What Expenses Can You Deduct from Canadian Rental Income in 2026?

1. What is the T776 form?

The T776 — Statement of Real Estate Rentals is the CRA form you attach to your T1 personal income tax return to report rental income and claim deductions. Every Canadian who earns rental income from a residential or commercial property is required to file it. You file one T776 per property.

The form calculates your net rental income or loss (Line 9946), which flows into your T1 on Line 12600. A net rental loss can offset other income, reducing your overall tax bill — which is why tracking every eligible expense accurately matters so much.

2. Fully deductible expenses — T776 line by line

The following expenses are fully deductible in the year they are incurred, provided the property was available for rent during that period. Each maps directly to a T776 line code.

3. Mortgage interest — the biggest deduction most investors miss

Mortgage interest is typically the largest single deduction on a rental property T776. The critical distinction: only the interest portion of your mortgage payment is deductible — not the principal repayment.

Your lender provides an annual mortgage statement breaking down exactly how much of your payments went to interest vs. principal. Use the interest figure on Line 8710 of your T776.

Refinancing and the direct use rule

CRA uses the "direct use" rule: interest is only deductible to the extent the borrowed money was used to earn income. If you refinance your rental property and use part of the proceeds for personal purposes (e.g., a vacation), only the portion of interest attributable to the rental-purpose borrowing is deductible. This calculation can get complex — consult a CPA if you've refinanced.

Home equity lines of credit (HELOC)

Interest on a HELOC drawn against your principal residence is deductible if the funds were used to purchase or improve a rental property. Maintain a clear paper trail linking the HELOC withdrawal to the rental property purchase or improvement.

4. Capital Cost Allowance (CCA) — optional but powerful

CCA is Canada's equivalent of depreciation. It lets you deduct a percentage of the cost of depreciable property (the building, not the land) each year. For rental buildings, the standard CCA rate is 4% per year (Class 1) on a declining balance — meaning you take 4% of the remaining undepreciated cost, not the original purchase price.

Why CCA is optional — and the catch

CCA on rental property is optional — you choose whether to claim it each year. The reason many investors skip it: recapture. When you sell the property, any CCA you've claimed gets "recaptured" as income in the year of sale. This means CCA defers tax rather than eliminating it. In a rising real estate market, investors sometimes prefer to save the CCA for years when their income is highest.

The rental income restriction

CCA on rental property cannot create or increase a net rental loss. You can only claim CCA up to the amount of your net rental income after all other deductions. Any unused CCA can be carried forward to future years.

Qualifying assets and their CCA classes

• Building (Class 1): 4% — the most common for residential rentals
• Appliances, furniture (Class 8): 20% — fridges, stoves, washers/dryers provided to tenants
• Computers (Class 50): 55% — if used to manage the rental business
• Heat pumps (Class 43.1): 30% — accelerated depreciation for eligible clean energy equipment

5. Repairs vs. capital improvements — the most common filing mistake

This is the area where Canadian rental property owners most often get it wrong, and where CRA most often reassesses. The distinction matters because:

• Repairs are deductible in full in the current year (Line 8810)
• Capital improvements are added to the cost base of the property and may be depreciated through CCA over many years — or reduce your capital gain when you sell

The test: current vs. enduring benefit

CRA's rule of thumb: if the work restores the property to its original condition, it's a repair. If it improves, upgrades, or extends the useful life of the property beyond its original state, it's a capital improvement.

The initial repair exception

If you purchase a property in poor condition and make repairs before renting it out, CRA may consider those repairs capital in nature, even if they would otherwise qualify as repairs. The reasoning: the low purchase price reflected the property's condition, so the repairs are part of acquiring a rentable property, not maintaining one.

6. Pre-rental expenses

Costs incurred before your property was first available to rent are handled differently. These are typically renovation costs, cleaning, advertising for the first tenant, and appliance purchases.

You cannot deduct pre-rental expenses against rental income in the year of purchase if you had no rental income that year. However, depending on the nature of the expense:

• Current expenses (advertising, cleaning, minor repairs): deductible in the year the property first becomes available to rent
• Capital costs (renovations, appliances): added to the cost base of the property for CCA or capital gains purposes
• Soft costs (interest during construction/renovation, legal fees): may be deductible as current expenses if specific conditions are met — get CPA advice here

7. What you cannot deduct

Several costs that rental property owners commonly try to claim are not deductible:

• Principal mortgage repayments — only interest is deductible
• Land transfer tax — a capital cost; adds to your Adjusted Cost Base (ACB)
• Legal fees to purchase the property — capital cost, not a current deduction
• Personal portion of expenses — if you live in part of the property, only the rental portion of shared expenses is deductible (see Section 8)
• Value of your own labour — if you personally do repairs, you cannot deduct a notional amount for your own time
• Expenses to earn capital gains — selling costs go against proceeds, not rental income
• Personal use expenses — expenses for a cottage you use personally, even partially

8. Partial-use and shared-space deductions

If you rent out part of your principal residence (e.g., a basement apartment or a room), you can only deduct the proportionate share of expenses attributable to the rented space.

The most common allocation method is square footage: if your basement suite is 30% of total floor area, you can deduct 30% of shared expenses like property taxes, insurance, mortgage interest, and utilities.

Shared expenses you can split

• Mortgage interest (proportionate to rental area)
• Property taxes (proportionate)
• Home insurance (proportionate)
• Utilities — heat, hydro, water (proportionate, or based on separate metering)
• Internet and cable (if provided to tenant as part of rent)

Principal residence designation risk

Renting part of your home generally does not affect your principal residence exemption (PRE) on the eventual sale, provided:

• The rental portion is minor relative to the whole property
• You have not made structural changes that permanently convert part to a rental unit
• You are not claiming CCA on the property (claiming CCA triggers a deemed disposition and can affect the PRE — speak to a CPA before claiming CCA on a partly-rented principal residence)

9. Filing checklist — before you submit your T776

Use this checklist each year before handing your return to your accountant or filing yourself:

Documentation to gather

• ☐ Annual mortgage statement (interest vs. principal breakdown)
• ☐ Property tax assessment notice
• ☐ Insurance renewal certificate and invoice
• ☐ All repair and maintenance receipts
• ☐ Property management fee statements
• ☐ Advertising receipts (Kijiji, photography, signage)
• ☐ Utility invoices (if you pay them)
• ☐ Legal and accounting invoices related to the rental
• ☐ Travel log (dates, destinations, purpose, km) for rental-related trips
• ☐ Lease agreements and rent payment records for all tenants

Calculations to verify

• ☐ Gross rental income matches rent roll (include all months, even missed payments)
• ☐ Mortgage interest figure comes from lender statement — not your own calculation
• ☐ Repairs vs. capital improvements correctly classified
• ☐ Pre-rental costs tracked separately and correctly categorized
• ☐ CCA decision made for the year (claim or not — document your reasoning)
• ☐ Partial-use ratio calculated if property is also personally used
• ☐ Net income (Line 9946) reconciles to the sum of income minus deductions

Province-specific checks

• ☐ BC residents: Speculation & Vacancy Tax (SVT) declaration filed by March 31
• ☐ Quebec residents: TP-128-V filed with Revenu Québec in addition to T776
• ☐ Ontario residents: No provincial rental form required — T776 only