How are last month's rent deposits handled at closing on an Ontario rental property?

Under Ontario's Residential Tenancies Act, landlords can collect a last month's rent deposit from tenants but cannot collect a separate security deposit. The last month's rent deposit belongs to the tenant — it must be applied to the last month's rent when the tenancy ends. When a rental property is sold, these deposits must be transferred from the seller to the buyer because the buyer becomes the new landlord and holds them on behalf of the tenants.

On the statement of adjustments, last month's rent deposits appear as a credit to the buyer. The seller received these deposits when the tenancies started, so on closing day, the seller's sale proceeds are reduced by the total amount of all tenant deposits, and the buyer receives that equivalent amount as a closing credit. The buyer then holds those deposits in trust effectively for the tenants.

Ontario law also requires that landlords pay interest on last month's rent deposits at a prescribed rate set each year. Any accrued interest on deposits is also an obligation that transfers to the buyer. Your lawyer will confirm the deposit amounts and any outstanding interest from the seller at closing.