When it comes to tax write offs and tax deductions for rental property and rental income in Canada, there are capital and current expenses.
After looking into real estate and if it was truly a viable option in Canada today, and then looking into whether I should go with a mortgage broker or bank, I decided that I had better understand some of the tax code associated with the income you get from being a landlord.  I knew that there were several tax deductions available in Canada when you begin earning rental income, but I wasn’t sure on the details.  This became especially pertinent when I crunched the numbers (check out my fourplex calculations here) and realized that my ROI wouldn’t be spectacular with the investment – so I should figure out how to shelter as much of it as possible from the tax man.  It turns out there are a lot of options available to accomplish this purpose.

While I’m still no expert in income tax preparation, or the application of some of the “greyer” areas of tax deductions applicable to real estate, I think I’ve got a pretty good handle on the basics.  When it comes to tax write offs for landlords, expenses that can be claimed are generally broken up into two categories: current expenses & capital expenses.

A current expense is something that usually reoccurs periodically.  For example, general maintenance such as re-staining a deck every few years would be a current expense.
A capital expense is basically a lasting improvement to the property that will raise the value of the property.  An example would be building an attached deck to the house you own.  Some other capital costs would be the purchase price of the rental property and the legal fees associated with that purchase.

Deducting depreciation of the property against your income is useful in sheltering your cash flow, but the tax man will get his day when you sell the property and it comes time to figure out your capital gains.

The Normal Deductions on Rental Income

Here is a list of the other things you can deduct according to the Canada Revenue Agency:

  • Your insurance on the property.
  • Advertising that tries to attract people to your rental property.
  • Several different fees from lawyers and mortgage brokers.
  • The cost of office supplies (obviously this applies more to large scale landlords).
  • Bookkeeping/accounting/tax preparation fees.
  • The salary/wages of your property manager and any other people you employ to take care or provide services to the property (and labour/time you put in to the equation is not tax deductible however).
  • Repairs to the property.
  • Property taxes.
  • The cost of providing utilities if you choose to pay for them on your rental agreement (making this an interesting perk to provide for clients).

Deducting Your Vehicle Costs as a Landlord

Vehicle costs aren’t as cut and dried as some of the other tax deductions that are available.  You are allowed to deduct the cost of travelling to you rental property in order to manage it if you are the property manager  – BUT not the cost of your board and lodging.

Related: Buying A Home Without A Realtor In Canada

You are not allowed to collect vehicle expenses associated with collecting rent unless you own two or more properties.  You are allowed to deduct expenses if you meet these three criteria:

  • You only have one rental property and you live fairly close;
  • You do part or all of the maintenance on the property;
  • You used your own vehicle to transport tools and building materials to your rental property.

Creating a Tax-Deductible Mortgage with Cash-Damming and a HELOC

The most interesting and creative tax write offs that I found associated with real estate had to do with the fact that any interest you pay in regards to investing in real estate is tax deductible.  Obviously this is most easily applied to the interest you are paying on the properties’ mortgage (likely a fairly large amount in most Canadian markets today – especially the first several years you own the house!).

Related: Investing In Real Estate Without All the Risk

The lesser-known strategy that I came across is known as cash-damming using a home equity line of credit.  I had seen the concept applied to the financial strategy known as the Smith Manoeuvre, but hadn’t realized it could also be advantageously applied to rental income.

The basic idea is that you tap into the equity you have in your home through a HELOC and use this money to pay for your expenses for the rental property.  The money that you had budgeted for these expenses can be applied to pay down your principal residence’s mortgage.  The idea is to convert an expense that is non-tax deductible (the mortgage on your principal residence) into a HELOC used entirely for business purposes – which is tax deductible.  Note that I stated entirely for business purposes, because if you use even 10% or so of your HELOC for non-investment purposes, the CRA can have a field day with what becomes fairly complicated accounting.

Banking on the government continuing to give incentives to people to borrow money for the sake of investment is probably as close to a guaranteed win as you’re going to come.  A vast majority of wealthy people depend on these sorts of tax deductions to run their companies and shelter their income, so you may as well take advantage of them too!

Rental Expenses That Are Not Tax Deductible

  • The principal you’re paying on the mortgage.
  • Land transfer taxes when you first purchase the property.
  • Penalties incurred on your notice of assessment.
  • Any personal labour you put into the game.

