Chapter 3 – Expenses
You can deduct any reasonable expenses you incur to earn rental income. The two basic types of expenses are:
Recurring expenses that provide a short-term benefit.
For example, cost of repairs you make to keep a rental property in the same condition as it was when you acquired it. You can deduct current expenses from your gross rental income in the year you incur them.
As for capital expenses, they provide a benefit that usually lasts for several years. For example, costs to buy or improve your property are capital expenses. Generally, you cannot deduct the full amount of these expenses in the year you incur them. Instead, you can deduct their cost over a period of several years as capital cost allowance (CCA). For more information on CCA, see Chapter 4.
Renovating an older building
Renovations or repairs are usually considered to be a current expense.
When you renovate or repair an older building that you bought to make it suitable to rent, the cost of the work is considered a capital expense.
Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses.
Capital expenses can include:
- the purchase price of rental property
- legal fees and other costs connected with buying the property
- the cost of furniture and equipment you are renting with the property
To decide whether an amount is a current expense or a capital expense, consider your answers to the questions provided in the following chart.
(see Capital expenses – Special situations)
|Does the expense provide a lasting benefit?||A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden house is a capital expense.||A current expense is one that usually recurs after a short period. For example, the cost of painting the exterior of a wooden house is a current expense.|
|Does the expense maintain or improve the property?||The cost of a repair that improves a property beyond its original condition is probably a capital expense. If you replace wooden steps with concrete steps, the cost is a capital expense.||An expense that simply restores a property to its original condition is usually a current expense. For example, the cost of repairing wooden steps is a current expense.|
|Is the expense for a part of a property or for a separate asset?||The cost of replacing a separate asset within a property is a capital expense. For example, the cost of buying a refrigerator to use in your rental operation is a capital expense. This is the case because a refrigerator is a separate asset and is not a part of the building.||The cost of repairing a property by replacing one of its parts is usually a current expense. For instance, electrical wiring is part of a building. Therefore, an amount you spend to rewire is usually a current expense, as long as the rewiring does not improve the property beyond its original condition.|
|What is the value of the expense? (Use this test only if you cannot determine whether an expense is capital or current by considering the three previous tests.)||Compare the cost of the expense to the value of the property. Generally, if the cost is of considerable value in relation to the property, it is a capital expense.||This test is not a determining factor by itself. You might spend a large amount of money for maintenance and repairs to your property all at once. If this cost was for ordinary maintenance that was not done when it was necessary, it is a maintenance expense, and you deduct it as a current expense.|
|Is the expense for repairs made to used property you acquired to put it in a suitable condition for use?||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 even though in other circumstances it would be treated as a current operating expense.||Where the repairs were for ordinary maintenance of a property you already had in your business, the expense is usually current.|
|Is the expense for repairs made to an asset in order to sell it?||The cost of repairs made in anticipation of selling a property, or as a condition of sale, is regarded as a capital expense.||Where the repairs would have been made anyway, but a sale was negotiated during the course of the repairs or after their completion, the expense is considered current.|
You were asking?
Q. My brother and I own an old apartment building that we have been renting for several years. In the current tax year, we had the roof and outside walls repaired. The repairs to the roof involved waterproofing and re-shingling several patches that had developed leaks. The building is made of brick, and the outside walls were redone using the original bricks. Can we deduct these expenses in calculating our rental income for the year?
A. Yes. The repairs to the building simply restored it to its original condition. As a result, they are current expenses.
If you need more information on the difference between current expenses and capital expenses, see Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance.
Capital expenses – Special situations
Modifications to rental properties to accommodate persons with disabilities
You can deduct expenses you incur for eligible disability-related modifications made to a building in the year you paid them. You can do this instead of adding them to the capital cost of your building. Eligible disability-related modifications include changes you make to accommodate wheelchairs, such as:
- installing hand-activated power door openers
- installing interior and exterior ramps
- modifying a bathroom, elevator or doorway
You can also deduct expenses you pay to install or get the following disability-related devices and equipment:
- elevator car-position indicators (such as braille panels and audio indicators)
- visual fire-alarm indicators
- listening or telephone devices for people who have a hearing impairment
- disability-specific computer software and hardware attachments
Renovating an older building
Renovations or repairs are usually considered to be a current expense. When you renovate or repair an older building that you bought to make it suitable to rent, the cost of the work is considered a capital expense.
