Form T776: how to report rental income in Canada

If you rent out a condo, a duplex or a room in Canada, the rent is taxable and the expenses you pay to earn it are deductible. The federal form that brings the two together is Form T776, Statement of Real Estate Rentals.

This guide is general information, not tax advice. Check the CRA's Rental Income guide (T4036) or an accountant for your own situation.

Who fills out Form T776

The CRA's rule is simple: the person who owns the rental property reports the income or loss. If you own a rental alone, you report all of it. If you own it with someone else, each owner reports their share, based on their ownership percentage. That percentage should normally stay the same from year to year unless the ownership changes.

A rental owned by a corporation is reported on the corporation's own return, not on a T776.

The main lines of the T776

Part 1 identifies you, Part 2 lists any co-owners or partners, and Part 3 gives each property's address and the number of units rented. Then come the income and expenses.

Income

Line 8141: gross rents for all units.
Line 8230: other income, such as the fair market value of rent paid in goods or services.
Line 8299: total gross rental income. It goes on line 12599 of your income tax return.

Expenses

The CRA lists these expense lines:

Line 8521: advertising
Line 8690: insurance
Line 8710: interest and bank charges
Line 8810: office expenses
Line 8860: professional fees (legal and accounting)
Line 8871: management and administration fees
Line 8960: repairs and maintenance
Line 9060: salaries, wages and benefits
Line 9180: property taxes
Line 9200: travel
Line 9220: utilities
Line 9281: motor vehicle expenses (not including CCA)
Line 9270: other expenses

From the total you remove any personal portion (line 9949), for example the part of the house you live in. Line 9369 is the net income or loss before adjustments. After the adjustments and the capital cost allowance (line 9936), line 9946 is your net income or loss, which goes on line 12600 of your return. A loss is shown in brackets.

Short-term rentals have extra lines (9365 to 9367): expenses tied to a short-term rental that does not comply with provincial or municipal rules can be denied.

What you can and cannot deduct

You can deduct reasonable expenses you incur to earn rental income. A few things are never deductible:

Mortgage principal. Only the interest is an expense; the repayment of the loan itself is not.
Your own labour. If you repaint a unit yourself, you can deduct the paint, not the value of your time.
Penalties shown on a notice of assessment.
Land transfer taxes are not an expense: they are added to the cost of the property.

Motor vehicle expenses have their own conditions. With one rental near where you live, you can deduct them only if you do repairs or maintenance yourself and use the vehicle to carry tools and materials. With two or more rentals in at least two different sites away from your home, you can also deduct trips to collect rent, supervise repairs or manage the properties.

Most landlords use the accrual method: income when you earn it, expenses when you incur them. A prepaid expense, such as a three-year insurance policy, is spread over the years it covers.

Keep your records and receipts. The CRA generally asks you to keep them for six years from the end of the tax year they relate to.

Current or capital expense?

This is the question that trips up most landlords. A current expense is deducted in full this year. A capital expense is added to the cost of the property and deducted over time through CCA.

The CRA's guide asks four questions:

Does it give a lasting benefit? A capital expense generally does; a current one tends to recur after a short time.
Does it maintain or improve the property? Bringing it back to its original condition is usually current. Making it better than it was is probably capital.
Is it a part of the building or a separate asset? Replacing part of the building, such as rewiring, is usually current unless it improves the property. Buying a separate asset, such as a refrigerator, is capital.
How big is it? Use this only if the other tests don't settle it: a cost that is large compared with the value of the property points to capital.

Capital cost allowance (CCA) in brief

You cannot deduct the price of a building in one year. Instead, you claim a yearly allowance called capital cost allowance. A few basics:

Classes and rates. Most buildings bought after 1987 are in Class 1 (4%). Appliances and furniture are usually in Class 8 (20%).
Land is not depreciable. Only the building's share of the price goes into the CCA calculation.
It is optional. You can claim any amount from zero up to the maximum for the year.
The half-year rule. In the year you buy, you can usually claim CCA on only half of the net additions to a class. Some property, such as accelerated investment incentive property, is treated differently: check the current T4036 for the rules that apply to your purchase date. The guide also describes a proposed faster rate for new purpose-built rental housing.
It cannot create or increase a rental loss. If your rental is already at a loss before CCA, you cannot claim CCA to make that loss bigger.
It can come back. When you sell, part or all of the CCA you claimed may be added back to your income (recapture). If the building is sold for less than its remaining value, you may have a terminal loss instead.

CCA is calculated in Area A of the T776, with the other areas feeding into it.

Co-owners

Co-owners have a few special points on the T776:

Fill in Part 2 with the other co-owners.
Enter the gross rental income for the entire property on line 12599. The CRA says not to split the gross income by your ownership share.
Enter your share of line 9369 (net income before adjustments) on amount 2.
Deductible expenses you paid yourself as a co-owner and did not claim elsewhere on the form go on line 9945.
Your share of any recapture (line 9947) or terminal loss (line 9948) is entered too.

Rental losses

When your expenses are higher than your rent, you have a rental loss, and you can generally deduct it from your other income, as long as the expenses were incurred to earn income. Two cautions from the CRA: a cost-sharing arrangement (for example a relative paying part of the costs) is not a rental, and renting below fair market value to someone you know generally does not let you claim a loss.

How Indivia helps

Indivia's Real-Estate Investor plan records each rental's revenue and expenses with categories that follow the T776 and TP-128 lines, and attaches receipts to the entries.

At tax time, Reports, Properties by tax line gives each taxpayer's year line by line as on the T776, at their share of each property, with a card per property and one for all rentals together. When you own part of a property, Whole property shows the full amounts beside your share. Shared expenses and the vehicle expense from the mileage log are already included. Mortgage principal and capital spending are kept off the expense lines.

On a property's Cost base and gain tab you type the CCA you or your accountant decided to claim each year, with its class. The summary then shows the net income after CCA, and the tab estimates the recapture if you sold at today's value. Indivia does not choose the CCA for you.

In Repairs and improvements, marking a job as done sends an improvement to the property's cost base and the rest to repairs and maintenance. The summary can be exported to CSV, printed, or shared with your accountant through a time-limited link.

Sources

In Indivia’s help

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