Some people advocate for running your rental property (s) through a corporation.  The tax breaks are applicable either way – but there are some arguments for one or the other which I think I’ll save for a post all on its own.

Updated for 2017

With the sharing economy becoming a bigger and bigger part of life for many Canadian landlords, understanding how tax deductions on rental income can be applied to cash that you received from Airbnb is more important than ever.  The first step to determining the tax that you owe is specifying if your income is rental or business income.  This can be a decisive difference – so it’s important to pay attention when the CRA states that if you are providing services other than basic lodging (such as linen or meals service) than your income falls under the business category – otherwise (and this is the case for most) it is considered rental income.  If income is considered “business” – then you are responsible for making CPP contributions based on those numbers.  If it’s determined to be rental income, then you simply file your Statement of Real Estate Rentals (T776) like normal.

It will be interesting to see going forward with variable and fixed mortgage rates staying so low, if more and more Canadian landlords keep propping up extraordinarily high real estate prices in many urban centres across Canada.  Given the relatively low vacancy rates it appears that there is still considerable demand for rental housing – which shouldn’t surprise anyone given the current difficult many young Canadians have in saving up a down payment to begin the climbing the housing ladder with.

 

Article comments

77 comments
Mary says:

I own a primary residence and just gotten a rental unit. I used HELOC to pay 25% DP (79K) for the rental. The $79K is now on a fixed term for 3 months (2.96% interest) . At the end of the year, my bank issues me a banking summary.

The rental unit will be rented beginning of June for $1600. The monthly expenses is $1750 so I am short of $150. My plan was to use the monthly rent to pay off the expenses of the rental property ($1750). After reading your article, my understanding is that I can use the rent to pay off my primary residence; and borrow money from my HELOC to pay off the rental’s monthly expenses.

How would I do it to ensure that traceability is adhered to (just incase CRA would audit me)? I am thinking of tapping my LOC then move money to my personal bank account. From my personal bank account, I will issue a cheque to my bank account (dedicated for rental expenses) for the monthly expenses. The interest incurred for borrowing money (from LOC) to pay off the monthly expenses can also be tax deductible. I am a bit confused. Am I making sense and am I doing it right? Thank you for your time.

Lisa Jackson says:

Hi Mary,

We would recommend speaking with a tax attorney or a chartered accountant about your situation. Best of luck!

Gord says:

Never ask CRA for advice as most times it is incorrect. Sometimes I wonder if this is on purpose to generate penalties and interest or they are just concentrating on collecting money more than knowing the tax laws.

Naga says:

Great article. I have a question, if I use Heloc for the downpayment (20%) on investment property, will I be allowed to write off the Heloc interest against the rental income?

CK says:

So if we were living in a condo, that we then turned into a rental property and are living in a different home with a separate mortgage, the only mortgage we could create a HELOC with would be the rental property, because we have equity built there. Does this cash damming still work if the HELOC is on the rental property? I am trying my best to wrap my head around this but this is a bit like learning a new language to me. It’s also late, so sorry if that is a silly question *brain fizzle*

Investor says:

Hi,

I borrowed $78,000 from my HELOC as downpayment for a rental property. Afterwards, I lumped the $78,000 loan into my principal residence mortgage to take advantage of low interest rate, without changing my regular monthly payment. Can I claim a constant interest on the rental property loan or is the payment meant to be applied to both my rental loan and personal loan on a pro-rated basis? As I noted, my regular mortgage payment amount didn’t change from the past.

Thanks in advance.

Richard and Susan Parker says:

With reference to a previous question of March 14, 2017 from Tom.
His quote “I own two rental properties and I am using 6% of my principle residence as a home office to manage my rental properties. Can 6% of my household expenses (hydro, gas, water, mortgage interest, home insurance, etc.) be claimed as an expense against the rental income I am earning?”
Your reply was, “as far as I’m aware, this would be correct”
We’ve had more than two rental properties for many years and wasn’t aware of this. However, we would like to take advantage for the 2017 return. In addition to the exact same question as Tom, we’d like to know please;
Q. Would a portion of the 6% of my household expenses be entered in the applicable boxes on T776 for each property, or elsewhere?
Q. What documentation would be needed (and retained) to support this claim?
We use a popular tax program with rental property inclusion, and netfile annually.
Thank you.

