One of the most common misconceptions among new Ontario landlords is the belief that they can collect a security deposit to cover potential damages. They cannot. Ontario's Residential Tenancies Act prohibits security deposits and strictly limits what landlords can collect upfront. Understanding these rules — and following them — keeps you legally protected and avoids LTB complaints.

What Ontario Law Allows (and Prohibits)

Under the RTA, the only deposit a landlord can collect from a new tenant is a last month's rent (LMR) deposit. This deposit cannot exceed one month's rent, must be applied to the tenant's last month of rent, and earns interest that must be paid annually. Any other form of deposit — damage deposit, security deposit, cleaning deposit, pet deposit — is explicitly prohibited. Collecting any such deposit is illegal and the landlord must return it.

This is a significant departure from how many other jurisdictions handle deposits. Landlords who come from other provinces or countries often assume a damage deposit is standard. In Ontario, it is not legal.

Rules for Collecting the Last Month's Rent Deposit

You may collect the LMR deposit at any time before or at the start of the tenancy. The deposit can be collected with the signing of the lease, before the tenant moves in, or when you offer to rent the unit. Key rules:

• The deposit cannot exceed one month's rent at the time of collection
• If you later increase the rent, you can collect the difference to top up the deposit to match the new rent
• You must give the tenant a receipt for the deposit
• The deposit earns interest — you must pay this interest annually, either in cash or as a credit toward rent
• The deposit can only be used for the tenant's last month of rent — not for cleaning, repairs, or damages

The Interest Obligation: What Landlords Often Miss

The RTA requires landlords to pay interest on the LMR deposit each year, equal to the rent increase guideline percentage for that year. This interest must be paid or credited to the tenant annually — typically on the anniversary of the tenancy start date. Many landlords are unaware of this obligation and accumulate years of unpaid interest that they are legally required to pay when the tenancy ends.

The practical approach: at each annual rent increase, apply the interest owing on the LMR deposit as a credit rather than a cash payment. This simplifies accounting and is legally sound. Document it in writing to the tenant each time.

What Happens to the Deposit When the Tenancy Ends

When the tenant gives proper notice and vacates, the LMR deposit is applied to their final month's rent. The tenant does not pay the last month's rent separately — the deposit covers it. If the tenancy ends mid-month, the deposit can be prorated accordingly. The landlord is not permitted to hold the deposit or apply it to any other obligation.

If a tenant abandons the unit or is evicted, the LMR deposit is still applied to the last period of rent owed. Any remaining balance in arrears must be pursued separately through the LTB.

What Landlords Can Do About Damage

Since there is no damage deposit, landlords must pursue compensation for tenant-caused damage separately. This is done through an L10 application (or combined with an L1 eviction application). Strong documentation through move-in and move-out inspection reports, photographs, and contractor invoices is essential for any damage claim. The LTB does award damage compensation — but only with adequate evidence.

Frequently Asked Questions

Can I require a pet deposit?

No. Pet deposits of any kind are prohibited under the RTA. You can include pet conditions in your lease, but you cannot charge an additional deposit.

What if the tenant refuses to pay the LMR deposit?

Collecting an LMR deposit is optional — the RTA allows it but does not require the tenant to pay it. If a tenant refuses, you can decline to rent to them, provided your decision is not discriminatory under the Human Rights Code.

Do I need to put the deposit in a separate bank account?

Ontario does not require landlords to hold the LMR deposit in a separate trust account (unlike some other provinces). However, keeping clear records of the deposit and interest is essential.