A Landlord’s Guide to Rental Deposits in Ontario

Understanding rental deposits in Ontario is essential for landlords to ensure compliance with provincial laws while protecting their rental property and income. This guide provides a comprehensive overview of the various types of deposits in Ontario, their legalities, and best practices for managing them.

Types of Rental Deposits in Ontario

The term “deposit” often leads to confusion in the rental market, especially in Ontario where strict rules govern what deposits landlords can collect. It’s important to distinguish between the different kinds of deposits and their legal status.

1. Rent Deposits (First and Last Month’s Rent)

A rent deposit is the most common type of deposit, legally known as a “last month’s rent deposit” (often referred to as “first and last month’s rent”). This is collected before or upon signing the lease agreement and serves two purposes:

First month’s rent is typically paid upfront to cover the first month of tenancy.
Last month’s rent is held by the landlord and applied to the tenant’s final month in the rental unit.

Legality: Rent deposits are fully legal in Ontario, provided they are used exclusively for covering rent. They cannot be used to pay for repairs, damages, or cleaning services.

Key Points:

Maximum deposit: The deposit cannot exceed the amount of one rental period. For example, monthly rent payments, cannot exceed one month’s rent. If rent is paid weekly, the deposit must not exceed one week’s rent.
Refundability: The deposit is not technically refundable but is applied toward the tenant’s final month’s rent. If a tenant vacates the property without using the last month’s rent, the deposit must be refunded.
Interest on Rent Deposits: Landlords are legally required to pay interest on rent deposits annually, based on the province’s rent increase guideline. For example, if the rent guideline increase is 2.5%, landlords must either add 2.5% interest to the deposit or pay the interest directly to the tenant each year.

2. Key Deposits

A key deposit is a sum collected by landlords to cover the cost of replacing lost or damaged keys or access devices (like fobs). This is typically done at the start of the tenancy and is returned at the end, provided the keys are returned in good condition.

Legality: Key deposits are legal in Ontario, but there are specific conditions:

The deposit must be reasonable: The amount should reflect the actual cost of replacing the keys or access devices. Landlords cannot charge excessive amounts beyond this.
Refundability: If the tenant returns the keys in good condition, the landlord must refund the key deposit in full.

Best Practice: Ensure that the tenant receives a receipt detailing the key deposit and the cost breakdown for replacement keys or devices.

3. Damage Deposits

Damage deposits are often misunderstood. While many landlords may wish to collect a damage deposit to cover potential damage to their rental unit, damage deposits are illegal in Ontario.

Legality: Under Ontario law, landlords are not permitted to ask for or collect a damage deposit. If damage occurs during the tenancy, landlords must file a claim with the Landlord and Tenant Board (LTB) to seek compensation for repairs or damages.

What to Do Instead: In the event of damage, landlords should document the issue and apply to the LTB for compensation rather than attempting to withhold funds from any type of deposit.

4. Pet Deposits

Pet deposits are another type of deposit that landlords sometimes request to cover potential damages caused by pets in the rental unit. However, similar to damage deposits, pet deposits are illegal in Ontario.

Legality: Ontario law prohibits landlords from collecting any kind of deposit related to pets. If a tenant has a pet, the landlord must follow the standard procedures for collecting rent and dealing with damages via the LTB.

Frequently Asked Questions About Rental Deposits in Ontario

1. Is collecting first and last month’s rent legal in Ontario?

Yes, collecting first and last month’s rent is fully legal. The first month’s rent covers the initial period of tenancy, while the last month’s rent is applied to the final month the tenant resides in the rental unit. Landlords must ensure that the deposit is only used for rent and nothing else.

2. Are security deposits legal in Ontario?

No, security deposits (which are also known as damage deposits) are illegal in Ontario. Landlords cannot collect a deposit to cover potential damages. Instead, landlords must go through the Landlord and Tenant Board to seek compensation for damages that occur during the tenancy.

3. How much can a landlord charge for a rent deposit?

The rent deposit cannot exceed the equivalent of one rental period. For monthly rent, this would be one month’s rent. If rent is paid weekly, the deposit cannot exceed one week’s rent.

4. Do landlords have to pay interest on rent deposits?

Yes, Ontario landlords are legally required to pay interest on rent deposits. The interest is calculated based on the annual rent increase guideline set by the province. The interest can either be added to the deposit or paid directly to the tenant each year.

For example:

If the rent increase guideline is 2.5% in a given year, landlords must pay 2.5% interest on the last month’s rent deposit.

5. Are rent deposits refundable?

In general, rent deposits are not directly refundable because they are applied to the tenant’s final month of rent. However, if a tenant pays a deposit and subsequently decides not to move in or the lease is canceled, the landlord must refund the deposit.

6. Are key deposits legal in Ontario?

Yes, key deposits are legal as long as they are reasonably priced and refundable. The amount charged for a key deposit should not exceed the actual cost of replacing keys or access devices, and the deposit must be returned if the tenant returns the keys undamaged.

Best Practices for Handling Rental Deposits in Ontario

To ensure a smooth and legal process, landlords should adhere to the following best practices when handling rental deposits:

Use Clear, Written Agreements: Ensure that all deposits, including rent and key deposits, are clearly outlined in the rental agreement. Specify the amount, purpose, and refund conditions.
Provide Receipts: Always provide tenants with a receipt for any deposit collected, detailing the amount, the type of deposit, and its purpose (e.g., first month’s rent, last month’s rent, key deposit). This provides transparency and proof for both parties.
Understand the Legal Limits: Avoid collecting illegal deposits like damage or pet deposits. Stick to rent and key deposits, which are legally enforceable, and use the Landlord and Tenant Board for any disputes over damages.
Pay Interest on Rent Deposits: Keep track of the annual rent increase guideline and ensure that interest on last month’s rent deposits is paid on time. Failure to do so could result in tenant complaints or legal issues.
Refund Deposits Promptly: Refund key deposits or any excess amounts as soon as the tenant vacates the property and returns keys or access devices in good condition. Always keep accurate records of deposit transactions.