Legal and accounting work that keeps a rental running is a rental expense. On Form T776 the line is called Professional fees (includes legal and accounting fees), line 8860.
What decides where a legal bill goes is not who sent it but what it was for: running the rental, or buying and selling the property.
What belongs here
- Legal services to prepare leases or collect overdue rent
- Bookkeeping services, audits of your records, and preparing financial statements
- Fees and expenses for advice and help preparing your income tax return and any related information returns
That last one is worth noticing: if you pay for help with the return itself, the cost of that help is deductible here.
What does not belong here
Legal fees to buy the rental property. These aren't deducted from your gross rental income. They're divided between the land and the building and added to the cost of each, where they matter later — when you sell.
Legal fees paid when you sell. These come off your proceeds of disposition when your capital gain or loss is worked out. The same treatment applies when a recapture of capital cost allowance (CCA) or a terminal loss is calculated — two things that can happen on a sale.
A real estate agent's commission on a sale. That's reported as outlays and expenses on Schedule 3, Capital Gains or Losses, not as a rental expense.
The pattern: fees for operating the rental are current expenses on this line; fees for acquiring or disposing of it attach to the property itself.
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 invoice matters more than the payment: it describes the work, and the description is what places the fee. A statement of account that says only "professional services" leaves the question open.
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.