Last Month's Rent Deposit in Ontario: The Complete Landlord Guide

The Residential Tenancies Act (s.105) limits landlords to collecting one type of deposit: a rent deposit to be applied to the last rental period of the tenancy. The maximum is one month's rent (or one week's rent for weekly tenancies).

If you collect an illegal deposit, the tenant can apply to the LTB (T1 application) to get it back, plus up to 12 months' rent as a penalty. This means a $3,000 illegal "damage deposit" could cost you $40,000+ in penalties if the tenant decides to pursue it.

The LMR is typically collected at the same time as the first month's rent — at lease signing, before the tenant moves in. The standard lease (Section 6) has a field for this. Here is the exact workflow:

1. 1.

   Confirm the amount

   The LMR equals the monthly rent stated in the lease — no more. If monthly rent is $2,200, the deposit is $2,200.

2. 2.

   Issue a written receipt

   You must provide a written receipt that includes: the amount paid, the date paid, the address of the rental unit, the period it covers (last month of tenancy), and a statement that it is a rent deposit under the RTA.

3. 3.

   Record it in Section 6 of the standard lease

   Section 6 asks whether a rent deposit was collected and the amount. Complete this accurately. An undisclosed LMR is still legally the tenant's money — recording it protects both parties.

4. 4.

   Do not commingle it

   You are not legally required to hold the LMR in a separate trust account (unlike some provinces). But good practice is to track it clearly, especially once annual interest starts accruing.

Under RTA s.106(6), landlords must pay interest on the LMR every 12 months, at a rate equal to the rent increase guideline for that year. The 2026 guideline is 2.1%, so a $2,200 deposit earns $46.20 in interest this year.

How to pay the interest

You can pay the interest as cash, as a credit against rent, or by adding it to the deposit balance. Most landlords credit it against rent for one month. Either method is valid — just document it. If you do not pay interest, the tenant can deduct it from a rent payment without this constituting non-payment.

Multi-year tracking

If a tenant has been in place for five years and you have never paid interest, you now owe five years of compounding interest on the original deposit. Example:

That $217 can be deducted from rent. Landlords who lose track of this get surprised when a long-term tenant suddenly pays $200 short and claims interest credit.

The LMR represents the last month's rent — which changes when rent increases. If rent goes from $2,200 to $2,246.20 (a 2.1% increase), the deposit should be $2,246.20. You have the right to ask the tenant to top up the difference.

However, you cannot demand the top-up immediately or in a lump sum. Under the RTA, you can ask the tenant to pay the additional amount over the same time frame as the rent increase notice — effectively, one month's additional payment spread over the year, or a one-time payment of the $46.20 difference.

In practice, most landlords handle this by netting the interest owed against the top-up. If you owe $46.20 in interest and the top-up is $46.20, they cancel out. This is clean and avoids cash movements.

This is where most landlords get confused. Here is the step-by-step for when a tenant gives proper notice:

When a landlord terminates a tenancy for personal use (N12) or major renovation (N13), the LMR still applies to the last rental period. But there are additional obligations:

N12 (landlord or purchaser personal use)

Under an N12, you must provide at least one month's compensation equal to one month's rent. You can fulfill this by paying cash, OR by not charging rent for one month before the termination date. If you choose the rent-free month, the LMR still applies to the final rental period — you cannot use the compensation month and the LMR to cover the same period.

N13 (demolition or renovation)

N13 compensation rules depend on whether the tenant plans to return after renovation. If the tenant is vacating permanently, the LMR applies to the last rental period, same as a standard move-out. Ensure all interest is paid up before the tenancy ends.

Property sale: does the LMR transfer?

Yes. When you sell a tenanted property, the LMR (and the obligation to pay interest on it) transfers to the new owner. The new landlord steps into your shoes. You are typically required to disclose the deposit to the buyer; it is accounted for in the closing statement. The tenant's deposit is not yours to keep at closing.

This is the part Ontario landlords find most frustrating. The LMR is for rent only — it cannot be applied to cleaning costs, repairs, or damage the tenant caused. It must be used for the last rental period, nothing else.

If the tenant damages your unit, your remedy is the L2 application (current tenant) or L10 application (former tenant) through the LTB. The LMR stays applied to rent, and damage is a separate claim.