Construction soft costs
You may have certain costs relating to the period you were constructing, renovating or altering your rental building to make it more suitable to rent. These expenses are sometimes called soft costs. They include:
- legal fees
- accounting fees
- property taxes
Soft costs for the period of construction, renovation or alteration of a building are made-up of the soft costs related to the building and ownership of the related land. The building’s related land consists of the land:
- that is under the building
- that is just beside the land under the building; used or intended for use for a parking area, driveway, yard, garden or any other similar use; and necessary for the use or intended use of the building
Depending on your situation, soft costs may be deductible as a current expense or added to the cost of the building.
Soft costs related to the building may be deductible as a current expense if they relate to:
- only the construction, renovation or alteration of the building
- the time period it took place in
We consider the period of construction, renovation or alteration to be completed on whichever date is earlier:
- the date the work is completed
- the date you rent 90% or more of the building
When these conditions are met, the amount of soft costs related to the building that you can deduct is limited to the amount of rental income earned from the building.
Soft costs that do not meet the above conditions can be added to the capital cost of the building and not the land.
CCA, landscaping costs and disability-related modifications to the buildings’ costs are not subject to the soft cost rules.
For more information on CCA, see Chapter 4.
For more information on landscaping costs, see Landscaping costs.
For more information on costs for disability-related modifications, see Modifications to rental properties to accommodate persons with disabilities.
If you rent part of the building where you live, you can claim the amount of your expenses that relate to the rented area of the building. You have to divide the expenses that relate to the whole property between your personal part and the rented area. You can split the expenses using square metres or the number of rooms you are renting in the building.
For example, if you rent 4 rooms of your 10-room house, you can deduct:
- 100% of the expenses that relate only to the rented rooms, such as repairs and maintenance of the rooms; plus
- 40% (4 out of 10 rooms) of the expenses that relate to the whole building, such as taxes and insurance.
If you rent rooms in your home to a lodger or roommate, you can claim all of the expenses for the part you are renting. You can also claim a portion of the expenses for the rooms in your home that you are not renting and that both you and your lodger or roommate use. You can use factors such as availability for use or the number of persons sharing the room to calculate the allowable expenses. You can also calculate these amounts by estimating the percentage of time the lodger or roommate spends in these rooms (for example, the kitchen and living room).
Fill in “Part 4 – Expenses” on Form T776 as follows:
- enter the full amount of each expense under “Total expenses”
- enter the part of each expense that was for personal use under “Personal portion”
- add up the amounts in each column and enter the result for “Total expenses” on amount A, and enter the “Personal portion” on line 9949
- subtract the personal portion total from the total expenses to get your total deductible expense. Enter this result on amount 4
If you are a co-owner or partner in a partnership, enter the personal portion of the expenses for all co-owners or partners at line 9949.
You cannot claim the expenses for renting part of your property if you have no reasonable expectation of making a profit.
For more information on renting part of your personal residence, see Changing part of your principal residence to a rental property. For more information on business-use-of-home expenses, see Line 9945 – Business-use-of-home expenses in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Patrick rents out 3 rooms of his 12-room house. He is not sure how to split the expenses when he reports his rental income. His expenses were property taxes, electricity, insurance and the cost of advertising for tenants in the local newspaper.
Patrick can claim the part of his expenses that relate to the area of the property he rented in the current tax year. Since he rented 25% of his residence (3 out of 12 rooms), he can deduct 25% of his property taxes, electricity and insurance costs from his rental income. He can deduct the full amount of the advertising expense, since this expense relates only to the rented area.
When he completes Form T776, Patrick enters the full amount of each expense in the “Total expenses” column. Then, in the “Personal portion” column, he shows the part of each expense that relates to his personal use. In this case, he enters 75% of the property taxes, electricity and insurance costs for the property. He will not enter anything for advertising in the “Personal portion” column.
