Rental Loss: CRA Review or Audit and the Records to Keep

Can a rental loss reduce my other income, and is a loss every year a problem?

A rental loss can reduce your other income when the rental is a source of income and the costs are deductible. You have a rental loss when rental expenses are more than gross rental income (CRA Guide T4036). The Income Tax Act subtracts a loss from property when it adds up your income for the year (section 3), and the net result of Form T776 goes on line 12600 of the return, in brackets when it is a loss (CRA: Completing Form T776). If the loss is more than your other income that year, the unused part is a non-capital loss, deductible in the 3 tax years before or the 20 tax years after (section 111), so a change to one loss year can reach others.

A loss in several years is not banned, and repeated losses alone do not settle whether a rental is a source of income. T4036 warns that when rental expenses are consistently more than rental income, the loss may not be allowed, but it gives no number of years or ratio. The CRA's audit manual asks whether the activity is "undertaken in pursuit of profit, or is it a personal endeavour"; with a personal element, such as part of your own home, it asks whether the activity is run in a sufficiently commercial manner. An activity undertaken mainly to generate tax losses fails even if it looks commercial (CRA: Audit Manual, chapter 27). Keep the evidence of that effort: the rent sought, the listings and the steps taken to find a tenant.

The case is not simple if any of these apply:

• A CRA letter has already arrived, or it names more than one year.
• A relative, friend or other person you know rents from you for less than a stranger would pay.
• You rent part of your own home, or use the rental yourself for part of the year.
• You borrowed against the rental and spent some of the money on something else.
• You rent by the night where the municipality requires registration, a licence or a permit.
• You have losses in more than one year and the records for the early years are partial or missing.

Gather the records in the table below, and your split of costs between your part and the rented part. If a letter has arrived, read the letter section below before you reply. The rules on this page are the federal (CRA) rules; if you file a Quebec return, see the last section.

Does negative cash flow on a rental reduce my income tax?

Only part of negative cash flow is a tax loss. Only deductible expenses count, so a rental can drain your bank account and still show a profit on Form T776. You cannot deduct repayments of mortgage principal (T4036). A capital expense, one that gives a lasting benefit, is generally deducted over several years as capital cost allowance (CCA), not in full in the year (T4036; CRA: Current or capital expenses); see current or capital.

You can deduct expenses only if you incur them to earn income (T4036). A genuine loss lowers your tax only by the tax on the income it offsets; the money spent is gone either way. For which T776 line each cost goes on, see rental statement expense lines.

Does a rental loss make a CRA review more likely?

The CRA's published reasons do not name a rental loss, but its list is introduced with "such as" and is not complete, and the page gives no assurance that a loss is safe. The CRA says a return may be selected for review for several reasons, including information that does not match third-party sources, the types of deductions or credits claimed, compliance history and random selection (CRA: How tax returns are selected). Selection for review does not represent a tax audit (CRA: Review your tax return).

In any review the CRA may ask for documents to support claims (CRA: Types of review). A rental loss is a loss amount with deductions behind it, so plan for a file that can answer a request, whatever triggered it.

What will the CRA ask for on a rental loss, and which records show it is genuine?

The CRA can ask for documents that support each claim. Official receipts are not the only proof it asks for: it may also ask for cancelled cheques or bank statements (CRA: How tax returns are selected). T4036 says to keep detailed records of rental income and expenses, and not to send them with the return.

An invoice shows what was bought; a bank statement shows it was paid. Keep both. T4036 and Form T776 tell you to enter the part of each cost that was for personal use, and T4036 measures a rented room by area or room count. For common annual costs of a room rented for only part of the year, the CRA says to use a reasonable basis: its example multiplies the annual heating cost by the room's share of floor area, then by the share of the year it was rented (CRA: Sharing economy). The page read gives no formula for other part-year personal use, such as a cottage, so keep the calendar and be able to explain the split you use; see rental income in Canada.