San says:

Hi, I have 5 rental properties with 7 families living in. Can I use 8% of my principle residence cost as office (utilities, insurance etc) to offset the rental income? what is the maximum percentage? any side-effect? Thanks.

Kelly says:

Hi, thank you for the interesting and important information. I was wondering the percentage of my house I should deduct in expenditures given that my tenant in my principal residence rents about half the space of the house. I have received conflicting advice on this. Some say I can claim a 50% deduction but that I will have to pay a lot of the money back after I sell the house. Others claim that if I deduct less than 25% (or 24% to be exact) I won’t have to pay back the tax deduction benefits when I do sell the house. I would appreciate your advice and feedback on this. Thank you very much!

Sam says:

I own a house that is my principal residence. The outstanding mortgage principal on the house is $300K. I decide to buy another house and to finance the purchase of that house I can either refinance my principal residence upto $600K (to generate $300K net) or get a HELOC for $300K. I understand, if I use the new house as rental property to earn rental income I can deduct the interest on the additional mortgage/HELOC from the rental income.
Question: Now, instead of using the new house as rental property, if I choose to move in and use it as my principal residence and convert my erstwhile principal residence to a rental property, will the mortgage interest still be deductible from the rental earned from the old house?

If yes, can I claim deduction for interest on $300K or interest on the entire $600K?

Colin says:

Hi Kyle,

Thanks for the great article! I’ve had a rental property for 8 months now. All this time I’ve been paying the expenses on the rental property with the monthly cheques I’ve received from my tenants. I never used the HELOC account before. So can I go back now and put all those 8 months of expenses onto my HELOC account before the current year ends? I want to use this extra money from the HELOC to put towards my principal mortgage. Thanks.

Kyle says:

You don’t need to put them in a HELOC account Colin – you can deduct those expenses with basic receipt documents.

JF says:

I am looking to purchase a home that already has a basement rental unit. In this case, would you be able to write off a portion of the mortgage interest attributable to the percent space of the home that is being rented out?

Kyle says:

As far as I’m aware JF.

Joel says:

I currently have a PR and a Rental property with a HELOC on it. Can I use that HELOC to pay the rental expenses (rental mortgage, strata, insurance etc..) and then deduct the interest paid on the HELOC?

I was thinking of widthdrawing the amount that the HELOC has grown that month (from paying down the rental mortgage) minus the interest charged that month on the HELOC to pay for the rental property, freeing up some rent money to pay down my PR a little faster.

Kyle says:

If any of the expenses belong to your current PR then only a percentage of the HELOC interest would be deductible Joel.

steven says:

Hi, I am planning on renting out my house and using the rent income to pay for another home I am renting for my own personal use. Can I offset my rental expense from my rental income?

Kyle says:

No you can’t Steven – sorry!

Tom says:

I own two rental properties and I am using 6% of my principle residence as a home office to manage my rental properties. Can 6% of my household expenses (hydro, gas, water, mortgage interest, home insurance, etc.) be claimed as an expense against the rental income I am earning?

Kyle says:

As far as I am aware, this would be correct Tom.

trevor says:

oh I just realized John also said ” So the best you can do is state that you have zero rental income and not pay any taxes against rental income.” That’s pretty much tax evasion which isn’t very good advise

trevor says:

This is my response to Johns comment below
John if your rental properties are in your personal name it is considered income and goes against all your personal income tax…so yes you can deduct your interest on the rentals against your personal income tax..you can also apply the depreciation of the properties against your personal income tax but the day you sell your property the capital gains will go against your income of the year you sell it.

Also the tax man does NOT like your business to keep losing money and after 5 years or so if you are still losing money chances are you will be audited
hope this helps

Johns comment is below

John
Hi,
Your monthly mortgage payment is really irrelevant for tax purposes. How much of that payment goes towards interest is relevant, but it can only be used to offset your rental income. It cannot be used to generate any loss against other income (e.g. from your job). So the best you can do is state that you have zero rental income and not pay any taxes against rental income. The fact that you have negative cash-flow is a poor business decision, but the taxman doesn’t care. You can refer to CRA publication t4036 or do a google search on t776 which is the form you need to file with your tax return.
This is just my 2 cents and should not be taken as tax advise. No liabilities.

