The short version
- Interest on the last month's rent deposit is payable every year, at the rent increase guideline rate. That is 2.1% in 2026 and 1.9% in 2027.
- You can top the deposit up to one month's current rent, so most years the two cancel each other out and very little money moves.
- If you do not pay it, the tenant is allowed to deduct it from rent themselves.
- The deposit can only ever be applied to the last rent period. Not to damage, not to cleaning, not to arrears mid-tenancy.
- Unpaid interest does not go away. It surfaces at the end of the tenancy, usually as a counterclaim.
01The rule in one paragraph
If you hold a last month's rent deposit, section 106(6) of the Residential Tenancies Act says you owe the tenant interest on it once a year, at the rent increase guideline in effect when the payment falls due. Section 106(3) says you can require the deposit to be topped up so it still equals one month's rent after an increase.
Those two rules were written to work together. On the anniversary you credit the interest, you ask for the top-up, and the difference is usually a few dollars in one direction or the other. It takes about ninety seconds if you know the deposit balance and the current rent.
The problem is that most landlords do neither, for years, and then meet both at once when the tenancy ends.
02What the numbers actually look like
Say you hold a $1,950 deposit from when the tenancy started, and the rent is now $2,200. On the anniversary, in a year with a 2.1% guideline, here is the whole calculation.
TenantBay calculatorDeposit interest you owe this year
If you hold a last month's rent deposit, you owe the tenant interest on it every single year, at the same percentage as the rent increase guideline. You are also allowed to top the deposit up to the current rent. Most landlords do neither, then find out about both at a hearing.
What you are holding
The settlement
Enter the deposit you hold and the current rent. You will see the interest owed, the top-up you are entitled to ask for, and what actually changes hands.
Based on sections 106(3) and 106(6) of the Residential Tenancies Act, 2006. General information, not legal advice.
03Where the money actually shows up
04Three things landlords get wrong here
- Treating the deposit as a damage deposit. It is last month's rent and nothing else, and applying it to damage is a straightforward breach.
- Applying it to arrears mid-tenancy. You cannot use it to cover a missed month in year three, even with the tenant's agreement in most circumstances.
- Collecting more than one month. A deposit above one month's rent, or a second deposit under a different name, is an unlawful charge the tenant can apply to recover.
05Make it something you do not have to remember
The reason this rule gets ignored is not that landlords are trying to keep forty dollars. It is that nothing prompts you. There is no bill, no notification, and no consequence until years later.
In TenantBay the deposit sits on the tenancy alongside the rent history, so the anniversary is a date the system knows about rather than one you have to hold in your head. The interest, the top-up and the increase all land in the same place, on the same record, with a trail you can hand to anyone who asks.
Questions landlords actually ask
How much interest do I owe on a last month's rent deposit in Ontario?
The same percentage as the rent increase guideline in effect when the payment falls due. That is 2.1% for 2026 and 1.9% for 2027. It is payable once a year on the anniversary of the tenancy.
Can I just keep the interest if the tenant never asks?
No. If the payment is not made when it falls due, the tenant is entitled to deduct it from a later rent payment, and unpaid interest can be claimed at the Landlord and Tenant Board after the tenancy ends.
Can I ask the tenant to top up the deposit when rent goes up?
Yes. The deposit can be brought back up to one month's current rent. In practice the interest you owe and the top-up you are owed are settled against each other on the anniversary.
Can the last month's rent deposit be used for damage?
No. It can only be applied to the rent for the last rent period of the tenancy. Ontario does not permit damage or security deposits at all, so there is no lawful deposit to draw on for repairs.
What is the maximum deposit I can collect in Ontario?
One month's rent where rent is paid monthly, or one week's rent where it is paid weekly. Anything above that, or any second deposit under another name, is an unlawful charge.
Sources
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