Rental income and taxes: What’s new for Canadian property owners in 2025

What do you claim? Rental income or business income?

When you earn income from the rental of a home, apartment, condo or other property, you will report both gross and net income on the T1 tax return using Form T776 (Statement of Real Estate Rentals). But, sometimes the T2125 (Statement of Business Income and Expenses) can be used if you are considered to be “in business” as opposed to owning an asset from which you derive “income from property.”

Which one should you claim? It’s a fine line.

In general, though, the more services provided (board and lodging, security and cleaning services, and so on), the more likely it is that you’re in “business.” Alternatively, if you provide only basic services like heat, light, parking and laundry facilities, you’re reporting rental income rather than business income.

What are the rules for principal residences?

Principal residence is the place you live—what you call home. There are important rules to follow when you rent out a part of your principal residence. If there’s no expectation of profit—say you rent to your child who turns 18 and starts to contribute to room and board—then there’s no need to report the income, as any losses are not going to be deductible.

However, where there’s a potential for profit, tax reporting is required, because you’re charging fair market prices for the rental. This may happen if you rent out a basement suite to a university student for example. I cover other tax traps for principal residence renters below.

Keep it simple: Use the calendar year to report the income from rent

Business owners can choose a non-calendar fiscal period to report their business income. Rental property owners must report their net rental income on a calendar year basis—January to December—each year. In the first year of rental, income and expenses are reported only for the rental period.

Retirement planning with rental income

It’s important to know that net rental income (rental income minus rental expenses) does qualify as earned income for the purposes of making a contribution to a registered retirement savings plan (RRSP). However, net rental income will not qualify for the purposes of making Canada Pension Plan (CPP) contributions, unless the income is reclassified as business income by the Canada Revenue Agency (CRA). Note that “net business income” is also “earned income” for the purposes of making an RRSP contribution.

What’s deductible for your income tax return with income from a rental property?

Accounting and legal fees, advertising for residential renters, capital cost allowances (a deduction calculated for the depreciation of business assets), home office, insurance, interest, property taxes, utilities, maintenance and repairs and in some cases travel expenses are claimable. Many of these expenses come with special nuances. So, check with your accountant to be sure what you can claim as a deductible for your rental property.

What’s an expense? What’s an improvement?

Most expenses incurred to earn rental income will be deductible in the year paid. But there are three important rules to know about:

1. Prepaid expenses, such as insurance, must be claimed against future rental income. This means that if insurance premiums are paid in advance for a year, only that portion of the expense that pertains to rental income earned this year can be claimed, and another portion is saved for the future
2. Maintenance and repairs can be claimed as an expense—100% deductible. However, often these expenses improve the useful life of the property. Consider the expense of replacing a roof rather than a series of shingles that blew off in a storm. Replacing the few shingles missing shingles is considered to be a repair; therefore those costs are fully deductible. On the other hand, the replacement of the whole roof is a capital expense. Those costs are depreciated over the lifetime of asset ownership under the capital cost allowance (CCA) rules. This means only a small part of the expenditure will be deductible each year. That’s often an unexpected and unpleasant surprise to DIY tax return filers, when it comes time for an audit.
3. It’s important to note that rental income reporting is often audited and the kind of questions that can be asked are articulated on Form RC685 (Refund Examination Program, Rental Information). Take a moment to download the form and be sure you can answer these questions. If not, schedule time with a tax accountant to get it right. The CRA can ask for this form to be completed before releasing a tax refund.

What to know about CCA

It’s important not to claim capital cost allowance on residential property to preserve all your options down the line including your principal residence exemption (PRE). When you claim CCA on a principal residence, let’s say for that room you rent to a university student, the PRE shouldn’t be claimed on that portion of the property. If it is, it will be excluded from the exempt portion of the capital gain.

Otherwise, CCA is claimed on other rental property assets in a similar fashion to business claims. There is one exception: a rental loss cannot be created nor increased by claiming CCA on rental assets. This rule applies collectively to all rental properties and related assets where more than one property is owned. That technically means that as long as there is no net rental loss (allowable rental expenses on all properties owned exceed rental income for all properties collectively), losses may be claimed on individual buildings.

