Almost Passive · Free weekly email
Most landlords find out about rule changes like this after it's already cost them something.
Once a week: what's actually happening in the London / St. Thomas rental market, what's changing at the LTB, and what I'm learning running Prospera — before it turns into a problem on your end.
Most Ontario landlords collected a last month's rent deposit when they signed their tenant's lease. Most of them have also never paid a single cent of interest on it.
That's a problem — because Ontario law requires it every year, without exception.
This is one of the most common LTB compliance failures among small landlords. The deposit sits in a bank account, interest accumulates on paper, and landlords assume that because nothing bad has happened yet, nothing is wrong. Then a tenant files a T1 application, and the landlord discovers they owe several years of unpaid interest — plus the T1 filing fees and hearing time.
Here is what the law requires, how to calculate what you owe, and how to pay it correctly.
The Misconception: The Deposit Just Sits There
When a tenant pays a last month's rent deposit, most landlords treat it like a security deposit — something that gets held and returned (or applied) at the end of the tenancy. They don't think of it as a live financial obligation that grows every year.
That framing is wrong. Under Ontario's Residential Tenancies Act, the last month's rent deposit is not a security deposit. It has a very specific purpose: it is applied to the final month of rent. And while it waits, the landlord owes the tenant interest on it — annually, every year the tenancy continues.
The legal requirement is in RTA Section 106(6):
"A landlord shall pay interest to the tenant, annually, on the amount of the rent deposit at a rate equal to the guideline interest rate that is in effect at the time payment is due."
That rate — the guideline — is the same percentage that caps annual rent increases in Ontario. In 2026, the guideline is 2.5%. So a landlord holding a $2,100 last month's rent deposit owes $52.50 in interest for 2026.
Why This Matters More Than You Think
Fifty-two dollars sounds trivial. But:
It compounds. If you collected a $1,800 deposit in 2019 and never paid interest, you owe interest on every year since then. The amount grows each year.
Tenants can file a T1 application. A T1 — Tenant's Application for a Rent Rebate — is specifically designed to recover unpaid deposit interest. The LTB takes these applications seriously.
The unpaid amount is capped, not erased. The Residential Tenancies Act gives tenants a one-year window to apply for unpaid interest. That means for any given year's interest, the tenant has until one year after the payment was due to file. Unpaid interest doesn't quietly disappear.
It's provably your obligation. You have the deposit. You can look up the guideline rate for every year. There is no factual dispute at a T1 hearing — only whether you paid or you didn't.
How the Interest Rate Is Determined
The interest rate on the last month's rent deposit is not a fixed number. It equals the Ontario rent increase guideline for each year — the same percentage Ontario announces every August for the following calendar year.
You can check the current and historical guideline rates on the Ontario rent increase guideline page.
Each year's interest is calculated on the deposit amount as it stood at the start of that year — which itself may have grown if you applied previous years' interest correctly (more on that below).
How to Calculate the Interest You Owe
Let's work through a concrete example.
Scenario: Your tenant moved in February 2022. They paid a last month's rent deposit of $1,800 at lease signing. You have never paid interest on it.
To calculate the total interest owed through to the 2026 payment date (February 2026):
| Year | Deposit Amount | Guideline Rate | Interest Owed |
|---|---|---|---|
| 2022 | $1,800.00 | 1.2% | $21.60 |
| 2023 | $1,821.60 | 2.5% | $45.54 |
| 2024 | $1,867.14 | 2.5% | $46.68 |
| 2025 | $1,913.82 | 2.5% | $47.85 |
| 2026 | $1,961.67 | 2.5% | $49.04 |
| Total owed | $210.71 |
Note how the deposit amount increases each year if interest is correctly credited — the deposit grows because the interest is notionally added to it. When the tenancy ends and the deposit is applied to the last month's rent, any interest that wasn't paid must be dealt with at that point.
