Reporting Rental Income on Your Tax Return – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Reporting rental income in Canada is a legal obligation for anyone who earns money from renting property, whether it is a house, condo, duplex, basement suite, commercial space, cottage, or even a short-term rental such as Airbnb or Vrbo. Many property owners believe that rental income is simple to report—or worse, that small rentals do not need to be declared. In reality, CRA enforces strict rules around rental income reporting, allowable deductions, capital cost allowance (CCA), and shared ownership. Failing to report rental income can lead to reassessments, penalties, interest, and audits that span multiple years. Understanding how to report rental income in Canada—including what counts as rental income, which expenses are deductible, how CCA works, and how to split rental income between spouses—is essential for property owners who want to remain compliant and minimize tax.

Legal and Regulatory Framework

The rules for reporting rental income in Canada are governed by section 9 of the Income Tax Act, which requires taxpayers to include rental income as part of their total income. Rental income is reported on Form T776 (Statement of Real Estate Rentals). Taxpayers must report gross rental income and all related expenses such as mortgage interest, property taxes, insurance, utilities, repairs, advertising, accounting fees, and property management fees. Deductible expenses must be directly related to earning rental income. Capital cost allowance (CCA) is governed by section 20(1)(a) and allows taxpayers to claim depreciation on buildings, furniture, and equipment used in the rental property. However, claiming CCA reduces the adjusted cost base and may create a recapture when the property is sold. Shared rental income between spouses must reflect actual ownership percentages unless a legal agreement states otherwise. These rules form the compliance framework for reporting rental income in Canada.

Key Court Decisions

Court rulings reinforce the importance of proper reporting and documentation for rental properties. In LeBlanc v. The Queen, CRA denied rental expenses because the taxpayer failed to provide receipts, and the court upheld CRA’s denial, emphasizing strict documentation requirements. In Sas v. Canada, the court addressed mixed-use properties, ruling that expenses must be allocated reasonably between personal and rental use. In Gibbs v. The Queen, the court ruled that CCA claims were improperly taken because the taxpayer used the property for personal purposes and failed to allocate depreciation correctly. In Natarajan v. Canada, CRA reassessed a taxpayer who underreported Airbnb income; the court upheld the reassessment because third-party platform data clearly showed undisclosed rental revenue. These cases demonstrate that CRA strictly enforces accuracy and transparency when taxpayers are reporting rental income in Canada.

Why CRA Targets This Issue

CRA aggressively audits rental properties because rental income is widely underreported. With the rise of short-term rental platforms like Airbnb and Vrbo, CRA has access to third-party data that identifies property owners earning rental income. CRA also compares municipal property records, Canada Mortgage and Housing Corporation (CMHC) data, and provincial tenancy registrations with tax filings. Common audit triggers include large rental losses, high repair expenses, unreported income, mixed-use claims, and high CCA deductions. CRA also reviews shared ownership arrangements between spouses to ensure income splitting matches legal ownership percentages. When rental properties show repeated losses, CRA investigates whether the property is a true income-earning business or a personal-use asset. Because underreporting rental income leads to significant tax loss, CRA keeps this area under close scrutiny.

Mackisen Strategy

At Mackisen CPA Montreal, we help property owners report rental income accurately and maximize allowable deductions while minimizing audit risk. Our strategy begins by collecting all rental agreements, receipts, mortgage statements, utility bills, and maintenance records. We classify expenses between current expenses and capital improvements, ensuring proper tax treatment. For clients with multi-unit or mixed-use properties, we calculate reasonable allocations based on square footage or usage patterns. We evaluate whether claiming CCA is advantageous or whether it may create future recapture tax. For shared rental properties, we correctly allocate income and expenses according to ownership percentages or legal agreements. For short-term rental operators, we integrate GST/QST registration rules and ensure compliance. If CRA initiates a rental audit, we prepare a complete response package, including documentation and legal arguments. This structured approach ensures taxpayers remain compliant when reporting rental income in Canada.

Real Client Experience

A landlord rented out a basement suite but claimed the entire home’s utilities and maintenance expenses. CRA reassessed the return and denied most deductions. We reconstructed the proper allocation based on square footage, submitted an adjustment, and had several expenses reinstated. Another client owned a condo used partly for Airbnb and partly for personal stays. They improperly claimed full expenses. We corrected the filings, separated personal and rental use, and avoided penalties. In a third case, spouses jointly owned a duplex but reported all rental income under the lower-income spouse. CRA challenged the split. We presented ownership documentation and negotiated a corrected allocation that minimized tax exposure. These cases show how proper planning and compliance reduce risk when reporting rental income in Canada.

Common Questions

Many landlords ask whether they can deduct the full mortgage payment. Only the interest portion is deductible, not principal. Others ask whether they must report rental income if it barely covers expenses. Yes—gross income must always be reported. Another common question is whether CCA should be claimed every year. CCA is optional, and claiming it can create large tax bills when selling the property. Landlords also ask whether renting to family members qualifies as rental income. It does only if rent is charged at fair market value. These questions show why understanding the rules for reporting rental income in Canada is essential.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps Canadians stay compliant while maximizing the tax deductions they are entitled to. Whether you own a single rental unit, multiple properties, or operate short-term rentals, our expert team ensures precision, transparency, and protection from audit risk.