Ray says:

I recently moved out of my condo but kept it for a rental property. My question is that I want to take advantage of the primary residence while I was living there, but then also take advantage of the CCA write off for the difference between my income and expenses on the property so that I have net zero income on it and won’t have to pay tax. I’ve got a letter from my real estate agent of what it was worth at the time of me moving out, is that fine for the CRA? Thanks

Kyle says:

As far as determining value at the time of moving out I’m not sure if that qualifies as an assessment Ray. It as to do with how it is deemed as you can tell here: http://www.taxtips.ca/personaltax/propertyrental/changeinuse.htm I’d call the CRA to figure out how they determine fair market value. Probably by looking at market comparables I would think.

Daniel says:

Hi great info here.
I own a building currently and am paying a lot of tax on my rental income. I am planning on buying another home to lease to own for my son. I would be the landlord and deduct my cost as mortgage repairs etc. After say 5 years I plan to sell it back to my son at no profit to me for roughly the same price i paid for it. Your thoughts please

Kyle says:

Sounds like a sound idea to me Dan. I’ve even read about cases where if your son gets a roommate you can “pay him” as a property manager and deduct that as an expense.

Noy says:

Am I able to write off a repair like redoing the foundation. When I bought the home from the realtor I didn’t get a home inspection but I got it for $20000 from list price and I’ve owned it since 2009 but moved out in 2011 and have been renting my property ever since. Am I able to write off foundation repair that will cost around 25-30000 dollars?

Kyle says:

As long as you’re currently renting the property Noy I don’t see why you couldn’t. Always best to contact the CRA though.

Angie says:

I have a rental property shared with someone else. We were each thinking of getting life insurance to cover the mortgage if something happened to one of us. Can the cost of insurance be written off?

Kyle says:

I would think that it could almost for sure Angie, but always best to consult the CRA directly on these things.

Dave says:

Hi my wife and I own 2 rental properties, we own a corporation but properties are in our personal name, but have rent cheques and all expense paid to or from our corporate account, I have been told I can claim all expenses but not the hst, this makes no sense to me, is this true.
Thanks in advance
Dave

Kyle says:

That doesn’t sound right to me Dave, but I would hire an accountant that has some real estate experience to get you set up properly. After that you might want to tackle tax prep going forward, but that sounds like an area that could get you audited in a hurry, so I’d check into it to make sure.

Alex says:

Can you use the Home Buyers Plan for a down-payment on a rental home? If not, would it make a difference if I lived in one of the 5 rooms I was renting? Cheers!

Kyle says:

Alex, you cannot use it for a downpayment on a rental home. I believe that as long as all five rooms were in the same house (not a duplex) you could use the homebuyers plan to purchase the house and then what you did after that would be up to you as far as renting goes!

Jack says:

Hi, Kyle
I heard about the reserve fund up to 6 month rent for the retail properties are not taxable. Is that true? Thanks.

Kyle says:

I’m not sure I follow Jack. What do you mean by “reserve fund”?

H.Bhatt says:

Can I claim vehicle lease amount (full or partial) for two rental properties located 1200 & 1400 KMs away from my principal location. The vehicle would be used for general maintenance and upkeep of the properties. I want to understand if I can do it in my individual tax return without forming a corporation.

Kyle says:

The short answer is that you can Bhatt, however there are some restrictions. Check out the CRA page in regards to your question here: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/bt/rprt/xpns/mtr/menu-eng.html

Christopher says:

Hi Kyle,

Very nice article.

Just to reiterate what you’re saying about the HELOC.

1. I take out a HELOC on my principal res and use that to pay for my expenses on my rental property

2. I then pay my HELOC using my personal income.

3. I can now claim the money used from my HELOC on my taxes.

My understanding is a HELOC is a 2nd loan/mortgage meaning in order to exercise this benefit I need to go into debt which makes me think I’m missing something here.

Kyle says:

You have the right idea Chris. It doesn’t have to be a HELOC, but it can be any loan where the entirety of the loan is used to fund income-producing investments.

