What Expenses Are Tax Deductible on a Rental Property in Ontario?

Ontario landlords can deduct many rental expenses incurred to earn rental income. These include property taxes, insurance, mortgage interest, repairs, utilities, and management fees. Note, however, that some costs must be prorated or claimed over a period of time.

The Canada Revenue Agency (CRA) has strict rules around what expenses landlords can deduct from rental income. As a landlord, you need to stay updated on these guidelines. Misclassify an expense or overclaim a deduction, and you risk losing legitimate write-offs or drawing unwanted attention during a review.

Apart from rental property insurance or landlord insurance costs, many operating expenses tied to running a rental property can be deducted to reduce taxable income. You need to know which expenses qualify, how they must be reported, and when costs need to be capitalized instead of deducted outright. Let’s break down everything you need to know about tax deductions.

How Property Taxes Work for Rental Properties in Canada

Property taxes are municipal taxes charged annually by cities or municipalities, such as the Municipal Property Assessment Corporation (MPAC) in Ontario. They’re based on assessed value and payable by the property owner. Note that it’s a separate responsibility from your income tax, land transfer tax, and special assessments.

Here’s a quick overview of how these taxes work by property type:

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Rental Expenses You Can Deduct on Your Ontario Rental Home

The CRA accepts reasonable expenses incurred to earn rental income as deductions. They fall under two categories:

• Current Expenses: These cover the ongoing costs of maintaining your rental unit in its existing condition, such as repairing property damage. You can deduct them in the same year you incur them.
• Capital Expenses: These include costs incurred to purchase or improve properties, such as renovating an apartment or condo unit for your tenants. Unlike current expenses, which are deductible in the same year, you’ll have to deduct them over several years as capital cost allowance.

Here are all of the deductible expenses that you can declare when filing taxes:

Advertising

Eligible deductions include online listings, Canadian media ads, and finder’s fees, among other costs that directly relate to rental activities. You can’t include ads for property resale or personal use.

Insurance

Deduct the premiums you pay for landlord insurance. Homeowners insurance is only accepted if the covered home is partially (fully) leased. However, non-rental-related coverages like your own personal liability insurance or tenant insurance policy aren’t deductible.

Interest and Bank Charges

You can’t deduct capital expenses in full. However, the CRA allows you to deduct the interest charge on the loan used to purchase or improve your rental unit. The same applies to construction soft costs, e.g., legal fees, accounting fees, and property taxes.

Office Expenses

Office expenses are minor, recurring costs tied directly to administering your rental activity. They’re typically used quickly and don’t provide long-term value. Larger items that last several years, such as desks, filing cabinets, computers, or office chairs, are capital assets, not current expenses.

Professional Fees

The legal fees used for lease preparation, rent collection, bookkeeping, and tax preparation are capitalized into the property’s Adjusted Cost Base (ACB). However, fees incurred when you bought the rental property are not deductible. Instead, they must be added to the property’s ACB and allocated between the land and the building.

Management and Administration Fees

If you have a property manager who collects rent, screens tenants and oversees day-to-day operations, you can deduct their fees. For the sales commission of your broker or agent, report it under capital gains tax.

Repairs and Maintenance

The cost of minor repairs and maintenance tasks is deductible, although you can’t deduct your own labour. For repairs that are classified as capital expense, you’ll have to claim Capital Cost Allowance CCA.

Salaries, Wages, and Benefits

Deduct the cost of hiring employees to manage your rental property. Apart from their wages, you can include employer CPP, EI, workers’ compensation, and related premiums, which are deductible. The value of your own services can’t be claimed.

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Property Taxes

You can deduct the property taxes that you incur while the property is available for rent. If you were only able to rent out your property for specific parts of the year, your expenses would need to be prorated.

Travel

If you collect rent, supervise repairs, and manage your properties in person, you can deduct your travel expenses. However, overnight trips that require lodging will be classified as personal expenses.

Utilities

Deduct utility bills that you (the landlord) shoulder under the lease agreement. They might include cable, water, oil, gas and electricity, although expenses must only apply to rental-related activities. The fees your tenant shoulders aren’t deductible.

Motor Vehicle Expenses

Deduct reasonable vehicle expenses if:

• your rental property is within the general area of where you live
• use your vehicle for repairs and maintenance
• have to transport tools and materials

Other Rental Expenses

Miscellaneous costs incurred to earn rental income that don’t fit neatly into standard categories, such as repairs, utilities, or professional fees, can still be deducted. Just note that they must be reasonable, directly related to the rental activity, and not of a personal nature.

