Almost every rental in Ontario begins with the same ritual. First and last, please, before you get the keys. That last month’s rent deposit is so routine that most landlords and tenants never think twice about it. That is exactly the problem. The rules governing this deposit are far stricter and more specific than most people realize, and violations happen constantly, often by well-meaning landlords who simply do not know the law. Getting it wrong can expose a landlord to a claim, and getting it right protects both sides.

MTS Paralegal Services P.C. represents both landlords and tenants before the Landlord and Tenant Board across Kitchener, Waterloo, Cambridge, Guelph, Hamilton, and Southwestern Ontario. Here are the deposit rules landlords most often miss.

Only One Kind of Deposit Is Legal

The single biggest misconception about deposits in Ontario is that a landlord can collect money to protect against damage. They cannot. Under the Residential Tenancies Act, 2006, the only rent-related deposit a landlord may lawfully require is a last month rent deposit, and it cannot exceed one month’s rent, or one week’s rent for a weekly tenancy. That is the entire universe of permitted rent deposits. There is no legal room for anything else.

This is where landlords new to Ontario, or those bringing habits from other provinces and countries, most often go astray. Damage deposits, security deposits, pet deposits, and cleaning deposits are all prohibited under Ontario law. A landlord who asks for first, last, and a damage deposit has requested something that is not permitted under the RTA, and the damage deposit portion can be recovered by the tenant. A refundable key deposit is permitted, but only up to the actual replacement cost of the key, fob, or remote, and never as a disguised security deposit. A tenant who agreed to a deposit not permitted under the RTA is not stuck with it, because agreeing to an unlawful charge does not make it lawful.

The Deposit Can Only Ever Be Rent

The name says it all, yet this rule is broken all the time. A last month rent deposit can be applied to one thing and one thing only: the rent for the final rental period of the tenancy. It is not a fund the landlord can dip into for cleaning, repairs, damage, or unpaid utilities at the end of the tenancy. It is not even available to cover unpaid rent partway through the tenancy. The Residential Tenancies Act, 2006 makes this restriction mandatory, and a clause in a lease that tries to say otherwise has no effect.

The practical consequence for landlords is significant. When a tenant causes genuine damage to a unit, the landlord cannot simply keep the last month’s deposit to cover it. The deposit must still be applied to the final month’s rent, and any claim for damage has to be pursued separately through the Landlord and Tenant Board. Treating the deposit as a damage cushion is one of the most common and costly errors landlords make, and it frequently turns into a dispute the landlord could have avoided. An experienced licensed paralegal helps landlords pursue damage claims through the correct channel rather than mishandling the deposit.

The Interest Rule Almost Everyone Forgets

Here is the rule that catches the most landlords off guard, and the one many tenants never realize is a right they hold. A landlord must pay the tenant interest on the last month’s rent deposit every year, at a rate equal to the annual rent increase guideline in effect. This is not optional and it is not a courtesy. It is a legal obligation under the Residential Tenancies Act, 2006 that accrues for every year the deposit is held.

For 2026, the rent increase guideline is 2.1%, which means a landlord holding a last month deposit owes the tenant 2.1% interest on it for the year. In practice, most landlords satisfy this by crediting the interest against the top-up a tenant owes when the deposit needs to rise to match a lawful rent increase. Either way, the interest belongs to the tenant. Over a multi-year tenancy it adds up, and where a landlord has never paid or credited it, that unpaid interest is owed and can be claimed. Many tenants have no idea this money is theirs, and many landlords have never accounted for it properly.

Topping Up and Getting It Back

Two further points round out the rules. When rent is lawfully increased during a tenancy, a landlord is entitled to ask the tenant to top up the last month’s deposit so it continues to equal one month’s rent. This is legitimate, provided the underlying rent increase itself followed the proper notice and timing rules. The annual interest owed on the deposit is frequently applied against exactly this top-up, which keeps the accounting clean when both are handled correctly.

At the end of the tenancy, the deposit is simply applied to the final month’s rent, meaning the tenant does not pay separately for that last month. Where a landlord has collected a deposit not permitted under the RTA, or has failed to pay the required interest, a tenant can apply to the Landlord and Tenant Board for a remedy. These applications are common precisely because deposit rules are so widely misunderstood, and they succeed when the tenant can show what was collected and what the law permitted.

Get the Deposit Right and Avoid the Dispute

The last month’s rent deposit looks simple, but the rules around it trip up landlords and tenants alike. Only a last month deposit is legal, it can only ever be applied to the final month’s rent, annual interest is owed every year, and damage claims must go through the Board rather than the deposit. A landlord who understands these rules avoids exposure, and a tenant who understands them protects money that is rightfully theirs. Timothy Ellis of MTS Paralegal Services P.C. has spent over two decades guiding both sides through Landlord and Tenant Board matters across Southwestern Ontario.

Anyone with a question about a rental deposit can reach the firm through the contact page at mtsparalegalservices.com to find out where they stand.

The deposit has rules. Knowing them protects your money.

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