Rental Income: Tax Reporting and Deductions | Quebec Guide

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Rental income is taxable in Canada and must be reported at both the fédéral level (Canada Revenue Agency) and provincial level (Revenu Quebec). Owners of rental properties must file Form T776 (Statement of Real Estate Rentals) with their fédéral return and Form TP-128 (Income and Expenses Respecting the Rental of Immovable Property) for Quebec. Net rental income — after deducting eligible expenses — is added to the taxpayer's total income and taxed at their marginal rate. Deductible expenses include mortgage interest, property taxes, insurance premiums, maintenance and repair costs, management fees, advertising, and legal fees related to rental activities. Capital cost allowance (CCA) on the building allows owners to deduct a portion of the building cost (excluding land) each year according to the applicable class. For most residential buildings acquired after 1987, the CCA rate is 4% per year (Class 1) on a declining-balance basis. Importantly, CCA cannot be used to create or increase a rental loss. Furthermore, claiming CCA directly impacts the capital gain at the time of sale, as it reduces the adjusted cost base of the property. Mortgage brokers should understand these mechanisms to properly advise investor clients on the true profitability of their rental properties.

Reporting Your Rental Income in Canada and Quebec

Every property owner who earns rental income in Canada must report it to tax authorities. At the fédéral level, the Canada Revenue Agency (CRA) requires Form T776 (Statement of Real Estate Rentals), which détails gross rental income, eligible expenses, and net income. In Quebec, Revenu Quebec requires an equivalent form, TP-128 (Income and Expenses Respecting the Rental of Immovable Property). Net rental income is added to your total income and taxed at your marginal rate at both the fédéral and provincial levels.

Deductible Rental Expenses

The Income Tax Act (R.S.C. 1985, c. 1, 5th Supp.) allows the deduction of reasonable expenses incurred to earn rental income. These expenses reduce your gross rental income and, consequently, the tax you owe.

Mortgage interest — The interest portion of your mortgage loan tied to the rental property is deductible. Principal repayments are not.
Property taxes — Municipal and school taxes paid on the rental property are fully deductible.
Insurance — Home insurance and liability premiums related to the property are deductible.
Repairs and maintenance — Costs to maintain the property (plumbing, painting, snow removal) are deductible. Major improvements that increase the property's value must be capitalized.
Management fees — Fees paid to a property manager or costs related to rent collection are deductible.
Advertising — Costs to advertise your units for rent are deductible.
Legal and accounting fees — Professional fees related to rental management (lease drafting, disputes, return preparation) are deductible.

Capital Cost Allowance (CCA)

Capital cost allowance (CCA) allows you to deduct annually a portion of the building's acquisition cost. Only the building cost is depreciable — land is not eligible. For Class 1 residential rental buildings, the CCA rate is 4% per year, calculated on the undepreciated capital cost (UCC) on a declining-balance basis. In the year of acquisition, only half the normal rate applies (half-year rule).

Undepreciated Capital Cost (UCC): The UCC represents the remaining capital cost of an asset after deducting all CCA claimed in previous years. The CCA rate is applied to this residual value each year.

It is crucial to understand that CCA cannot be used to create or increase a rental loss. Furthermore, every dollar of CCA claimed reduces the adjusted cost base (ACB) of the property, which increases the taxable capital gain on resale. Recaptured dépréciation is taxed as ordinary income, not at the reduced capital gains rate. The decision to claim CCA should be made in consultation with an accounting professional.

Frequently Asked Questions

How do I report rental income in Quebec?

It is necessary to file Form T776 with your fédéral return and Form TP-128 with your provincial return. Report the full amount of rent received, then subtract eligible expenses. The net income is added to your total income and taxed at your marginal rate.

What expenses can I deduct from my rental income?

Key deductions include mortgage interest, property taxes, insurance, repair and maintenance costs, property management fees, advertising for tenants, legal and accounting fees, and utilities paid by the owner.

What is capital cost allowance (CCA) on a rental building?

CCA allows you to deduct annually a portion of the building's acquisition cost (excluding land). For a Class 1 residential building, the rate is 4% per year on the undepreciated capital cost. This deduction cannot be used to create or increase a rental loss.

Must I claim CCA every year?

No, CCA is optional. You can choose not to claim it if you wish to maintain a higher adjusted cost base to reduce your capital gain upon sale. This is a strategic decision to make with your accountant based on your overall tax situation.

What happens if my rental expenses exceed my income?

If your current expenses (excluding CCA) exceed your rental income, you may report a rental loss that will reduce your taxable income from other sources. However, CCA cannot be used to create or increase this loss. The CRA may also question repeated losses.