Are Rent Deposit Rules Changing In Ontario?

A recent landmark decision by the Ontario Supreme Court has the potential to change the game for landlords and tenants across Ontario.

If you are considering renting an apartment in Ontario, you likely already know that you’ll need to pay first and last month’s rent upfront. This rent deposit is the only type of deposit landlords are legally able to request. (Key deposits may be an exception, provided that the deposit is fully refunded when the keys are returned.)

Rightly or wrongly, security deposits or damage deposits are not permitted under the Residential Tenancies Act of Ontario. This is meant to protect tenants from unscrupulous landlords, but it can actually make it more difficult for renters to find the right property and for landlords to find the right tenants.

Because landlords have limited options to protect their property, most are very selective when considering prospective tenants. Students and people who don’t have regular employment – such as entrepreneurs, newcomers to Canada, or even the unemployed but financially secure – often find it challenging to rent. Some landlords also prefer not to rent to pet owners or families with small children because of the risk of damage to their property.

The rules regarding deposits are not changing, but the good news is that a recent precedent-setting decision by the Ontario Supreme Court is changing the way these rules are interpreted.   If you are a landlord or a tenant in Ontario, pay attention to this case!

landlord not returning deposit ontario

So what’s the back-story?

Alison Corvers, a UK citizen in Canada on a visitor’s visa, applied to rent a Mississauga home from Tanveer Bumba for $7,500/month in the spring of 2013. Bumbia initially refused her application because the terms of her visa did not allow Ms. Corvers to legally work in Canada, and he was concerned that she might fail to maintain the payments.

Ms. Corvers then offered to pay one full year’s rent in advance ($90,000) to demonstrate her good faith and paid an additional $7,500 security deposit. Bumbia agreed to these terms and Corvers moved into the home in May 2013. After moving in, Covers brought an application before the court to have the extra months of rent and the security deposit paid back to her, on the grounds that these payments violated the terms of the Residential Tenancies Act.

The case was originally heard in October 2013. Mr. Bumbia’s side presented an email he received from Corvers’ real estate agent, which read: “Alison will pay 12 months’ rent upfront.” Based on this email, the judge ruled that the rent deposit was offered by the tenant (and not required by the landlord) and, as such, it was legal. The security deposit was not offered by the tenant, so it needed to be returned to her.

Corvers appealed the decision, and the case went before the Ontario Supreme Court in February of 2014. Judge Frank Marrocco upheld the initial ruling stating that, though a landlord can not require a tenant to pay more than the first and last month’s rent as a condition of the tenancy, if the tenant offers to pay more money in advance and the landlord accepts the payment, it is legal.

Reactions to this ruling have been mixed; some describe this case as “muddying the waters”. Up until now, the interpretation of the RTA requirements has been cut and dry. Landlords could not require nor could they accept any deposits beyond the first and last month’s rent. This ruling could make the system vulnerable to terrible abuses.

On the other hand, many landlord advocacy groups believe that this case will allow landlords to expand their rental pool demographic and prevent long and costly vacancies. They are hopeful that this case may lead to changes in the RTA that will permit landlords to charge damage deposits if they desire to do so.

Ultimately, the Corvers vs. Bumbia ruling opens the door for renters in less than ideal circumstances to negotiate with prospective landlords when they find the apartment of their dreams. It equalizes the playing field and gives tenants an ace in the hole when negotiating a new lease.

Keep in mind that this is still something of a legal grey area. If you do decide to accept a deposit in excess of the first and last month’s rent, tread very carefully and make sure you get it in writing that this payment was offered by the tenant and not required by the landlord.

It is important to remember that landlords are still required by the RTA to pay yearly interest on the rent deposit. In the Corvers vs. Bumbia case, the Supreme Court ruled that Bumbia was required to pay interest on the full amount of the deposit, calculated on the monthly declining balance and payable upon the last day of the lease term.

If you offer or accept deposits in addition to the first and last month’s rent, interest will be due on the entire amount of the deposit. This interest is calculated based on the Consumer Price Index – the guideline used to determine the maximum allowable yearly rent increase. Therefore, the Landlord must pay the same amount as the rent increase guideline that is in effect when the interest is due.

That is fairly straightforward when we are only considering last month’s rent or a security or damage deposit. You only use the guideline in effect when the interest payment is due, even if the 12-month lease period falls over two calendar years. It becomes a little trickier if the tenant has offered to pay several months of rent in advance.

Consider the Covers vs. Bumbia case. The lease began May 1st, 2013. The guideline for 2013 was 2.5%, and for 2014 it is 0.8%. The interest is calculated based on the declining monthly balance, based on the guideline in effect each month.

Total amount received from Corvers: $90,000 (rent for 1 year) + $7,500 security deposit= $97,500

  • May 31, 2013 – remaining balance is $90,000 – monthly interest is $187.50
  • June 30, 2013 – remaining balance is $82,500 – monthly interest is $171.88
  • July 31, 2013 – remaining balance is $75,000 – monthly interest is $156.25
  • August 31, 2013 – remaining balance is $67,500 – monthly interest is $140.63
  • September 30, 2013 – remaining balance is $60,000 – monthly interest is $125
  • October 31, 2013 – remaining balance is $52,500 – monthly interest is $109.38
  • November 30, 2013 – remaining balance is $45,000 – monthly interest is $93.75
  • December 31, 2014 – remaining balance is $37,500 – monthly interest is $25
  • January 31, 2014 – remaining balance is $30,000 – monthly interest is $20
  • February 28, 2014 – remaining balance is $22,500 – monthly interest is $15
  • March 31, 2014 – remaining balance is $15,000 – monthly interest is $10
  • April 30, 2014 – remaining balance is $7,500 – monthly interest is $5

At the end of April, Bumbia will need to pay Corvers $1,059.39

The ramifications from the precedent-setting verdict, in this case, are only just beginning to unfold. Here at Buttonwood Property Management, we will be monitoring this situation closely, so check this blog often for further developments.

Sabine Ghali
Sabine Ghali
Helping real estate investors build wealth over time

Sabine Ghali, Managing Director at Buttonwood Property Management, Award Winning Real Estate Broker and an Entrepreneur at heart. Sabine is on a mission to help investors create real estate wealth over time in the Greater Toronto Area. Sabine is published in a number of media outlets, including Toronto Star, The Globe and Mail, Toronto Sun, Entrepreneur, Forbes, and Gulf News, among many others.