What if I cannot produce a record?

The CRA may not allow all or part of an expense when you have no receipts or other documents to support it (T4036). When a letter asks for something you no longer have, the CRA's response page says to include a written explanation (CRA: Responding to us). The page does not say that an explanation is accepted in place of the record.

Ask the lender, the bank and your suppliers for copies before a letter arrives. Where years of rent and costs have no paperwork, one way to repair this is to rebuild them from bank and card statements; see rebuilding books from bank statements. A rebuild is not an original document, so say in your written explanation which records are rebuilt.

Which rental losses does the CRA not allow?

The CRA does not allow a rental loss, or may refuse it, in these situations (T4036; Form T776 instructions):

CCA and non-compliant short-term rentals have their own sections below. In the below-market case, T4036 says only that no rental loss can be claimed. It does not say how the rent you did collect is reported or which costs go against it, so the facts of the arrangement matter.

Does CCA let me turn a small profit into a loss?

No. You cannot use CCA to create or increase a rental loss (T4036). CCA can use up a profit but cannot take the result below zero. With more than one rental property, you work out your overall net income or loss from all of them, even in different classes, before claiming CCA.

CCA is also optional: you do not have to claim the maximum in any year. A terminal loss is treated differently: if it is more than your rental income, you can create a rental loss (T776; T4036). For whether to claim CCA at all, see should you claim CCA on a rental and capital cost allowance.

Does a short-term rental that broke local licence rules lose deductions?

Yes, for the days it was non-compliant. Under Income Tax Act section 67.7, no amount is deductible to the extent it is a non-compliant amount. The CRA says the rule applies to tax years after 2023 (CRA: short-term rental deductions). The section denies deductions only; it does not remove the rent from income.

A short-term rental is a residential property in Canada, or any part of one such as a room, rented or offered for rent for a period of less than 90 consecutive days. It is non-compliant when the province or municipality does not permit it at that location, or requires registration, a licence or a permit and the rental does not meet every requirement (section 67.7).

The denied amount is A × B ÷ C:

• A: the total of all amounts that would otherwise be deductible for the short-term rental. This includes CCA (T4036).
• B: the days in the year the property was a non-compliant short-term rental.
• C: the days in the year it was a short-term rental, which means rented or offered for rent, not only nights booked.

A rental that was non-compliant for the whole period loses all those deductions. One that became compliant part way through loses the share for the non-compliant days. For the 2024 tax year only, a rental in a place that requires registration, a licence or a permit was deemed compliant for the whole year if it met every requirement by December 31. Subsection (4) lets the CRA reassess any year to apply the rule despite the usual time limits. Whether a short stay is reported on T776 or as business income is a separate question; see short-term rental income: T776 or business.

How long must I keep rental records?

Keep rental records for six years from the end of the tax year they relate to (T4036). The Act counts from the end of the last tax year to which the records and their vouchers relate (section 230(4)).

Records for property you still own last longer. The CRA's circular says the period is set by the last tax year in which a record could enter an income tax calculation, not the year it was created, and gives records supporting the cost of capital property as its example (IC78-10R5). So keep purchase and capital-improvement records until six years after the last tax year in which they could affect CCA or a sale.

The Act sets longer periods in some cases (section 230):

• A year with no return filed: six years from the day the return is filed.
• An objection or appeal: until the time to appeal has passed or the appeal is finished.

A demand for records and electronic records have their own rules; see how long to keep business records. Because section 67.7(4) lets the CRA reassess any year for a non-compliant short-term rental, keep that rental's licence, registration and permit records, and your calendar, past the six years.

What do I do first if a CRA letter arrives?

