What Happens to the Deposit if a Real Estate Deal Falls Through?

Who holds the deposit, and why that matters

A real estate deposit is money the buyer pays when signing an agreement of purchase and sale, as a sign of good faith that the deal will close. It is not paid to the seller directly. In Ontario, a brokerage holding a deposit is bound by trust rules and may only disburse it in one of two ways: a mutual release signed by both buyer and seller, or a court order, as set out in a RECO Registrar’s Bulletin on failed agreements. In Alberta, the Real Estate Act requires that trust money collected on a deal be kept on deposit within Alberta while the transaction is worked out. This is functionally similar to a US “escrow” deposit: a neutral holder sits on the money until both sides agree, or a court decides.

The default rule: forfeiture and a damages claim can both happen

The most misunderstood point is that forfeiting the deposit does not use up the seller’s remedies. The Supreme Court of Canada held in Dobson v. Winton and Robbins Ltd. that when a buyer repudiates the agreement, the seller can forfeit the deposit and separately sue for loss of bargain and out-of-pocket expenses. This common law principle applies across Canada, including Ontario and Alberta. So a buyer who assumes “I’ll just lose my deposit and that’s the end of it” may be wrong if the seller’s actual losses exceed the deposit amount.

Ontario: when a court will override forfeiture

Ontario’s default position favours the contract’s forfeiture clause, but it is not absolute. The Ontario Court of Appeal in Mouralian v. Groleau confirmed that courts will only relieve a defaulting buyer against forfeiture where the amount forfeited is out of proportion to the seller’s actual damages and keeping it would be unconscionable; otherwise, the agreed forfeiture stands.

Timing clauses are enforced strictly. In 3 Gill Homes Inc. v. 5009796 Ontario Inc. (Kassar Homes), the Court of Appeal upheld forfeiture of the deposit to the vendor after the buyer missed a “time is of the essence” closing deadline, even though the delay was measured in minutes, and confirmed the forfeiture clause operates without prejudice to the seller’s right to claim further damages.

The outcome flips when the seller is at fault. In Chan v. Mangal, the Ontario Superior Court ordered the deposit refunded to the buyer, without interest and without either side owing damages, because the deal collapsed when the seller, acting in good faith, could not satisfy the buyer’s timely title requisitions.

And getting the deposit back does not end the matter. In Datta v. Eze, the Court of Appeal confirmed that a buyer who already accepted return of the deposit following the vendor’s breach was not barred from separately pursuing a damages claim against that vendor.

Alberta: trust rules and the standard forfeiture clause

Alberta’s regulatory framework works differently in structure but points to a similar practical result. The Real Estate Act requires that trust money stay on deposit in Alberta pending resolution of the transaction, meaning it cannot simply be paid out to one side on request. The Real Estate Council of Alberta’s standard-form Exclusive Seller Representation Agreement provides that where a buyer fails, without legal justification, to complete a legally binding purchase contract, the buyer may forfeit the deposit. A reported Alberta appellate decision applying this clause to a specific set of facts was not located for this article; the common law rule from Dobson v. Winton, recognized across Canada, still applies in Alberta as a general matter.

The tax bill that follows a forfeited deposit

A forfeited deposit is not simply “kept” tax-free. If the seller is a GST/HST registrant, section 182 of the Excise Tax Act deems a taxable supply to have occurred at the moment of forfeiture, meaning the seller is treated as having collected GST/HST on that amount, according to CRA GST Memorandum 300-6-8. Separately, for income tax purposes, the CRA’s Income Tax Folio S3-F9-C1 treats the retained deposit as proceeds from disposing of contractual rights: a capital gain if those rights were capital in nature, or ordinary income if the rights were of an income nature. Both rules are federal and apply the same way in Ontario, Alberta, and every other province.

A worked example

A buyer in Ontario signs an agreement of purchase and sale with a $50,000 deposit and a financing condition expiring on day 10. If the buyer notifies the seller within that window that financing fell through and properly does not waive the condition, the deposit is returned in full under the standard condition clause described in RECO’s bulletin. Now change the facts: the financing condition is waived, the agreement makes time of the essence, and the buyer simply fails to close on the agreed date. Under the reasoning in Kassar Homes, the $50,000 is forfeited to the seller, and under Dobson v. Winton, the seller may still sue for any further loss on resale above that amount.

Common mistakes

• Assuming forfeiture is automatic no matter what. In Ontario, a court can order the deposit returned if forfeiting it would be disproportionate to the seller’s actual loss and unconscionable, per Mouralian v. Groleau; the forfeiture clause is not immune from review.
• Thinking getting the deposit back settles everything. Datta v. Eze confirms an Ontario buyer who already received the deposit back can still be sued, or can still sue, for further damages arising from the same failed deal.
• Believing the brokerage can just hand the money to whoever asks. In Ontario, a brokerage holding a deposit in trust needs either a mutual release or a court order before it can release the funds; it cannot decide unilaterally.
• Treating “time is of the essence” as flexible. Kassar Homes shows an Ontario buyer can lose the entire deposit over a closing delay of minutes when the contract makes time of the essence.
• Forgetting the tax consequence. A seller who keeps a forfeited deposit may owe GST/HST on it under section 182 of the Excise Tax Act, and may have to report it as a capital gain or as income, depending on the nature of the rights under the contract.