Property income: interest, dividends, rent and attribution

Property income is the return on capital that the owner does not actively work to earn: interest on a bond, dividends on a share, rent from a building, royalties from a patent. Subdivision b of Division B governs it, together with business income, so the same general rules on deductions apply. But property income has its own special features, and this lesson covers four of them: the annual accrual of interest, the gross-up and dividend tax credit for dividends from Canadian corporations, the rules for rental properties, and the attribution rules that stop families from shifting investment income to lower-taxed members. Along the way it adds Leah's interest, dividends and rental condominium to her 2026 picture.

Property income or business income?

The line between property income and business income matters for several rules: the attribution rules apply to property income but not business income, CCA on rental buildings cannot create a loss, and, for corporations, the rates differ greatly. Income from property is generally passive: the owner receives it simply by owning the asset. Income becomes business income when the owner provides significant services or carries on activity beyond ownership. A landlord who rents apartments under long leases earns property income; a hotel owner who provides cleaning, meals and front-desk service earns business income. A person who trades securities frequently may be in the business of trading, while a person who holds a portfolio for dividends earns property income.

Interest

Interest is taxed under paragraph 12(1)(c) when received or receivable, depending on the taxpayer's method, but individuals cannot defer interest indefinitely on long-term investments. Subsection 12(4) requires an individual who holds an investment contract, such as a five-year compound-interest GIC or a strip bond, to include interest accrued to each anniversary day of the contract, even though nothing is paid until maturity. Financial institutions report interest on T5 slips. Interest earned in an RRSP, RRIF, TFSA or FHSA is not taxed as it is earned (lesson 11). Interest from foreign sources is fully taxable, with a foreign tax credit for any foreign withholding tax.

Dividends: gross-up and dividend tax credit

Dividends from taxable Canadian corporations get special treatment because the corporation has already paid tax on the profits from which they are paid. To avoid taxing the same income twice, the Act uses a two-step mechanism called integration. First, the individual includes more than the cash dividend in income: the dividend is grossed up to approximate the corporation's pre-tax income. Second, the individual deducts a dividend tax credit that approximates the corporate tax already paid. There are two rates. Eligible dividends, paid mainly by public corporations and by private corporations out of income taxed at the general corporate rate, are grossed up by 38 per cent and carry a federal credit of 15.0198 per cent of the grossed-up amount. Non-eligible dividends, paid mainly by private corporations out of income taxed at the small business rate, are grossed up by 15 per cent with a federal credit of 9.0301 per cent. Provinces add their own dividend tax credits. ACCT-352 explains integration in detail.

The program compares the federal tax on $1,000 received in four forms by someone in Leah's 26 per cent federal bracket.

# Property income: comparing $1,000 of each kind at Leah's federal bracket (26%), 2026
rate = 0.26
kinds = {
    "Interest":               (1_000, 0.0),
    "Eligible dividend":      (1_000 * 1.38, 0.150198 * 1_000 * 1.38),
    "Non-eligible dividend":  (1_000 * 1.15, 0.090301 * 1_000 * 1.15),
    "Capital gain":           (500, 0.0),
}
print(f"{'$1,000 of':<24}{'taxable':>9}{'tax':>8}{'DTC':>8}{'net federal':>12}")
for k, (taxable, dtc) in kinds.items():
    tax = taxable * rate
    print(f"{k:<24}{taxable:>9,.2f}{tax:>8,.2f}{dtc:>8,.2f}{tax - dtc:>12,.2f}")

# Leah's rental condo: CCA cannot create or increase a rental loss
rent = 21_600
costs = {"Mortgage interest": 7_400, "Property tax": 2_900, "Condo fees": 4_200,
         "Insurance": 650, "Repairs": 1_250}
before_cca = rent - sum(costs.values())
ucc_class1 = 182_000
max_cca = min(round(0.04 * ucc_class1), before_cca)
claimed = 2_000
print()
print(f"Net rent before CCA {before_cca:,}; class 1 CCA available {round(0.04 * ucc_class1):,},"
      f" limited to {max_cca:,}")
print(f"Leah claims {claimed:,}: net rental income {before_cca - claimed:,}")

$1,000 of                 taxable     tax     DTC net federal
Interest                 1,000.00  260.00    0.00      260.00
Eligible dividend        1,380.00  358.80  207.27      151.53
Non-eligible dividend    1,150.00  299.00  103.85      195.15
Capital gain               500.00  130.00    0.00      130.00

Net rent before CCA 5,200; class 1 CCA available 7,280, limited to 5,200
Leah claims 2,000: net rental income 3,200

At the federal level, an eligible dividend bears $151.53 of tax per $1,000, far less than the $260 on interest, and a capital gain bears $130. The gross-up has two less obvious effects. Because the grossed-up amount goes into net income, dividends can push up income-tested amounts, such as the Old Age Security recovery tax for seniors, by more than the cash received. And because the dividend tax credit is non-refundable, a person with little other income can find that some of the credit is wasted, although at low incomes eligible dividends can be received with very little or no tax. Leah received $2,000 of eligible dividends in 2026 from her shares of Canadian public companies, so she reports taxable dividends of $2,760 and claims a federal dividend tax credit of $414.55.