To get the exact guideline rates for each year, use the Ontario government's guideline page. Do not guess or estimate.
Two Correct Ways to Pay the Interest
Once you've calculated what you owe for a given year, you have two options for paying it.
Option 1: Credit Against Rent
The most common approach. You tell the tenant in writing that the interest for the year has been credited toward their next rent payment. If the monthly rent is $2,100 and the interest owed is $52.50, the tenant's next rent payment is $2,047.50.
This is administratively clean. Put it in writing — a simple email or letter is enough. Keep a copy for your records.
Option 2: Cash Payment
You can also pay the interest by cheque or e-transfer. Some landlords prefer this because it keeps the rent amount clean and consistent.
Either method is valid. The requirement is just that you pay — and that you document it.### What You Cannot Do
You cannot skip payment because the amount seems too small. You cannot wait until the tenancy ends and deal with it then (by that point, the deposit has already been applied to rent, and unpaid interest becomes a separate obligation). You cannot argue that the tenant never asked for it — the RTA doesn't require the tenant to ask. The obligation is automatic and annual.
The Deposit Amount Tracks With the Deposit, Not the Current Rent
Here is a detail that trips up many landlords.
If you raise rent over the years, the last month's rent deposit does not automatically update to match the new rent. The deposit stays at the original amount — unless the tenant agrees in writing to top it up at the time of a rent increase.
So if a tenant paid $1,800 as their last month's rent deposit in 2022, and their rent is now $2,200, the deposit is still $1,800. When you apply it at the end of the tenancy, the tenant owes you $400 for the final month.
The interest is calculated on the actual deposit held — $1,800 — not on the current rent.
Before you keep reading
This is exactly the kind of thing Almost Passive covers every week.
Local market shifts, RTA/LTB changes that actually affect your properties, and real lessons from managing rentals. One short email. No fluff.
Multi-Year Unpaid Interest: How to Fix It
If you have never paid interest on a deposit that has been held for several years, the correct approach is:
- Look up the guideline rate for every year you have held the deposit. Use the Ontario government website.
- Calculate the cumulative interest using the compounding method shown in the table above.
- Pay or credit the total. You can do this as a lump sum or over several months as rent credits.
- Document everything. Keep a written record of the calculation, how you paid, and the date.
Going forward, set a calendar reminder for the same date every year — the anniversary of the lease start, or the anniversary of when you first received the deposit — to calculate and pay that year's interest.
What Happens If a Tenant Files a T1
A T1 — Tenant's Application for a Rebate of Money the Landlord Owes — allows tenants to recover unpaid interest at the LTB. The application covers any interest that should have been paid within the past year.
At the hearing, the landlord will need to show:
- When the deposit was collected
- What the deposit amount is
- That interest was paid, and when
If you cannot demonstrate payment, the LTB will order you to pay the unpaid interest. This is not a high-stakes hearing — the amounts involved are rarely large — but it is a finding against you that goes on the record. Repeated T1 applications from the same tenant are also relevant context if you later need to bring an L1 or eviction application.
The T1 has a one-year limitation period per RTA s.135: the tenant must apply within one year of the day the interest was due. Each year's unpaid interest has its own one-year window.
London and SW Ontario Context
In London, St. Thomas, and Strathroy, last month's rent deposits are standard — almost every tenancy includes one. With London 2BR rents averaging around $2,100/month, the annual interest obligation at 2.5% is roughly $52.50 per unit.
For a landlord with four units, that's $210/year in interest obligations. For a landlord who hasn't paid in five years across four units, the exposure is over $1,000 — plus LTB fees and hearing time if a tenant files.
Landlords in London also need to track this obligation alongside the City of London Rental Housing Licence renewal — both have annual obligations that are easy to miss without a calendar system.
How the Deposit Interacts With Rent Increases
When you raise rent, you should also review your deposit interest obligation at the same time.
