Is Your Home Deposit Protected If the Brokerage Fails in Ontario?

When you make an offer on a home, you usually hand over a deposit before you own anything. It is natural to wonder what happens to that money if the brokerage holding it runs into trouble, or if the deal falls apart.

The answer depends on why the money is at risk. Protection against a brokerage's own failure or misconduct is different from what happens when you and the seller disagree. This article walks through both, in plain language.

Where your deposit sits: the brokerage trust account

Under the Trust in Real Estate Services Act, 2002, section 27(1), every brokerage must keep a trust account in Ontario. It must deposit all money it holds in trust for others into that account, keep that money separate from its own, and pay it out only according to the terms of the trust.

For deposits, a deposit received by the brokerage that is to hold it under the Agreement must be put into that brokerage's real estate trust account within five business days of receipt. Sources for that timing cite the older regulation under the former legislation, so the current section number under the Trust in Real Estate Services Act, 2002 is worth confirming with a lawyer before you rely on it by number.

RECO deposit insurance: what it covers

RECO's consumer deposit insurance covers deposits held in a brokerage's real estate trust account against events such as brokerage theft, fraud, insolvency or misappropriation. It pays up to $200,000 per claim and up to $4 million for all claims arising from a single event, at no cost to consumers.

• It is aimed at problems on the brokerage's side, such as money going missing or the brokerage becoming insolvent.
• It comes at no cost to consumers.
• The limits apply per claim and per event, so a very large deposit could be affected by the $200,000 cap.

What the insurance does not cover: a failed deal and a dispute

RECO deposit insurance does not apply where a deal has failed and the buyer and seller simply cannot agree on who gets the deposit. That means the insurance is not the route for resolving that kind of disagreement.

When a deal fails, the brokerage should release the deposit only under a release or direction signed by all parties to the Agreement, or under a court direction. That means a brokerage generally will not simply hand the money to whoever asks first. If the other side will not sign, the dispute may need to go to court, and a lawyer can explain the options on your facts.

Unclaimed trust money and money held by lawyers

Trust money that goes unclaimed in a brokerage trust account for more than two years must be paid to RECO. This includes money where it is unclear who is entitled to it. Before paying it over, the brokerage must make reasonable efforts to find the person entitled. A brokerage does not have to send RECO unclaimed trust money totalling less than $25.00, although it may choose to.

Sometimes a lawyer, not the brokerage, holds funds for a closing. The Law Society's Compensation Fund typically pays for losses involving trust funds held for real estate closings. It is a last resort: you must first try to recover the loss from the lawyer or paralegal and from any other sources.

What to do next

• Keep a copy of your Agreement of Purchase and Sale and your deposit receipt or proof of payment.
• Note who is holding the deposit: the brokerage or a lawyer.
• Ask the brokerage to confirm in writing that the deposit went into its real estate trust account.
• If the deal falls through, do not assume the deposit is yours or the seller's. Check what the Agreement says and expect that a signed release or direction will be needed.
• If you and the other side disagree, speak with a real estate lawyer before signing anything or demanding payment.

Frequently asked questions