Ontario last-month's-rent deposits: accounting and interest rules
Ontario's rules on rental deposits are stricter and more specific than most provinces. Landlords can collect a last-month's-rent (LMR) deposit — equal to one month's rent — but no damage deposit, no additional security deposit, and no key deposit beyond a refundable amount equal to the key's replacement cost. On top of that, the LMR deposit earns interest that landlords must pay annually. Getting the accounting right requires understanding the rules before you set up your books.
What Ontario allows (and doesn't)
Under the Residential Tenancies Act (RTA), a landlord in Ontario may collect:
- A last-month's-rent deposit equal to no more than one month's rent at the start of the tenancy.
- A refundable key deposit, not exceeding the replacement cost of the key.
- Nothing else. Damage deposits are prohibited outright.
The LMR deposit is applied to the tenant's last month of rent — it is not held as security for damage. If a tenant causes damage, a landlord's remedy is through the Landlord and Tenant Board, not through the deposit.
The annual interest obligation
Every 12 months, a landlord must pay the tenant interest on the LMR deposit at the rent-increase guideline rate for that year. The Ontario rent-increase guideline is set annually by the provincial government. For 2026, the guideline is 2.1% (per the Ontario government's published guideline). The interest must be paid or credited within 30 days of the anniversary of the tenancy, or it can be applied as a credit against rent due.
Calculating the interest
The calculation is straightforward: LMR deposit amount × applicable annual guideline rate. For a $2,000 deposit at the 2026 guideline rate of 2.1%, the interest owed is $42.00. The interest is calculated on the deposit amount at the time it was received, and updated each year as the deposit is topped up when rent increases.
Topping up the LMR deposit
When you increase rent (within the guideline), the LMR deposit can be increased to match the new rent amount. The tenant is not required to pay the increase all at once — they can pay it in installments over the same 12-month period as the rent increase. The interest owing for the period can also be applied to offset part of the top-up amount.
How to account for the LMR deposit
- When received: debit trust cash, credit a liability account 'LMR Deposits Held' in your chart of accounts. Do not record it as income.
- Annual interest accrual: debit an interest expense account, credit the tenant's LMR deposit balance (or a separate 'LMR Interest Payable' account if you track them separately).
- When credited to rent: debit 'LMR Interest Payable', credit the tenant's rent receivable. No cash moves — it's a credit.
- When the tenancy ends and LMR is applied: debit 'LMR Deposits Held', credit rental income for the final month.
What happens if you don't pay the interest
Under the RTA, if a landlord fails to pay the required interest, the tenant is entitled to deduct the interest from a rent payment. This is a legal deduction, not a missed payment. Tenants who file an application with the LTB can also recover unpaid interest. Tracking and crediting interest annually is not optional — it is a statutory obligation.
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Can Ontario landlords collect a damage deposit?
No. Ontario's Residential Tenancies Act prohibits damage deposits. The only deposit allowed is a last-month's-rent deposit (equal to one month's rent) and a refundable key deposit not exceeding the key's replacement cost.
What interest rate applies to Ontario LMR deposits?
The interest rate equals the Ontario rent-increase guideline for the year in which the anniversary falls. The 2026 guideline is 2.1% per the Ontario government's published rate. The rate changes annually and must be applied for each 12-month period.
When must the LMR deposit interest be paid?
Within 30 days after the anniversary of the tenancy start date. You can pay it directly, apply it as a rent credit, or use it to offset a partial LMR top-up. If it is not paid, the tenant can legally deduct it from a rent payment.
Does the LMR deposit have to be held in trust?
Yes. In Ontario, the LMR deposit is money held on behalf of the tenant and must be treated as a trust liability — held in your trust account, recorded as a liability on your books, and never commingled with your operating funds.
What happens to the LMR deposit when a tenant leaves?
The deposit is applied to the final month's rent. It is not returned in cash and it cannot be applied to cleaning, repairs, or any other charge. When applied, debit your LMR Deposits Held liability and credit rental income for that final month.
LMR interest tracked automatically
Kera reminds you before each anniversary to calculate and pay LMR deposit interest, and keeps your deposit balances reconciled to trust.
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