Landlord tax services: T776 or T2, the CCA trade-off, and repairs CRA reclassifies

T776 or T2: where rental income belongs

Personally held rentals are reported on a T776 filed with your T1, and net rental income is taxed at your marginal rate. Co-owners split income by legal ownership share — you cannot shift it to the lower-income spouse unless their money actually bought their share. A corporation files a T2, but a rental portfolio inside a corporation is normally a specified investment business: no small business deduction unless it employs more than five full-time people, and passive tax of roughly 50% in Ontario up front, with part refunded only as the corporation pays you taxable dividends. Landlords incorporate for liability, financing, or estate reasons — almost never for the rate.

One quiet simplification: long-term residential rent is HST-exempt. You charge nothing on it, and the trade-off is that you recover no input tax credits on your costs — the HST on a management fee or a furnace repair is simply part of the expense.

CCA is optional — recapture is not

Buildings sit in Class 1 at 4% declining balance; land gets no CCA at all, which is why the price allocation on purchase matters. Claiming CCA shelters rental profit today, but every dollar claimed comes back as recapture — fully taxable — in the year you sell for more than the undepreciated balance, stacked on top of the capital gain, of which half is taxed. Two more constraints shape the decision: CCA cannot create or increase an overall rental loss, and appliances belong in Class 8 at 20% rather than in the building.

We claim it when the deferral is worth the eventual bill: a high current marginal rate, a long expected hold, or a plan to sell in a lower-income year. We skip it when a sale is near or when the owner's rate is already low — a deferral at 20% that reverses at 53.53% is a bad trade.

Repair or improvement: CRA's favourite reclassification

A current expense deducts this year; a capital cost joins a CCA class and dribbles out at 4%. The tests are practical: does the work restore the property to its original condition or make it better than it was, does it create an enduring benefit, and is it really a separate asset? Audits of landlords lean hard on this line, so we document the answer invoice by invoice.

Change in use: a sale you never signed

Move out of your home and start renting it, and the Income Tax Act treats the property as sold at fair market value that day — a deemed disposition, with the principal residence exemption ending as the rental period begins. A subsection 45(2) election can defer that result and preserve the exemption for up to four more years, provided no CCA is claimed on the property. Moving back into a former rental has a mirror-image election under 45(3). Renting out a basement suite is gentler: CRA generally does not apply a deemed disposition while the rental use stays ancillary, nothing structural changes, and no CCA is claimed.

Whatever the election, get an appraisal dated to the change. Years later, that number is the difference between an exempt gain and a taxable one, and reconstructing it from memory convinces nobody.

When the border enters the picture

Leave Canada and keep the portfolio, and the system changes underneath you: tenants or your property manager must withhold 25% of gross rent, an NR6 undertaking moves withholding to the net amount, and a section 216 return with NR4 slips settles the year. Landlords who add a US property inherit a second filing system entirely. Both paths are mapped on our cross-border tax page for landlords, and our tax services cover the T1 and T776 work either way.

Source: CRA — Current expenses or capital expenses.