What expenses are deductible on T776?
- Mortgage interest (not the principal portion).
- Property tax and property insurance premiums.
- Repairs and maintenance (as opposed to capital improvements).
- Utilities paid by the landlord.
- Property management fees plus GST on those fees.
- Advertising costs for finding tenants.
- Legal and accounting fees related to the rental.
- Condominium fees for condo rentals.
- Travel costs directly related to managing the property (reasonable and documented).
- Home office expenses in some circumstances (reasonable portion).
How does Capital Cost Allowance work on a Calgary rental?
Under CCA Class 1, residential rental buildings depreciate at 4 percent per year on the declining balance. Only the building portion of the purchase price qualifies (land does not depreciate). The half-year rule limits year 1 to 2 percent effective. CCA is optional. Each year, you calculate 4 percent of the undepreciated capital cost (UCC) and decide whether to claim it. CCA cannot be used to create or increase a rental loss, so if your net rental income is already zero, no CCA is allowed for that year.
The recapture trap on sale
When you sell the property for more than its UCC (which is almost always the case after appreciation), the difference between the lesser of (a) sale proceeds and (b) original cost, and the UCC, is recaptured and added to income in the year of sale. Recapture is taxed as ordinary income, not capital gain. For most long-hold appreciating Calgary properties, forgoing CCA during the hold period avoids larger recapture at sale and often produces a similar or better lifetime tax outcome.
Repairs vs capital improvements
A repair restores the property to its original condition (patching drywall, replacing a broken window with a like unit, repainting a room). A capital improvement extends the useful life or improves the property beyond its original condition (new roof of higher quality, kitchen renovation, adding a legal basement suite). Repairs are fully deductible in the year incurred. Capital improvements are added to the property cost base and depreciated through CCA. CRA examines this line closely at audit.
Sources
- CRA Form T776 Statement of Real Estate Rentals.
- CRA Guide T4036 Rental Income (deductible expenses and CCA rules).
- CRA Income Tax Folio S3-F4-C1 (rental property general rules).
- CRA Income Tax Folio IT-274R2 (rental property deductions and CCA).