JS says:

What if you just rent out bedrooms and share the rest of the house? Basically collect rent only, utilities included. Would this complicated one’s taxes or would this be a simple calculation based on the sq ft of the bedrooms? Any landlords want to comment?

Kyle says:

I’ll certainly leave it to landlords to comment. I would think it would be a sq footage thing. Here’s a relevant link I found: http://blog.turbotax.ca/renting-out-a-portion-of-your-home/

Colin says:

are condo fees and strata fees (BC) deductible for a condo rental unit?

Kyle says:

I would guess that they are, but again Colin, best to ask the CRA.

Micheal says:

Hello
I had a question in regards to the tax deductions on
The capital gains tax on a property “gifted from family”
Would this be a deduction ?
Would it be if a holdings company owned it?

Kyle says:

The capital gains tax would not be a deduction to the best of my knowledge. If a holdings company owned it then it wouldn’t be “gifted from family” right? I don’t think it would matter though, capital gains tax is still applicable and not a deduction from what I’ve read. As always though, best to talk to the CRA directly.

Thanks for the insightful information! I have a question. Situation is that we bought a new home for our primary residence and rented out our old home. We remortgaged our old home for 80% of the value(so we did not have to may CMHC fees) and used the equity as a down payment for our new home which would now become our primary residence. I have been told that in this case I cannot claim the interest that was paid on the mortgage for the rental because technically I borrowed the money for a down payment for my primary residence and not for the rental. Is this the case?
If so is there any way to fix this issue so I can claim the interest besides setting up a corporation to buy the rental property?

Kyle says:

This one is over my head V. I’d definitely call the CRA or a real-estate-experienced accountant to talk about this. I would guess you should still be ok on the interest deduction, but that’s just a guess.

Cyrus says:

I about about renewing my mortgages on both rental and my personal property. Presently I can get a lower interest on my house. I am planning to use the equity on my home to pay the rental off. If I do so can I still claim the interest on my house loan against my rental property?

thanks

Kyle says:

I’m fairly certain you cannot Cyrus. Always best to call the CRA directly on these types of things, but I have never spoken with anyone who has been able to claim the interest on their home mortgage against rental income.

Jeanne Moreau says:

Your article said:
“Some people advocate for running your rental property (s) through a corporation. The tax breaks are applicable either way

Kyle says:

I did not Jeanne. When I get some more personal experience with real estate investing I will re-visit the issue. I would look to tax specialist for a second opinion. Cheers!

Gary says:

I purchased two homes and had to pay for CHMC mortgage insurance which was included in my mortgage. Am I able to deduct the portion of my monthly payment
that is paying the premium each month

Kyle says:

You shouldn’t be paying CMHC premiums each month Gary. You are likely paying housing insurance every month, but the CMHC insurance should just be rolled into your mortgage, and yes the interest on that throughout the year in deductible.

Newmom says:

Can I write off the mortgage interest on an investment property that is not currently being rented ?

Kyle says:

This is probably a question you should ask the CRA directly Newmom. I would hazard a guess and say yes – as long as it was being rented before and it was clearly a rental property (not a property you had just moved out of or some other extenuating circumstances).

Mark says:

Hi Kyle,
If I had a relative do up the bookkeeping for me would it still be tax deductible? Also, would said relative need any bookkeeping qualifications in order for their services to be tax deductible?

Thanks,
Mark

Kyle says:

I again make the caveat that you should call the CRA to be absolutely sure, but that being said, I see no problem from anything I’ve read with your proposal. Just have them submit a receipt.

Dennis says:

Hi Kyle,
I recently purchased a home and added a basement suite. Because I also live at the same address(in the upstairs portion) can I still claim the tax deduction from my Mortgage interest? Or would it be proportional to the size of the space, I.E. 40% of the total square footage?
Many thanks,

Dennis W.

Kyle says:

I believe it would be proportional Dennis, but always best to consult with an accountant or the CRA on these type of things. Cheers.

Teena says:

My only income is my rental income. I was told I could write off LOC (interest only), house insurance, the usual stuff. The accountant took all my receipts, carefully sorted and prepared, and told me I would receive nothing. What is the point of investing in property if you can’t profit from it? Do you have to make an outside income to get anything back at income tax time? Do I need a new accountant?? Very frustrated!

