Understanding Rent Increases and the Last Month’s Rent Deposit in Ontario

As a professional property management company in Ontario, one of the most common areas of confusion we encounter relates to rent increases, last month’s rent deposits, and the annual interest landlords are required to pay. In this article, we aim to clarify how these processes work, especially in light of the Rent Increase Guideline and Ontario’s Residential Tenancies Act.

Annual Rent Increases and the Rent Increase Guideline

Each year, landlords in Ontario are permitted to increase rent based on the Ontario Rent Increase Guideline, which is tied directly to the Consumer Price Index (CPI). This percentage changes yearly and dictates the maximum allowable rent increase without requiring approval from the Landlord and Tenant Board.

What Happens to the Last Month’s Rent Deposit?

When a tenant moves in, they provide a last month’s rent deposit (LMR). By law, landlords must pay interest on that deposit annually. The twist? The annual interest rate is the same as the rent increase guideline—which means that in most standard situations, the interest owing to the tenant and the increase in rent effectively cancel each other out.

Rather than issuing an interest payment each year, landlords are permitted to apply that interest toward topping up the LMR deposit so that it matches the new rent amount after a lawful increase.

Why Tenants Don’t Receive Annual Interest in Most Cases

If your landlord increases your rent each year according to the guideline, you typically won’t receive a separate interest payment. That’s because:

• Your rent goes up.

• The amount of interest owed on your LMR deposit goes up.

• The landlord applies the interest directly to your LMR deposit to bring it in line with your new rent amount.

Example:
If your monthly rent increases from $1,500 to $1,545 due to a 3% guideline increase, your LMR deposit also needs to be $1,545. The landlord uses the 3% interest that would be paid to you to cover this difference.

Vacating the Rental Unit: Topping Up the Last Month’s Rent

When tenants move out—whether after 2, 5, or 10 years—the rent they’re paying will almost always be higher than it was when they moved in. At that point, they are responsible for topping up the last month’s rent deposit to ensure it equals the current lawful rent at the time of their last month in the unit.

This is an important detail for both landlords and tenants to keep in mind, especially when discussing move-out timelines and final payments.

Rent Increase Notice Requirements

As per Ontario’s Residential Tenancies Act, landlords must provide at least 90 days' written notice before increasing the rent. Additionally:

• The rent increase must take effect on the first day of a rental period, usually the 1st of the month.

• Use Form N1 (Notice of Rent Increase) to serve proper notice.

Example:
If your tenant’s lease began on June 1st, and you plan to increase the rent on June 1st of the following year, you must serve the N1 notice no later than the end of February to provide the full 90-day notice period (March, April, and May).

Key Takeaways for Landlords and Tenants

• No cash interest payout is typically owed when rent is increased annually according to the guideline.

• The LMR deposit must always match current rent, and landlords can use annual interest to cover this.

• Tenants must top up the LMR deposit at move-out if it does not reflect the current rent amount.

• Proper notice and timing are critical when issuing a rent increase—always follow the 90-day rule.

Need Clarification?

We understand that these topics can be complex. If you’re a tenant unsure about your responsibilities, or a landlord trying to ensure you're in compliance with Ontario rental laws, our team at Babcock & Robinson Inc. is here to help.