Recently there have been some temporary incentives for claiming CCA. For example, under the accelerated investment incentive (AII), there’s an enhanced claim for the first year of ownership for properties acquired after November 20, 2018. The property must be available for use before 2028.

Rental assets (other than buildings) purchased in 2022 to 2024 and available for use before 2025, may be designated as immediate expensing properties (DEIP), and that means CCA rates of 100% may be claimed. The effect of this is full expensing in the year of acquisition.

However, DIEP claims are still limited to the rental loss restrictions—you can’t create or increase a rental loss with this claim. Also if the property appreciates over time, an over-deduction of CCA, is “recaptured” and added to income when the assets are disposed of.

Receiving income from a rental property? Little-known tax traps for 2024/2025

There are a host new tax twists for 2024 you’ll want to discuss with your tax advisor when you file in 2025.

STRs

Starting in 2024, non-compliant short term rental owners will not be allowed to deduct any rental expenses from income. That means you’ll have to report the rental income but not the offsetting expenses nor CCA deductions, unless you can show you have met local licensing requirements. That makes for a larger tax bill. You might consider a larger RRSP contribution to reduce the extra taxes, if you are eligible and have contribution room.

Legal fees

The claim for legal fees is subject to special rules. If you have paid legal fees to prepare leases or to collect rent, the costs are fully deductible. But legal fees paid to acquire the property will be added to the cost of the property, so that a future capital gain will be reduced by these costs.

Interest on loans and credit

Interest has special rules. Interest paid on a mortgage to purchase the property, plus any interest on additional loans to improve the rental property may be deducted. But if an additional mortgage is taken for another purpose—such as to buy furniture or personal use items—the mortgage interest is not deductible as a rental expense. And, if the mortgage funds were used for another investment, the costs are deducted differently. They may be deductible as carrying charges in most cases.

The costs of acquisition of the mortgage itself are not deductible in the year paid but amortized over a five-year period starting at the time they were incurred. Finally, it’s possible to elect to add the interest to the capital cost of the asset rather than deduct it in the year paid if that provides advantages, such as, for example, to offset future recaptured CCA that would otherwise increase income subject to tax.

Travel

Expenses related to travel are only claimable if you own two or more properties—unless, in the case of single property ownership, you are driving to delivery tools and/or equipment.

Spousal ventures

Be sure to properly indicate in the case of spouses, where there is a partnership (indicating a business venture) or co-ownership (indicating income from property that is an investment).

Non-residents

Rental properties owned jointly by Canadian citizens, or permanent residents and non-residents, may be subject to the underused housing tax (UHT) filings in some cases. These rules were subject to numerous changes since first introduced in 2022. It’s best to check with your tax advisor to see if you may be subject to the filing requirement in any year since then.

If you’re a co-owner of rental property with non-residents, you will also be required to remit withholding taxes. Consider filing a Canadian tax return based on net income, rather than gross income by electing to do so under Section 216/217 of the Income Tax Act. This will generally drop the withholding tax from 25% of gross to 15% of net income.

House flippers

Here is perhaps the biggest trap of all. You’ll have to report business income, rather than capital gains income, if you flip a personal residence for profit within a year of acquiring it. That’s a big problem because you’ll lose your principal residence exemption and you’ll lose the capital gains treatment. There are some exceptions but, in general, more tax care is required any time your rent residence that has the potential of being chosen as the tax-exempt principal residence. Seek advice of a qualified advisor.

What it means to be a landlord in Canada—tax-wise

Rental property ventures, in short, are fraught with tax audit risk here in Canada. Be sure to work with a qualified tax specialist if you wish to become a rental property owner.

Read more about renting: 

• How to improve your credit score with rent payments in Canada
• 10 financial buzzwords we kept hearing in 2024
• Insurance for landlords in Canada: Your guide to protecting rental properties
• Where are rent prices headed in Canada?

About Evelyn Jacks, RWM, MFA, MFA-P, FDFS

Evelyn Jacks is the best-selling tax author of 55 books, an award-winning business leader and the founder and president of Knowledge Bureau, an online financial education institute.

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