Read what the letter asks, which years it covers and the reply date. The CRA contacts you or your authorized representative by telephone or in writing (CRA: Responding to us). Then:

1. Note whether it is a review or an audit. For an audit, or any letter covering several years, see what to do and what to send.
2. List every year and amount the letter questions, and pull the records for each from the table above.
3. Reply within the time frame in the letter, to the address in the letter, or by sending scanned documents online through CRA Account.
4. For a review letter, call the number at the bottom of the letter if you need more time. The CRA's response page covers review programs, not audits.
5. If a record is missing, include a written explanation, or call the number at the bottom of the letter to explain.

You can authorize a representative to act for you through My Account for Individuals or on Form AUT-01 (CRA: Review your tax return). For how far back the CRA can reassess, see how far back the CRA can reassess.

What if the CRA disallows expenses and I disagree?

You can file a notice of objection by the later of 1 year after the return's filing due date or 90 days after the date of the notice of assessment (CRA: P148). P148 excludes loss determinations from the one-year option: a notice that determines a loss has 90 days from the notice, so read which kind of notice you hold. How to file the objection, what happens to collection and the Tax Court appeal are in what to do and what to send. The records in the table above are what an objection stands on.

Example

These examples are illustrative. All figures are Canadian dollars.

Condo that loses money on paper

A condo in Ottawa rents for C$26,400 a year. Costs are mortgage interest C$17,000, property tax C$4,200, condo fees C$5,400, insurance C$900 and repairs that restore the unit C$4,000: C$31,500 in all. The result is a loss of C$5,100 before CCA, shown in brackets on line 12600 and subtracted from the owner's other income. The lease, rent deposits, mortgage statements and invoices support every line, so a request for documents can be answered line by line. CCA cannot add to the loss. If the owner also repays C$8,000 of mortgage principal, cash out is C$39,500 against C$26,400 of rent, a C$13,100 shortfall, but the tax loss stays C$5,100.

If the rent were C$32,000 with the same costs, the result would be a profit of C$500. CCA could reduce it to zero but not below.

Nephew in the basement suite

A landlord charges a nephew C$600 a month for a basement suite that would rent to a stranger for C$1,500. The suite costs C$1,300 a month to carry, so on paper it loses C$700 a month. Because the rent is below what a stranger would pay, T4036 says no rental loss can be claimed. It does not say how the C$600 is reported or which costs go against it, so the lease, the listing and comparable rents are the records that show what the arrangement was.

Room listed without the required registration

An owner rents a room on a platform for 120 nights at C$150, a total of C$18,000, in stays under 90 consecutive days. The municipality requires registration and she has none. Costs for the room are C$6,000, and the room is offered only for those 120 days. Every day is non-compliant, so B equals C and the whole C$6,000 is denied: C$6,000 × 120 ÷ 120. All C$18,000 is still income, so she reports C$18,000 of net rental income.

If she had registered after 60 of the 120 days, the denied amount would be C$6,000 × 60 ÷ 120 = C$3,000, and the net income C$15,000.

Different for you?

• A CRA letter has arrived, or it covers more than one year: what you send can affect every year named, and for a non-compliant short-term rental the CRA can reassess any year. Which years and amounts are exposed, what to send and from whom is the part to settle with a tax professional before replying; see what to do and what to send and individual tax returns.
• Records for earlier years are partial or missing: ask for more time before the reply date, then rebuild the rental books from bank and card statements; see rebuilding books from bank statements and bookkeeping.
• A relative or friend rents below market, or you refinanced and used some of the money personally: the facts decide what is deductible; see interest on rentals and individual tax returns.
• You co-own the rental: see co-owned rental property reporting.
• Rent or income was left off a return: see unreported income and voluntary disclosure.
• You rent through an online platform: see platform reporting to the CRA.
• The rental is owned by a corporation: the rules differ; see books for a rental holding corporation and corporate tax returns.
• You live outside Canada: see non-resident landlords.
• You file a Quebec return: the rules above are federal. Revenu Québec assesses the Quebec return separately, with its own audit and objection process; see what to do and what to send and, for the Quebec rental statement, rental income in Canada.
• How rent is taxed or the T776 basics: see rental income in Canada.