Patrick can also claim CCA on the rented area of the property if it does not create or increase a rental loss and he is not designating the building as his principal residence.
Expenses you can deduct
A prepaid expense is an expense you paid for ahead of time. Under the accrual method of accounting, claim the expense you prepay in the year or years in which you get the related benefit.
Under the cash method of accounting, you cannot deduct a prepaid expense amount (other than for inventory) relating to a tax year that is two or more years after the year the expense is paid. However, you can deduct the part of an amount you paid in a previous year for benefits received in the current tax year. These amounts are deductible as long as you have not previously deducted them.
Catherine paid $2,100 for insurance on her rental property. The insurance was for the current tax year and the two following years. Although she paid the insurance for three years, she can deduct only the part that applies to the current tax year from her gross rental income.
Catherine can deduct $700 in the current tax year and $700 in each of the following two years.
For more information, see Interpretation Bulletin IT-417, Prepaid Expenses and Deferred Charges.
Line 8521 – Advertising
You can deduct expenses for advertising, including advertising in Canadian newspapers and on Canadian television and radio stations. You can also include any amount you paid as a finder’s fee.
Line 8690 – Insurance
You can deduct the premiums you pay on your rental property for the current year. If your policy gives coverage for more than one year, deduct only the premiums related to the current year. Deduct the remaining premiums in the year(s) to which they relate.
Line 8710 – Interest and bank charges
You can deduct the interest charge on money you borrow to buy or improve your rental property. If you have interest expenses that relate to the construction or renovation period, see Construction soft costs.
You can also deduct interest charges you paid to tenants on rental deposits. If you are claiming interest as a rental expense on Form T776, do not include it as a carrying charge on Form 5000-D1, Federal Worksheet (for all except non-residents).
Do not deduct in full for the year any lump-sum amount paid for interest or a fee paid to reduce the interest rate on a mortgage. You prorate these amounts for the rest of the original term of the mortgage or loan. You also prorate a penalty or bonus paid to a financial institution to pay off your mortgage loan before it is due.
For example, if the term of your loan or mortgage is five years and in the third year you pay a fee to reduce your interest rate, treat this fee as a prepaid expense and deduct it over the remaining term of the loan or mortgage.
You can deduct certain fees when you get a mortgage or loan to buy or improve your rental property. If the loans relate to the construction or renovation period, first read about soft costs.
Loan fees include:
- mortgage applications, appraisals, processing and insurance fees
- mortgage guarantee fees
- mortgage brokerage and finder’s fees
- legal fees related to mortgage financing
You deduct these fees over a period of five years, regardless of the term of your loan. Deduct 20% (100% divided by five years equals 20%) in the current tax year and 20% in each of the next four years. The 20% limit is reduced proportionally for fiscal periods of less than 12 months.
If you repay the loan before the end of the five-year period, you can deduct the remaining financing fees then. The number of years for which you can deduct these fees is not related to the term of your loan.
If you incur standby charges, guarantee fees, service fees or any other similar fees, you may be able to deduct them in full in the year you incur them. For more information, see Interpretation Bulletin IT-341, Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate and Expenses of Borrowing Money.
You can choose to treat finance fees you paid and the interest on money you borrowed to acquire depreciable property as capital expenses.
If you refinance your rental property to get money for a business or other investments, you may be able to claim the interest expenses on Form 5000-D1, Federal Worksheet (for all except non-residents). See line 22100 in the Federal Income Tax and Benefit Guide, or the “Expenses” chapter in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income. If the funds are for personal use, you cannot deduct the interest expenses.
You were asking?
Q. I own and rent a semi-detached house. This year, I refinanced the property to increase the mortgage because I needed money for a down payment on my personal residence. Can I deduct the additional interest on the mortgage against my rental income?
A. No. You are making personal use of the funds you got from refinancing your rental property. As a result, you cannot deduct the additional interest when you calculate your net income or loss from your rental property.
Line 8810 – Office expenses
You can deduct the cost of office expenses. These include small items such as pens, pencils, paper clips, stationery and stamps. Office expenses do not include capital expenditures to acquire capital property such as calculators, filing cabinets, chairs and a desk. These are capital items.
