For an Ontario tenancy covered by the Residential Tenancies Act, a lawful rent deposit has a specific purpose. It is applied to the last rental period, not held as a general fund for repairs after the tenant leaves.
Calling a charge a "security deposit" does not decide whether it is permitted.
Identify the payment before recording it
The Landlord and Tenant Board explains that a rent deposit cannot exceed one month's rent, or one week's rent for weekly payments, and cannot be used for damage. The landlord must pay interest on it each year.
Other amounts need their own legal basis. For example, a qualifying refundable key deposit is not the same as permission to collect a damage deposit. Confirm the applicable rules rather than combining every charge under one label.
The receipt and lease should identify the amount, date, payer, property and purpose. This helps both sides distinguish the deposit from the first month's rent.
Maintain a deposit history
Use a separate ledger column or account for the deposit balance. Record any permitted top-up, interest calculation, application to the final period and refund where applicable.
For example, if a tenant pays first and last month's rent together, the bank sees one transfer. The ledger should still identify two components. When the final month arrives, applying the existing deposit must not create a second cash receipt.
Reconcile the lease, ledger and return
Bookkeeping labels alone do not determine tax timing. Give the preparer the lease terms, receipt date, period covered and deposit application history so the tax treatment can be assessed under the applicable accounting rules.
At move-out, resolve damage claims through the proper process rather than quietly taking them from the rent deposit. Accurate records make the final rent balance easier to explain and prevent a legal deposit from becoming an unexplained accounting adjustment.
