Last Month's Rent Deposit in Ontario: The Rules, and the Interest You Owe

This article is general information, not legal advice. Verify against the Residential Tenancies Act and the Landlord and Tenant Board's guidance, or consult qualified counsel.

Rent deposits are one of the most misunderstood parts of renting in Ontario, on both sides of the lease. Landlords sometimes ask for things they are not allowed to collect, and tenants often do not know they are owed interest every year. Here is the whole picture, kept simple.

What you can and cannot collect

In Ontario, the only rent deposit a landlord may collect is a last month's rent (LMR) deposit, and it cannot exceed one month's rent (or one week's rent for a weekly tenancy). That deposit is exactly what it sounds like: it is applied to the final rental period of the tenancy, and nothing else.

What is not allowed in Ontario:

• Security or damage deposits.
• Pet deposits.
• Cleaning deposits.
• "First, last, and a damage deposit" arrangements.

The one narrow exception is a key deposit, and even then it is limited to the actual replacement cost of the keys and must be refunded when the keys are returned. If you have ever been asked for a damage deposit on an Ontario rental, that request was not permitted under the law.

The LMR can only be used for the last month

This trips up a lot of landlords. The last month's rent deposit is not a fund you can draw on for damage, cleaning, or unpaid rent during the tenancy. It can only be applied to the final rental period. If a tenant damages the unit, that is a separate matter you pursue through the Landlord and Tenant Board, not something you deduct from the LMR.

You owe interest on it, every year

This is the part most often missed. A landlord must pay the tenant interest on the last month's rent deposit once a year, at the rent-increase guideline rate for that year. For 2026, the guideline is 2.1 percent, so the annual interest on an LMR deposit is 2.1 percent of the deposit (see our 2026 rent-increase guideline explainer).

In practice, this usually nets out cleanly against a rent increase:

• When you raise the rent (by the guideline), you may require the tenant to top up the LMR deposit so it still equals one month's rent.
• The interest you owe is typically applied toward that top-up, so no money actually changes hands. The tenant's deposit grows to match the new rent, and the interest obligation is satisfied in the same step.

If you are not raising the rent, you still owe the interest and should pay it or credit it. Keeping this straight, year over year, for every unit, is exactly the kind of small recurring obligation that is easy to forget and awkward to reconstruct later.

A worked example

Say the rent is $2,000 and you collected a $2,000 LMR deposit at move-in.

• After a year, you owe 2.1 percent interest on the $2,000, which is $42.
• You raise the rent by the 2026 guideline of 2.1 percent, so the new rent is $2,042.
• You may require the deposit to be topped up from $2,000 to $2,042, a difference of $42.
• The $42 of interest you owe is applied to the $42 top-up. They cancel out, the deposit now equals the new rent, and nobody writes a cheque.

For tenants

Two things worth knowing. First, if you were asked for a damage or security deposit in Ontario, that was not allowed, and it should have been a last month's rent deposit or nothing. Second, you are owed interest on your LMR every year, whether or not your rent goes up. If your landlord raises the rent and asks you to top up the deposit, the interest you are owed should be credited against that top-up.

Frequently asked questions

Can an Ontario landlord ask for a damage deposit? No. The only permitted rent deposit is last month's rent, capped at one month. Key deposits are allowed but limited to replacement cost.

How much interest is owed on a last month's rent deposit? It is paid annually at the year's rent-increase guideline. For 2026 that rate is 2.1 percent.

Can I use the last month's rent deposit to cover damage or unpaid rent mid-tenancy? No. It can only be applied to the final rental period. Damage and arrears are handled separately through the Landlord and Tenant Board.

What happens to the deposit if the tenant never misses rent? It is applied to their last month of rent when the tenancy ends, which is its entire purpose.

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Rent deposits, interest, and top-ups are small obligations that add up across a portfolio and are easy to lose track of. Habyn helps small landlords keep clean, consistent records for every unit so nothing slips. See how Habyn helps landlords.