Line 8860 – Professional fees (includes legal and accounting fees)
You can deduct fees for legal services to prepare leases or collect overdue rents. If you incur legal fees to buy your rental property, you cannot deduct them from your gross rental income. Instead, divide the fees between land and building and add them to their respective cost. For example, you buy a property worth $200,000 ($50,000 for the land and $150,000 for the building) and incur legal fees of $10,000. Split the $10,000 proportionately between the land and building. In this case, $2,500 is added to the cost of the land (for a total of $52,500) and $7,500 is added to the cost of the building (for a total of $157,500). For more information, see Land.
The legal fees you paid when selling your rental property are deducted from your proceeds of disposition when calculating your capital gain or loss. The deduction for legal fees also applies when calculating a recapture of CCA or a terminal loss.
You can also deduct expenses you had for bookkeeping services, audits of your records and preparing financial statements. You may be able to deduct fees and expenses for advice and help to prepare your income tax return and any related information returns.
Line 8871 – Management and administration fees
You can deduct the amounts paid to a person or a company to manage your property. You can also deduct amounts paid or payable to agents for collecting rents or finding new tenants.
If you paid commissions to a real estate agent when selling your rental property, include them as “Outlays and expenses” on Schedule 3, Capital Gains (or Losses), when you report the disposition of your property.
Line 8960 – Repairs and maintenance
You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn income.
You cannot deduct the value of your own labour.
You cannot deduct costs you incur for repairs that are capital in nature. However, you can claim CCA.
Transportation and installation expenses for appliances in a rental property are typically considered current operating expenses rather than capital expenses. These expenses can be reported on the T776 form as part of the “Maintenance and Repairs” section.
On the T776 form, you will find a section called “Maintenance and Repairs” where you can report various expenses related to the upkeep of your rental property. This section allows you to report expenses such as repairs, maintenance, and other current operating expenses incurred during the tax year.
Under the “Maintenance and Repairs” section on the T776 form, you can claim various expenses related to the upkeep of your rental property. Here are some examples of expenses that can typically be claimed:
Repairs: Costs incurred for repairing the property, such as fixing plumbing, electrical systems, or structural damage.
Maintenance: Expenses related to routine maintenance, including painting, cleaning, and landscaping.
Supplies: Costs of materials and supplies used for maintenance or repairs, such as paint, nails, cleaning supplies, and gardening tools.
Pest control: Expenses for pest extermination or prevention services.
Snow removal: Costs associated with snow removal from driveways, walkways, or parking areas.
Utilities: Payments for utilities directly related to the rental property, such as electricity, gas, water, and sewer fees. Note that if the utilities are shared with personal use, you may need to prorate the expenses.
Security system: Expenses for the installation, maintenance, or monitoring of security systems.
Cleaning and janitorial services: Costs for professional cleaning or janitorial services for common areas or the entire property.
Lawn care and landscaping: Expenses for maintaining the lawn, landscaping, or gardening services.
Waste disposal: Payments for garbage collection or waste removal services.
Line 9060 – Salaries, wages and benefits
You can deduct amounts paid or payable to superintendents, maintenance personnel and others you employ to take care of your rental property. You cannot deduct the value of your own services.
As the employer, you must deduct your part of Canada Pension Plan or Quebec Pension Plan contributions and employment insurance premiums. You can also deduct workers’ compensation amounts payable on employees’ remuneration and Provincial Parental Insurance Plan (PPIP) premiums. The PPIP is an income replacement plan for residents of Quebec. For details, contact Revenu Québec. For more information on making payroll deductions, go to Payroll.
You can also deduct any insurance premiums you pay for an employee for a sickness, an accident, a disability or an income insurance plan.
For more information on wages, see Guide T4001, Employer’s Guide – Payroll Deductions and Remittances.
Line 9180 – Property taxes
You can deduct property taxes you incurred for your rental property for the period it was available for rent. For example, you can deduct property taxes for the land and building where your rental property is situated. For more information, see Vacant land and Construction soft costs.
