The How, Why, and When of Ontario Rent Deposits

When signing a new lease in Ontario, most landlords will request first and last month's rent upfront. Under the Residential Tenancy Act (RTA), first and last month's rent are the only rental payments a landlord is allowed to request from a tenant in advance. However, tenants may voluntarily offer additional, upfront rental payments, typically when in competitive rental markets, such as Toronto. In either instance, there is often some confusion as to when and how these deposits are applied.

Last Month Deposits: An Overview

A last month deposit may only be applied against a tenant's final rental payment before moving out or terminating the rental agreement. Confusion here often arises from a tenant's lease term. If a tenant enters a twelve month lease term, many may assume that their last month deposit will be applied against the twelfth month of their tenancy. However, this is not always the case.

In Ontario, rental agreements protected under the RTA will automatically renew on a month-to-month basis after the initial lease term has completed, unless the tenancy has been explicitly terminated or renewed with a new lease agreement. If the agreed upon lease term is January 1st through December 31st, but the tenant will not be moving out on December 31st, the last month deposit will not be applied yet. This is because the tenancy has already extended and is still active, despite the originally specified lease term ending. Landlords should still be withholding the tenant's last month deposit for whichever month precedes their move-out/termination date. This is irrespective of whether the tenant has moved out at the end of their original lease term or even multiple years afterward.

Prepaid Rent vs. Deposits

When a tenant voluntarily provides multiple last month deposits, all but one should be considered more so as prepaid rent rather than deposits, as deposits imply an accrual of interest and an unspecified payout period. Any prepaid rent should, (but is not required to be) applied during the original lease term, and the last month deposit saved for when the tenant decides to move out.

Consider a tenant who provides the first and last four months rent upfront for a lease term from January 1st to December 31st. The first month's rent will apply to January, and it is recommended that the last four month deposits be applied against rent for September, October, and November, with the final deposit only being applied to December if the tenant plans to vacate the unit on December 31st. If the tenant plans to move out March 31st of the next year, then the deposit needs to be withheld and used for March’s rent instead.

Interest

An important reason for this distinction is interest accrual. Every twelve months, a tenant is entitled to the interest accrued on any rent deposits the landlord is still holding. The interest rate for rent deposits is always equal to the year's rent increase guideline amount percentage. The purpose is to ensure that a tenant's last month deposit will always cover the last month, regardless of annual rent increases. For convenience, landlords will often automatically apply any interest owing toward a tenant's last month deposit, rather than requesting tenants to "top up" their last month deposit. The latter scenario is more tedious: a tenant would top up their last month deposit after a rent increase, and then be able to request the landlord to pay back the same amount immediately afterward.

Whereas, if a landlord is still holding multiple last month deposits after twelve months, they will owe interest on the total amount held--not just the single last month deposit. As a result, a landlord will actually lose rental income from not applying prepaid rent in the first twelve months, the only interest-free period.

Notice Period

Another factor to consider is a tenant's notice period to end the tenancy. If the tenant is now renting on a month-to-month basis, they are only required to provide sixty days notice to end the tenancy. If a landlord is only holding one last month deposit, then applying the last month deposit will be a straightforward process. Otherwise, it can become more complicated. The landlord will need to apply the deposits toward the entire sixty day period, and then repay the tenant, in full, any additional rent deposits still held, plus interest.

Conclusion

Rent deposits can be complicated, especially when multiple are provided--one of the grayer areas of the RTA. For simplicity's sake, it's best that only one rent deposit is still held after tenancies exceed twelve months. Any additional prepayments or rent deposits are better off when used during the first twelve months of the lease, otherwise tenancies become complicated with multiplied interest amounts and potential deposit refunds needed. Keeping these matters clear and concise will benefit all parties. As always, if you're unsure about your financial obligations as a landlord, take care to reach out to an experienced property manager to help demystify the process.