Kyle says:

Hey Teena,

If your only income is rental income from one property then it doesn’t shock me that you didn’t get anything back, because chances are you didn’t pay any tax throughout the year. If you have paid tax throughout the year at a certain rate, then a return becomes possible. If your accountant was that thorough, I doubt it was there fault. The other point of investing in property is the capital gain – maybe look at selling the place?

Richard says:

If you paid cash for a rental property then took out a HELOC to invest in NON-DIVIDEND producing stocks, can you still deduct the interest expenses from the HELOC?

Kyle says:

Hi Richard. From everything I’ve read (once again, not a tax expert) you could use the HELOC on an investment home to run a Smith Maneuver.

HOWEVER

You cannot run the SM with non-dividend producing stocks from what I’ve read. I have heard a minority claim that you can use non-divided producing stocks with the rationale that they have the ability to becoming income producing at any point, but I personally wouldn’t go down that road.

MYygd says:

Hi,

If you have few properties, assume there is no other income, is it better to put them into corporation or under your name?

Kyle says:

Since it’s considered passive income you’re usually better to keep your properties outside of a corporation from what I can tell.

Val says:

another item, I pay some of my rental expense from credit card (to collect points). I assume this is allowed to be paid off with the HELOC.

does the credit card need to be separate from personal, or is a paper trail enough?

Kyle says:

I would keep a credit card specifically for the rental expenses in this case just to keep life simple. Once again, I would call the CRA on this.

I would be careful to show the exact amount coming out of the HELOC and exactly which expenses on the credit card were being paid, so that the amounts match up.

Val says:

question about cash-damming with a HELOC.
mortgage interest is often lower then HELOC rate.

How high an expense balance should you carry as you build up your interest?
How do you calculate when HELOC interest expense plus tax benefit become less beneficial vs the additional mortgage interest.

Can you run your rental investment with negative gross income continuously? I thought this was something that CRA frowned upon.

Kyle says:

I’m not sure if you could run the rental investment with a negative gross income tbh Val, you might want to call the CRA about that one specifically. That being said, you probably picked a pretty bad investment if that is the case. If you’re truly spending more from your HELOC than you’re taking in, in rent, then you may want to reconsider.

The HELOC vs additional mortgage interest argument doesn’t make much sense to me tbh. One should not be at the expense of the other.

Val says:

I thought the point of this was to accumulate expense and therefore interest in the HELOC to offset your rental income.

I would take the income and pay off the mortgage instead. So eventually after say 5 years of doing that, i would have a HELOC balance of ~$30,000 equating to interest of ~1,200 annually @4%, which isn’t actually a lot…

you’re right, I’ll not be negative in gross income even after deducting the interest expenses unless my unit have a period of long vacancy.

Val says:

Also on negative gross income, it can happen simply due to vacancy and uncollectible rent and can be used to offset all other income (in Canada).

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/lss-eng.html

Nick Robinson says:

Hey im a young entrepreneur thinking of creating a future income cushion using real estate. When one says tax deductible such as intrest on mortgage, is that applied to rental income alone or is it deductable from your income taxes as a whole.

Bahjat says:

Hi
Nice post, I would like your opinion on some tax issue relating to real estate.
My main residence is in Ottawa and I purchasdd a condo in Toronto last year. This unit has been vacant for a good period of time and it was rented for the less than the cost of the mortgage. My question is is there is a shortfall of $300 a month would that amount be a tax deduction? Thanks and I look forward to your response.

Kyle says:

Hi Bahjat,

You raise an interesting question. I’m no expert, and you might want someone with more experience in real estate to help you out. This article would suggest you can deduct that amount on your taxes if I’m reading it right: http://www.taxplanningguide.ca/tax-planning-guide/section-3-investors/rental-properties/

John says:

Hi,

Your monthly mortgage payment is really irrelevant for tax purposes. How much of that payment goes towards interest is relevant, but it can only be used to offset your rental income. It cannot be used to generate any loss against other income (e.g. from your job). So the best you can do is state that you have zero rental income and not pay any taxes against rental income. The fact that you have negative cash-flow is a poor business decision, but the taxman doesn’t care. You can refer to CRA publication t4036 or do a google search on t776 which is the form you need to file with your tax return.

This is just my 2 cents and should not be taken as tax advise. No liabilities.