Borrowing to buy or improve a rental property has a cost, and the interest part of that cost is a rental expense. On Form T776, it goes on line 8710, Interest and bank charges.
The word doing the work in that sentence is interest. A mortgage payment is two things at once, and only one of them belongs here.
What belongs here
- Interest on money you borrowed to buy or improve your rental property
- Interest you paid tenants on their rental deposits
- Bank charges on the account you run the rental through
- Certain fees paid to reduce the interest rate on your mortgage, and a penalty charged for paying the mortgage off early
That last one has a wrinkle: those amounts aren't deducted all at once in the year you pay them. They're spread out, and how far depends on the loan. Keep the statement that shows the charge and the loan's original term — both are needed to work the spread out when you file.
What does not belong here
The principal. You cannot deduct the repayments of principal on your mortgage or loan. Only the interest portion of the payment is an expense, so what you need is the annual statement that separates the two — not the twelve withdrawals from your chequing account, which show the combined amount and nothing else.
Land transfer taxes. You cannot deduct the land transfer tax you paid when you bought the property. It's added to the cost of the property instead, where it matters later, when you sell.
Interest from a construction or renovation period. Interest that relates to building, renovating, or altering the property may be a soft cost — a carrying cost added to the building rather than deducted in the year. If you borrowed to build or renovate, keep that interest identifiable in your records rather than lumped in with the rest.
Interest already claimed somewhere else. If you're claiming interest as a rental expense on Form T776, don't also include it as a carrying charge on Form 5000-D1, Federal Worksheet.
Interest on money you used personally. If you refinance the rental property and spend the money on something personal — a down payment on your own home, say — the extra interest isn't a rental expense. What the borrowed money was used for decides, not what secures the loan.
One limit on vacant land
If the rental income comes from vacant land, interest and property taxes on that land are limited to what's left of the rental income after your other expenses. They cannot create a rental loss or make one bigger.
This limit is applied on the return, at the point where all the year's expenses are added up. Nothing on the statement will tell you it applies, so it's worth knowing about before you file.
What to keep
Keep detailed records of the rental income you earn and the expenses you incur, supported by invoices, receipts, contracts, and other supporting documents. For this line, the documents that matter are:
- the annual mortgage statement, which splits interest from principal
- statements for any other loan you took out for the property
- bank statements showing account charges
- the paperwork for a rate-reduction fee or a prepayment penalty
Don't send them in with your return — keep them in case the Canada Revenue Agency (CRA) asks to see them. The CRA may not allow an expense you can't support with a document. Generally, keep your records for six years from the end of the tax year they relate to.
Official CRA sources
Source: Canada Revenue Agency (canada.ca). Not tax advice.