I understand that real estate transactions can be complex and confusing. One of the most important aspects of any real estate purchase and sale agreement is the deposit. 

In this blog post, I will provide you with detailed information on real estate deposits in Toronto, including the typical amount of the deposit, how it is paid, its role in the agreement, and much more.

What is a real estate deposit?

A real estate deposit is an amount of money that the buyer pays to the seller as a show of good faith and commitment to the purchase. This deposit is usually a percentage of the purchase price and is typically held by the seller’s brokerage until the closing of the transaction.

How much is a typical real estate deposit?

The amount of the deposit can vary depending on the specific circumstances of the transaction. In Toronto, the typical deposit amount is around 5% of the purchase price, although this can vary based on factors such as the type of property, market conditions, and the negotiations between the parties.

What happens to the deposit once it’s paid?

The deposit is typically held in trust by the seller’s brokerage until the closing of the transaction. During this time, the deposit earns interest, which is paid to the buyer after the transaction is completed. The interest earned is taxable income for the buyer. 

Brokerages may have different requirements regarding interest earned and often attach an additional schedule to the agreement defining the rates payable, minimum interest paid, and specific timeline to earn the interest.

How is the deposit paid?

The deposit can be paid by certified cheque, bank draft, wire transfer, or by a combination of these methods. The payment is usually made directly to the seller’s brokerage within a few days of the agreement being signed or as detailed in the agreement.

What is the role of the deposit in the purchase and sale agreement?

The deposit plays a crucial role in the purchase and sale agreement. It serves as a show of good faith from the buyer to the seller and as a security deposit to ensure that the buyer will complete the transaction. 

The agreement will typically outline the conditions for the release of the deposit to the seller, such as the completion of any required inspections or the satisfaction of any other conditions.

What happens if the buyer defaults on the agreement?

If the buyer defaults on the agreement, the seller has several options. The seller can choose to terminate the agreement and keep the deposit as liquidated damages, or they can seek legal action to enforce the agreement and claim damages in addition to the deposit. In either case, the deposit is forfeited.

What happens if the seller defaults on the agreement?

If the seller defaults on the agreement, the buyer has several options. The buyer can choose to terminate the agreement and demand the return of the deposit, or they can seek legal action to enforce the agreement and claim damages in addition to the deposit. If the agreement is terminated, the deposit is returned to the buyer.

Can the deposit be used as part of the down payment?

The deposit is not the same as the down payment, which is the amount of money the buyer pays toward the purchase price. However, the deposit can be used as part of the down payment on closing. It simply forms part of the net differential of the purchase price less the mortgage (if any) taken out on the property.

Can the deposit be forfeited?

If the buyer fails to fulfill the terms and conditions of the purchase agreement, such as by backing out of the sale without a valid reason, the seller may be entitled to keep the deposit as compensation for damages and losses incurred.

However, the specific conditions for forfeiture of a deposit can vary depending on the terms of the purchase agreement. It’s important for both buyers and sellers to carefully review and understand the terms of the agreement, including the deposit provisions, to avoid any potential issues or disputes.

How is the deposit returned to the buyer?

If the transaction is completed, the deposit is credited toward the purchase price. If the transaction is not completed, the deposit is returned to the buyer, less any applicable fees or expenses. The timing of the deposit return is typically outlined in the purchase and sale agreement and can vary depending on the specific circumstances of the transaction.

If the seller breaches the agreement, the buyer may be entitled to a return of the deposit. However, the specific circumstances of the breach and the terms of the purchase agreement can impact whether or not the deposit is returned.

For example, if the seller breaches the agreement by failing to disclose certain material defects or issues with the property, the buyer may be entitled to a return of the deposit. Additionally, if the seller breaches the agreement by refusing to close on the sale, the buyer may be entitled to the return of the deposit.

Can the deposit be held in trust?

In Ontario, the Real Estate Council of Ontario (RECO) requires that all real estate deposits be held in trust. This means that the deposit is held by the seller’s brokerage in a separate trust account and is not accessible until the transaction is completed.

However, in certain circumstances, it is possible for someone else to hold the deposit. For example, the buyer and seller may agree to have a lawyer or a notary public hold the deposit in trust. In this case, the lawyer or notary public would be responsible for holding the deposit and ensuring that it is released in accordance with the terms of the purchase and sale agreement.

What are the tax implications of the deposit?

The interest earned on the deposit is considered taxable income for the buyer and must be reported on their tax return. The deposit itself is not taxable, as it is a refundable security deposit.

How can a real estate lawyer help with the deposit?

A real estate lawyer can provide guidance and advice on the deposit and other aspects of the purchase and sale agreement. They can review the agreement to ensure that it protects the buyer’s interests and can assist in resolving any disputes that may arise.

Conclusion

In summary, a real estate deposit is a critical part of any purchase and sale agreement. It is a show of good faith from the buyer to the seller and serves as a security deposit to ensure that the transaction is completed. Understanding the role of the deposit, as well as the conditions for its release, forfeiture, and return, is essential for any buyer or seller. By working with a real estate lawyer and following best practices, both parties can ensure that the deposit is properly handled and that the transaction is completed successfully.