When an Ontario Tenant Stops Paying: The Tax Side of Rent Arrears

The first thing a landlord in an arrears situation asks me is some version of: I did not receive the money, so surely I do not pay tax on it. The answer depends entirely on which accounting method you use, and most Ontario landlords are on the one that produces the uncomfortable answer.

The tenancy process and the tax process run on separate clocks. The Landlord and Tenant Board decides whether you get possession. The CRA decides, on its own rules and its own evidence standard, whether you get a deduction. Handling one well does not automatically handle the other.

Accrual first, cash only in narrow cases

The CRA’s position in the rental income guide is that in most cases you calculate rental income using the accrual method: you report rent in the year it is due, whether or not it was paid, and you deduct expenses in the year they are incurred, whether or not they were paid.

The cash method is available only where you have almost no amounts receivable and no expenses outstanding at year end, and only where the result would be almost the same either way. A landlord sitting on four months of arrears fails that test by definition.

So the sequence for an accrual landlord is: report the rent as income, then, if and when it becomes uncollectible, deduct it. Not reporting it in the first place is not an option, and it is the error that turns a bad tenancy into a reassessment.

The bad debt deduction, and its evidence standard

The guide is direct about the write-off. You may deduct losses from uncollectible debts, and the conditions are specific:

• the amount must have become uncollectible during the tax year
• proof is required. The CRA gives examples: a notice to creditors from a trustee in bankruptcy, correspondence from the tenant, or some other assurance that the tenant was pursued without success
• only debts that are certain of being uncollectible count

Two consequences follow. First, an unpaid balance is not a bad debt merely because it is old. If you have a judgment you have not tried to enforce, or a tenant you have not attempted to locate, the CRA’s position is that the debt is not yet certain. Second, if you are reporting on a cash basis there should be no receivables and no claim for uncollectible rents at all. You cannot deduct income you never reported.

If the tenant later pays an amount you wrote off in a previous year, that recovery is income in the year you receive it. And where the tenant is not at arm’s length, a relative in a family-owned unit being the usual case, the CRA says the factors establishing the uncollectible amount need to be verified. In practice that means a family arrears file is scrutinised in a way an arm’s length one is not.

What you can deduct while the file is running

The vehicle restriction is worth pulling out because it is counterintuitive. If you own one rental property, the CRA allows motor vehicle expenses only in narrow circumstances, and it states specifically that motor vehicle expenses incurred to collect rents are personal expenses. Travel costs to collect rent are deductible under the travel line, but driving your own car to do it, as a single-property landlord, is not.

Repairs after an eviction sit on the usual current-versus-capital line. Restoring damage to the state the unit was in is a repair. Replacing the kitchen because it was tired anyway is capital, and it goes into a capital cost allowance class instead. The full expense framework for a rental file is in rental property accounting for Ottawa landlords.

The Ontario overlay: deposits, interest and the guideline

Ontario’s rules shape the numbers you are accounting for.

Under section 106 of the Residential Tenancies Act, a rent deposit cannot exceed the lesser of one rent period and one month of rent, and it must be applied to the rent for the last rent period before the tenancy ends. It is not a damage deposit and it cannot be applied to arrears partway through a tenancy. When it is finally applied, it becomes rental income in that period, because that is when it becomes rent.

The same section requires the landlord to pay the tenant interest annually on the deposit, at the rent increase guideline rate in effect when payment becomes due. If you do not pay it, the tenant may deduct it from a later rent payment. Ontario sets the rent increase guideline at 1.9 percent for 2027, following 2.1 percent for 2026. That interest is a deductible rental expense, and it is one of the most commonly missed deductions on a T776 because it is small, annual and easy to forget.

Ontario also confirms that a landlord cannot evict without an order from the Landlord and Tenant Board, whatever notice has been served, and that the Board must consider whether the landlord tried to work with the tenant on arrears before applying. The practical tax point is that the legal and filing costs of that process are costs of collecting rent, which is exactly the category the CRA allows at line 8860.

Working an arrears file

Rent is unpaid at year end.
│
├── Which method are you on?
│   ├── Accrual → Report the rent as income now.
│   │             Go to the write-off test below.
│   └── Cash    → Do not report it. There is also
│                 no bad debt deduction available.
│
└── Write-off test, at each year end:
    │
    ├── Has the tenant been pursued and the debt
    │   is certain to be uncollectible?
    │   ├── Yes → Deduct it this year. File the
    │   │         evidence with the return records.
    │   └── No  → Carry it. Reassess next year end.
    │
    └── Did they later pay some of it?
        └── Include the recovery as income in the
            year you actually receive it.

Records that make the deduction survive a review

A rent arrears deduction is a judgment call you are asking the CRA to accept, so the file has to speak for itself. Keep, at minimum:

• a rent ledger showing what was due, what was paid and when
• copies of every notice served and every application to the Board, with dates
• correspondence with the tenant, including attempts made after they left
• any Board order, and any evidence of enforcement attempts
• the bankruptcy notice, if there is one

The record retention rules require six years from the end of the tax year the records relate to. For an arrears file that spans several years, run the clock from the last year, not the first.

Two further questions often surface at the same time. If the property is heavily serviced, short-term or run like a business, the income may not be rental income at all, and the distinction is worked through in rental income or business income. And if the unit sat empty during the dispute, the expenses of that period are still generally deductible provided the property was available for rent, which is a different test from being occupied.

If you are carrying arrears across a year end and are not sure whether to write them off now or hold them, send me the ledger, the Board documents and last year’s T776. I will tell you which year the deduction belongs in and what the file needs to look like if the CRA asks. Get in touch with the rent ledger attached.