Line 9200 – Travel
You can deduct travel expenses you incur to collect rents, supervise repairs and manage your properties. Travel expenses include the cost of getting to your rental property but do not include board and lodging, which we consider to be personal expenses. To claim the travel expenses you incur, you need to meet the same requirements discussed at Line 9281 – Motor vehicle expenses.
Line 9220 – Utilities
You can deduct expenses for utilities, such as gas, oil, electricity, water and cable, if your rental arrangement specifies that you pay for the utilities of your rental space or units.
Line 9281 – Motor vehicle expenses (not including capital cost allowance)
You can deduct motor vehicle expenses in the following circumstances:
- If you own one rental property:
You can deduct reasonable motor vehicle expenses if you meet all of the following conditions:
- you receive income from only one rental property that is in the general area where you live
- you personally do part, or all, of the necessary repairs and maintenance on the property
- you have motor vehicle expenses to transport tools and materials to the rental property
You cannot deduct motor vehicle expenses you incur to collect rents. These are personal expenses.
- If you own two or more rental properties:
In addition to the expenses listed above, you can deduct reasonable motor vehicle expenses you incur to do any of the following:
- collect rents
- supervise repairs
- manage the properties
This applies whether your rental properties are located in or outside the general area where you live. Your rental properties have to be located in at least two different sites, away from your principal residence. The motor vehicle expenses that we consider to be reasonable depend on the circumstances of your situation.
For the definition of motor vehicle, see Definitions.
For information on how to calculate the motor vehicle expenses, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Line 9270 – Other expenses
There are expenses you can incur to earn rental income other than those listed on Form T776. We cover some of them in the following sections. Enter on this line the total of other expenses you incurred to earn income, as long as you did not include them on a previous line.
You can deduct the cost of landscaping the grounds around your rental property only in the year you paid the cost, even if you use the accrual method for calculating your rental income.
Lease cancellation payments
You can deduct amounts paid or payable to tenants to cancel their leases. The deductible amount is calculated as follows:
If you made the cancellation payment in the year:
Cancellation payment × Number of days to the end of the year when payment is made ÷ Number of days left on the lease
If you made the cancellation payment in a previous year:
Cancellation payment × Number of days in the year left on the lease ÷ Number of days left on the lease
For this calculation, the life of the lease (including all renewal periods) cannot be longer than 40 years.
Samir is a landlord. He paid his tenant $1,000 to cancel a lease on August 18 of the current tax year. The lease was due to expire on December 31 of the next year. When he made the payment, there were 135 days left in the current year and 500 days left on the lease.
For the current tax year, Samir deducts $270, calculated as follows:
$1,000 × 135 ÷ 500 = $270
For the next year, Samir deducts $730 calculated as follows:
$1,000 × 365 ÷ 500 = $730
If you dispose of the property, the tax treatment will vary depending on your situation. For more information, see Interpretation Bulletin IT-359, Premiums and Other Amounts with Respect to Leases.
If you earn rental income from a condominium unit, you can deduct the expenses that you would usually deduct from it. You can also deduct condominium fees that represent your share of the upkeep, repairs, maintenance and other current expenses of the common property. For more information, see Interpretation Bulletin IT-304, Condominiums.
You might earn rental income from vacant land. You can deduct your operating expenses from this income. There are limits on how much you can deduct for both:
- interest on money you borrowed to acquire the land, or on an amount payable for the land
- property taxes on the land assessed by a province or territory and a Canadian municipality, including assessments for school taxes and local improvements
The amount you can deduct for these two expenses is limited to the amount of rental income left after you have deducted all other expenses. You cannot create or increase a rental loss, or reduce other sources of income, by claiming a deduction for interest or property taxes. They can be added to the cost of the land. This will decrease your capital gain or increase your capital loss when you dispose of the land.
You cannot deduct your mortgage interest and property taxes for vacant land if you are not earning any income from that land. You cannot add these expenses to the adjusted cost base of your land. In addition, you cannot deduct income taxes, profit taxes or land transfer taxes you have for the vacant land.
For more information on vacant land, see Interpretation Bulletin IT-153, Land Developers – Subdivision and Development Costs and Carrying Charges on Land, and Interpretation Bulletin IT-456, Capital Property – Some Adjustments to Cost Base, and its Special Release.