Prepaid Expenses

Expenses paid in advance will be deducted in the year the benefit applies. Expenses are matched to benefit periods under accrual accounting, while future-year expenses generally cannot be deducted early.

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Rental Expenses You Can’t Deduct & Common Mistakes to Avoid

You’re responsible for the deductions that you claim, so be careful. You may be penalized if you submit incorrect expenses, even if it's an accident. Here are some common exclusions to note.

Land Transfer Taxes

Land transfer tax is not a deductible expense for rental purposes. It is classified as a capital cost that’s related to acquiring the property. You can only recover it when calculating capital gains on sale, not against rental income.

Mortgage Principal

Mortgage principal repayments are not deductible. Only the interest portion of mortgage payments qualifies as a current expense.

Penalties

Fines and penalties imposed by governments or regulatory bodies are never deductible for tax purposes. They include late payment penalties, bylaw fines, and compliance violations.

Value of Your Own Labour

You cannot deduct the value of your own time or labour. If you’re responsible for repairing and maintaining your property, you can only deduct materials and hired labour.

Personal Portion of Expenses

Expenses must be prorated if the property is partially used for personal purposes. Only the portion attributable to rental use is deductible.

Short-Term Rental Portion of Total Expenses

For short-term rental properties, personal use days will reduce deductible amounts. You can only file deductible expenses on days when your house or unit was occupied by renters.

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How Special Rental Situations Affect Tax Deductions

The CRA doesn’t assign the same tax responsibilities to all rental properties. Deduction rules change when only part of the property is rented, rental use is intermittent, and the owner also lives in the same house. Here’s how these situations change with tax deductions.

Partial Rentals

You can still claim tax deductions even if it’s not your entire house that’s rented. As long as a portion of your property generates rental income, you can file specific tax deductions. The CRA just requires homeowners to allocate expenses reasonably based on the following factors:

• Square Footage: How many square meters of your living space is leased to third parties?
• Number of Rooms: How many rooms in your home are for personal and shared use?
• Time Used for Rental Purposes: How long do tenants usually stay at your leased space?

Note: When deducting your home insurance policy premiums, they might have to be prorated.

Shared Spaces

Shared-space rentals involve overlapping personal and income-earning use. The CRA will ask you to define all your shared spaces explicitly. Take utility bills, for example. Since both you and your flatmate use the utilities, you won’t be able to deduct “your share” of these expenses.

To minimize confusion, the CRA discourages flatmates from relying on informal agreements. All your payments, transactions, and conditions must be documented.

Short-Term Rentals

Short-term rentals are treated as rental income when the primary intent is to earn profit. Unlike long-term shared spaces, they require more precise time-based allocation. 

Expenses must be claimed based on the number of days the unit was rented or available for rent during the period. Any costs incurred during personal use or non-rental periods aren’t deductible.

FAQs About What Expenses Are Tax Deductible

In Summary

• The CRA allows landlords to deduct reasonable expenses incurred in earning rental income, but these deductions must follow strict classification and reporting rules.
• Property taxes are deductible only for periods when the property is rented out.
• Common deductible costs include advertising, insurance premiums, mortgage interest, management fees, repairs, utilities, salaries, and travel.
• Expenses that are personal, penal in nature, or tied to personal use days cannot be deducted. Your own insurance and renters insurance, which cover tenants’ personal belongings, are also not deductible.
• Special rental situations, such as owner-occupied properties, shared spaces, and short-term rentals, require careful allocation based on the space and time used to generate income.
• Proper recordkeeping and receipts are mandatory. Misclassification can lead to denied deductions or CRA investigations.
• Beyond tax planning, comprehensive rental insurance coverage plays a critical role in protecting income and avoiding losses that deductions alone can’t offset.

Secure Your Investment Property With the Right Landlord Insurance Policy

Apart from getting your taxes in shape, you need to protect the income that your rental business generates. A single uninsured loss can wipe out years of taxes that you save. 

For flexible, comprehensive rental insurance liability coverage tailored to your risk profile, turn to KASE Insurance. We’re an award-winning specialty commercial insurance brokerage in Toronto, working with property owners across all types of rental properties.

Call our specialist today for a free consultation. We’ll identify gaps in your rental property insurance policy and explain where additional protection may be needed.