in a year you received no money. You can elect under subsection 45(2) not to be treated as having changed the use, in which case no capital gain is reported at that point and you may designate the property as your principal residence for up to four more years. The election is made by attaching a signed letter to your return for the year of the change, describing the property and stating that you want subsection 45(2) to apply. The condition is that you cannot claim capital cost allowance on the property.
What are the short-term rental deduction rules?
Section 67.7 of the Income Tax Act, effective for tax years after 2023, provides that no amount is deductible in respect of a short-term rental to the extent it is a non-compliant amount. A short-term rental is a residential property rented or offered for rent for less than 90 consecutive days. It is non-compliant if it is in a jurisdiction that prohibits such rentals, or if it does not comply with all applicable provincial or municipal registration, licensing and permit requirements. The denied portion is prorated by the number of non-compliant days. Toronto licenses short-term rentals, so an unregistered Toronto operator loses deductions for those days while the rental income remains fully taxable. A transition rule deemed a rental compliant for all of 2024 if it became compliant by 31 December 2024; that relief has expired.
What is the difference between rental income and business income?
CRA draws the line by the services provided. T4036 states that in most cases you are earning income from property if you rent space and provide basic services only, which it defines as heat, light, parking and laundry facilities. If you provide additional services such as cleaning, security and meals, you may be carrying on a business. A conventional condo lease is rental income; a serviced short-stay operation is closer to a business.
Related reading
- Does an Etobicoke investment condo actually cash flow?
- Capital gains tax when selling a home in Ontario
- Condo insurance in Ontario: the standard unit and the deductible chargeback
- Above-guideline rent increases in Ontario
Sources
Every figure on this page traces to one of these, and each was read on 30 August 2026. Primary sources only — statute, regulation, and the government or agency that administers the rule. Where I could not verify something from a primary source, the page says so instead of guessing.
- Form T776, Statement of Real Estate Rentals. Canada Revenue Agency form page, date modified 10 February 2026. Current version t776-25e. Accessed 30 August 2026.
- T4036, Rental Income. Canada Revenue Agency guide, date modified 27 March 2026, current for the 2025 tax year. Accessed 30 August 2026.
- Current expenses or capital expenses. Canada Revenue Agency, date modified 28 July 2026. Sets out the six tests CRA applies, including repairs made in anticipation of sale. Accessed 30 August 2026.
- Rental expenses you can deduct. Canada Revenue Agency, date modified 27 May 2026. Line-by-line deductible categories for Form T776. Accessed 30 August 2026.
- Rental expenses you cannot deduct. Canada Revenue Agency, date modified 28 July 2026. Includes land transfer tax on purchase, repayments of loan principal, and the value of your own labour. Accessed 30 August 2026.
- How much capital cost allowance you can claim. Canada Revenue Agency, date modified 28 July 2026. States that you cannot use capital cost allowance to create or increase a rental loss, and sets out the half-year rule. Accessed 30 August 2026.
- Line 9947 — Recaptured capital cost allowance. Canada Revenue Agency. Sets out when recapture arises on the sale of depreciable rental property. Accessed 30 August 2026.
- Ownership — co-owner or partner. Canada Revenue Agency, date modified 28 July 2026. States that co-ownership of a rental property as an investment does not make a partnership. Accessed 30 August 2026.
- Changes in use of your property. Canada Revenue Agency. Sets out the deemed disposition on a change of use and the subsection 45(2) and 45(3) elections. No date modified was exposed on the page when read; corroborated by Income Tax Folio S1-F3-C2, date modified 30 January 2024. Accessed 30 August 2026.
- Income Tax Act — section 67.7, non-compliant short-term rentals. Justice Laws Website consolidation. Last amended 18 June 2026, current to 21 June 2026. Denies deductions to the extent an amount is a non-compliant amount, for tax years after 2023. Accessed 30 August 2026.
- Changes to the rules for eligible deductions on short-term rental income. Canada Revenue Agency tax tip, published 22 January 2025. Sets out the transition rule deeming a short-term rental compliant for all of 2024 if it was compliant by 31 December 2024. Accessed 30 August 2026.
- GST/HST Memorandum 19.2.2, Residential Real Property — Rentals. Canada Revenue Agency. Note the age: the memorandum is dated February 1998 with a date modified of 11 January 2006. The underlying exemption in Schedule V, Part I, paragraph 6(a) of the Excise Tax Act is unchanged, but the page itself is old. Accessed 30 August 2026.
About the author — Jatin Dua, Etobicoke real estate agent
I’m the Broker of Record at RE/MAX Quantum Realty, 799 The Queensway in Etobicoke. I write these pages the same way I work a file: read the primary source, quote it, date it, and say plainly where the source is silent or where two sources disagree. If a figure on this page has no citation beside it, that is a mistake and I want to hear about it.
I work with buyers, sellers, renters and investors across Etobicoke, Mimico, Humber Bay Shores, New Toronto, Long Branch, Alderwood and Stonegate–Queensway. connect@jatindua.com or 437-987-1925.