Under RTA s.106(8), if you provide the tenant with an N1 notice of rent increase and pay the full interest at the same time, the tenant can top up the deposit to match the new rent. You cannot require the top-up — the tenant chooses whether to pay it. But if they do, your deposit increases, which makes the end-of-tenancy calculation cleaner.
See how to increase rent in Ontario for the N1 procedure and notice requirements.
Common Mistakes
1. Confusing the last month's rent deposit with a security deposit. Ontario does not permit security deposits. The last month's rent deposit is not a security deposit — it applies to rent only, not to damages.
2. Treating the obligation as optional until the tenant asks. The RTA does not require the tenant to request interest. You owe it from the anniversary date, regardless of whether anyone reminds you.
3. Raising rent without reviewing the deposit interest. If you raise rent but haven't caught up on past interest, you compound the outstanding amount.
4. Applying interest at the wrong rate. Using the wrong year's guideline — or using a flat rate like 2% — produces an incorrect calculation. Always check the official Ontario figure for each year.
5. Not documenting the payment. If you credit rent, write it down. An email to the tenant noting the credit is sufficient. "I gave them a discount one month" is not adequate documentation for an LTB hearing.
6. Assuming the obligation ends when the lease converts to month-to-month. The interest obligation continues for the entire tenancy — fixed term and month-to-month alike. The deposit keeps earning interest until it's applied.
7. Forgetting the deposit amount tracks the original deposit, not current rent. If the tenant's rent has increased but they didn't top up the deposit, interest is calculated on the original deposit amount, not the new rent.
Frequently Asked Questions
Do I owe interest if the tenant is still on the original rent? Yes. The interest obligation is tied to holding the deposit, not to any rent increases. Even if rent has never changed, interest accrues every year.
What if the guideline rate is 0%? In years where the guideline is set at 0%, no interest is owed. This happened in 2021 — landlords holding deposits through that year owed no interest for 2021. Always verify the year's rate.
Can I use the deposit as a security deposit for damages? No. The last month's rent deposit can only be applied to rent — specifically, the last month of the tenancy. You cannot deduct cleaning or repair costs from it. For damage claims, see what you can deduct from a last month's rent deposit.
Do I have to top up the deposit when rent goes up? No. You can offer the tenant the option to top up (RTA s.106(8)), but you cannot require it. The deposit stays at the original amount unless the tenant voluntarily increases it.
What if I never charged a last month's rent deposit? You have no obligation. The deposit interest rules only apply if you collected a deposit. If you didn't, there's nothing to pay interest on — but you also don't have a deposit to apply when the tenant leaves.
If the tenant owes rent arrears, can I keep the deposit interest? No. Interest on the deposit belongs to the tenant. You cannot offset it against rent arrears. Rent arrears are recovered through an N4 notice and L1 application, not by withholding deposit interest.
How do I prove I paid the interest if a tenant disputes it? Email records, bank transfer records, or a signed acknowledgment from the tenant. Keep these records for at least two years after the tenancy ends. See landlord record-keeping in Ontario for a full document retention system.
Can the tenant waive their right to interest? No. RTA s.4 voids any agreement between a landlord and tenant that gives a tenant less than their rights under the Act. The tenant cannot waive deposit interest in the lease or otherwise.
Build a System Before the Next Anniversary
The simplest fix is a calendar event. On the anniversary of every deposit you hold, calculate that year's interest, notify the tenant in writing, and apply it as a rent credit. Keep the calculation in your records.
If you manage several units, you may have several different anniversary dates. A spreadsheet with deposit amounts, start dates, and guideline rates by year takes thirty minutes to set up and eliminates the risk entirely.
If you have years of unpaid interest across multiple units and are not sure where to start, that's exactly the kind of compliance backlog that Prospera Properties can help you work through — alongside the annual reminders and documentation that prevent it from building up again.
Always verify the current Ontario rent increase guideline at ontario.ca before calculating deposit interest. Guideline rates change annually.