You were asking?
Q. In 1995, I bought vacant land as an investment. In the current tax year, I rented this land to a farmer for pasture. Can I deduct my mortgage interest and property taxes from my rental income?
A. Yes. After deducting all your other allowable expenses, you can deduct the amount of your mortgage interest and property taxes for the year that you need to reduce your remaining rental income to zero. If you do not need to use the full amount of your taxes and interest, you can add the rest to the adjusted cost base of the land.
Expenses you cannot deduct
Land transfer taxes
You cannot deduct land transfer taxes you paid when you bought your property. Add these amounts to the cost of the property.
You cannot deduct the repayments of principal on your mortgage or loan on your rental property. For more information about the interest part of your mortgage, see Line 8710 – Interest and bank charges.
You cannot deduct any penalties shown on your notice of assessment or notice of reassessment.
Value of your own labour
You cannot deduct the value of your own services or labour.
Line 9949 – Total for personal portion
Enter the total amount from the column called “Personal portion.” For more information, see Personal portion.
Your deductible expenses are your total expenses minus your total personal expenses.
Line 9369 – Net income (loss) before adjustments
Enter the gross income minus the deductible expenses (line 8299 minus amount 4). This amount is the net rental income of all co-owners or partners before any claim for CCA.
Co-owners – Your share of line 9369
If you are a co-owner, enter your share of the amount from line 9369 on amount 5. This amount is based on your share of ownership of the rental property.
If you are a co-owner or partner, also fill in Part 2 – Details of other co-owners and partners.
Line 9945 – Other expenses of the co-owner
Enter the amount of deductible expenses you have as a co-owner that you did not deduct elsewhere.
Line 9947 – Recaptured capital cost allowance
If you had a recapture of CCA, enter that amount at this line. If you are a co-owner, enter your share of the amount.
Line 9948 – Terminal loss
Enter any terminal loss amount you had on the sale of rental property at this line. If you are a co-owner, enter your share of the amount.
Line 9936 – Total capital cost allowance claim for the year
Enter the amount of your total CCA claim for the year from amount ii in Area A. For information on how to calculate CCA, see Chapter 4.
If you are a partner in a partnership that does not need to issue you a T5013 slip, enter the total CCA allocated on the financial statements the partnership gave you.
Do not use the amount at line 9936 if you are a member of a partnership that has to file Form T5013SUM, Summary of Partnership Income. Your CCA amount is already included in box 110 of your T5013 slip.
Net income (loss)
Enter your net income (loss) at amount 9.
Amount 10 – Partnerships
If you are a member of a partnership, enter your share of amount 9 or the amount from box 107 or 110 from your T5013 slip.
Line 9974 – GST/HST rebate for partners received in the year
If you received a GST/HST rebate for partners, report the amount of the rebate that relates to eligible expenses other than CCA on line 9974 of your Form T776 for the year you receive the rebate.
Line 9943 – Other expenses of the partner
Enter the amount of deductible expenses you have as a partner that you did not deduct elsewhere on Form T776.
Line 9946 – Your net income (loss)
This is the amount of your net income or loss for the tax year. Enter the amount from line 9946 on line 12600 of your income tax return.
You have a rental loss if your rental expenses are more than your gross rental income. If you incur the expenses to earn income, you can deduct your rental loss against your other sources of income.
Renting below fair market value
You can deduct your expenses only if you incur them to earn an income. In certain cases, you may ask your son or daughter, or anyone else living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries. You do not report this amount in your income, and you cannot claim rental expenses. This is a cost-sharing arrangement, so you cannot claim a rental loss.
If you lose money because you rent a property to a person you know for less money than you would to a person you do not know, you cannot claim a rental loss. When your rental expenses are consistently more than your rental income, you may not be allowed to claim a rental loss because your rental operation is not considered to be a source of income. You can claim a rental loss if you are renting the property to a relative for the same rate as you would charge other tenants and you expect to make a profit.
Rental expenses you can deduct
Capital expenses – Special situations
Rental Income From: Canada Revenue Agency
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