Rental income

Rental income is computed like business income: gross rents minus expenses incurred to earn them, such as mortgage interest, property taxes, insurance, condominium fees, utilities paid by the landlord, repairs and property management fees. Two issues dominate in practice. The first is the distinction between current repairs, which are deductible, and capital improvements, which are added to the property's cost and recovered through CCA. The CRA asks whether the expense restores the property to its original condition (current) or improves it beyond that (capital), whether it is a recurring cost, and whether it is for a separate asset. Replacing a broken window is current; adding a deck is capital. The second issue is CCA. Regulation 1100(11) provides that CCA on rental properties cannot be used to create or increase a net rental loss; the claim is limited to the net rental income before CCA from all rental properties combined.

Leah's condominium in downtown Winnipeg earned $21,600 of rent in 2026. Her expenses before CCA were $16,400, leaving $5,200. The condominium's class 1 UCC would allow CCA of $7,280, but the claim is capped at $5,200 because CCA cannot create a rental loss. She chooses to claim only $2,000, reporting net rental income of $3,200 on form T776. Why not claim the full $5,200? Because CCA claimed on a building that later sells for more than its cost will be recaptured in full as ordinary income, and her UCC is better used in a future year if her income or rates rise. Each rental building costing $50,000 or more is placed in its own class, so recapture cannot be deferred by buying another property.

Two further rules deserve mention. Rental losses from renting to family members at below-market rent are not deductible, because the activity is not a source of income. And since 2024, section 67.7 denies all expenses of a short-term rental, a rental of a residential property for fewer than 90 consecutive days, operated in a province or municipality where it is not permitted or not properly registered.

Deducting interest on money borrowed to invest

Paragraph 20(1)(c) allows a deduction for interest on borrowed money used for the purpose of earning income from a business or property. What matters is the current use of the borrowed money, traced to an eligible use, not the collateral. In Bronfman Trust (1987), the Supreme Court denied interest on money borrowed to make a capital distribution to a beneficiary, because the money was not used to earn income, even though it allowed the trust to keep its investments. In Singleton (2001), a lawyer who withdrew capital from his law firm to buy a house and then borrowed to replace the capital could deduct the interest, because the borrowed money was directly used in the business. The lesson is that how a transaction is structured matters: borrowing to invest and paying cash for personal assets gives deductible interest, while the reverse does not. Interest on money borrowed to buy shares is deductible if there was a reasonable expectation of income, such as dividends, at the time; following Ludco (2001), the expectation need not be greater than the interest cost.

Brokerage and investment counsel fees for advice on buying and selling specific shares are deductible under paragraph 20(1)(bb), but fees for RRSP and TFSA accounts are not, and neither are safekeeping fees or commissions, which are added to the cost or deducted from proceeds of the shares instead.

Attribution: keeping investment income in the family

Because Canada taxes individuals separately at progressive rates, a family can save tax if a high earner shifts investment income to a spouse or child in a lower bracket. The attribution rules in sections 74.1 to 74.5 prevent the simplest ways of doing so. If an individual transfers or lends property, directly or indirectly, to a spouse or common-law partner, any income or loss from the property, and any capital gain or loss when it is sold, is attributed back to the transferor. If the property is transferred or lent to a related minor, such as a child, niece or nephew under 18, income and losses are attributed, but capital gains are not. Income earned on attributed income, called second-generation income, is not attributed.

The rules do not apply to transfers for fair market value consideration, to loans made at the prescribed interest rate (3 per cent for the first quarter of 2026) where the interest is actually paid each year by 30 January of the following year, or to income from a business, as opposed to property. They also do not apply to amounts a high earner pays for a spouse's personal expenses while the spouse saves their own income. Separately, the tax on split income, introduced in its current form in 2018, taxes certain dividends and other amounts received by family members from a private business at the top rate; ACCT-352 covers it.

# Attribution: a gift versus a prescribed-rate loan to a spouse (illustrative)
capital, yield_rate, prescribed = 50_000, 0.05, 0.03    # 3% rate set for Q1 2026
income = capital * yield_rate
print("Gift of $50,000 to Tomas, invested at 5%")
print(f"  income {income:,.0f} attributed to Leah (s. 74.1); Tomas reports 0")
interest = capital * prescribed
print("Loan of $50,000 at the prescribed rate, interest paid by 30 January")
print(f"  Tomas reports {income:,.0f} and deducts {interest:,.0f}: net {income - interest:,.0f}")
print(f"  Leah reports the interest received: {interest:,.0f}")
for leah_rate, tomas_rate in [(0.26, 0.14)]:
    saving = (income - interest) * (leah_rate - tomas_rate)
    print(f"  federal saving at 26% vs 14%: {saving:,.2f} a year")

Gift of $50,000 to Tomas, invested at 5%
  income 2,500 attributed to Leah (s. 74.1); Tomas reports 0
Loan of $50,000 at the prescribed rate, interest paid by 30 January
  Tomas reports 2,500 and deducts 1,500: net 1,000
  Leah reports the interest received: 1,500
  federal saving at 26% vs 14%: 120.00 a year

Leah earns far more than Tomás. If she simply gives him $50,000 to invest at 5 per cent, the $2,500 of income is attributed back to her. If she lends him the money at the 3 per cent prescribed rate in effect when the loan is made, and he pays her the $1,500 of interest by 30 January each year, the rules do not apply: Tomás reports the $2,500 and deducts the interest, Leah reports the interest, and the family saves tax on the $1,000 spread at the difference between their rates. The saving is modest, but over many years and larger amounts, a prescribed-rate loan made when rates are low can be valuable, because the rate in effect when the loan is made applies for the life of the loan.