How Is Rental Income Taxed in Retirement?
At your full marginal rate, with no credit and no partial inclusion, which makes it the most heavily taxed form of investment income available. It also enters net income in full, so it counts toward the Old Age Security recovery tax and every other income-tested benefit.
- The answer:: Net rent after deductible expenses is taxed as ordinary income, like interest, with no credit and no inclusion discount.
- The trap:: Claiming capital cost allowance without planning for recapture. The deduction is reversed as ordinary income when the property is sold.
- The recommendation:: Model the property against the OAS threshold, because rent is exactly the income that pushes a retiree over it.
Where the AI summary above gets this wrong
"Rental property is a good source of retirement income."
That's surface-true. Here's what it misses:
- It is the most heavily taxed income type — Rent is fully included and taxed at your marginal rate, unlike capital gains or eligible dividends.
- Depreciation is a deferral with a sting — Capital cost allowance reduces tax now and is recaptured as ordinary income on sale, often at a higher rate.
- It counts fully for benefits — Net rental income enters net income in full, so it reduces the age amount and can trigger the OAS recovery tax.
01 Why rent is taxed most heavily
Net rental income, after deductible expenses such as interest, property tax, insurance, maintenance and management, is included in income in full and taxed at your marginal rate. There is no dividend tax credit and no half-inclusion as there is for capital gains.
That places it alongside interest as the least tax-efficient income a retiree can hold, and the comparison across income types is in interest versus capital gains.
Source: Capital gains (line 12700)
02 What capital cost allowance really does
Claiming capital cost allowance depreciates the building against rental income, reducing tax in the year claimed. It cannot be used to create or increase a rental loss, so its use is capped by the income it offsets.
On sale, everything claimed is recaptured and added to income as ordinary income in that year. For a retiree selling a long-held property, that recapture arrives in a single year on top of the capital gain, often at the top rate and often triggering a clawback.
Shows: what a given amount of additional taxable income costs you in tax at your marginal rate, and what you keep. Ignores: provincial surtaxes, credits that phase out with income, and any effect on income-tested benefits.
Source: Capital gains (line 12700)
03 The benefit interaction to model
Net rental income enters net income in full, which is the figure used for the Old Age Security recovery tax, the age amount and the Guaranteed Income Supplement. A property producing modest cash flow can therefore cost more in reduced benefits than it delivers.
That is particularly true near the recovery threshold, where each additional dollar carries both tax and clawback — the threshold arithmetic is in the OAS clawback threshold.
Owning the property jointly with a spouse splits the income between two returns, which can keep both below a threshold that one would cross alone. The split has to follow the actual ownership and the funds used to buy, though, rather than being chosen at filing time to suit the year's numbers.
Rental property gets recommended as retirement income by people comparing gross rent to a dividend yield. The right comparison is after tax, after the clawback and after the eventual recapture, and by then it is a very different asset than it looked.
FAQ
How is rental income taxed in Canada?
Net rent after deductible expenses is included in income in full and taxed at your marginal rate, with no dividend credit and no partial inclusion as capital gains receive.
Should I claim capital cost allowance?
It defers tax rather than removing it. Everything claimed is recaptured as ordinary income when the property is sold, often in a single high-income year.
Does rental income affect my OAS?
Yes. Net rental income enters net income in full, so it counts toward the recovery tax, the age amount and the Guaranteed Income Supplement.
Sources
Regulator references
- Capital gains (line 12700) · Canada Revenue Agency · 2025How capital gains and losses are calculated, reported and carried.Last verified: 2026-09-07
- Interest and other investment income (line 12100) · Canada Revenue Agency · 2025That interest is included in income in full, unlike capital gains or eligible dividends.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.