Escrow is a common concept in real estate, but the way it works in Canada is different from the US. Here is a practical guide to how escrow, trust accounts, and holdbacks function in Canadian real estate transactions.
How escrow works in Canada
In Canada, the escrow function is handled by:
| Entity | Role | Regulated By |
|---|---|---|
| Real estate brokerage | Holds purchase deposit in brokerage trust account | Provincial real estate regulator (RECO, BCFSA, RECA, etc.) |
| Real estate lawyer | Holds closing funds, manages holdbacks, facilitates fund exchange | Provincial law society |
| Notary (Quebec) | Handles all closing functions including fund transfer and registration | Chambre des notaires du Québec |
There is no standalone escrow company industry in Canada. Lawyers and brokerages perform the escrow function as part of their regulated roles.
Deposit trust accounts
When you submit an offer to purchase, your deposit is placed in a trust account:
How the deposit flows
| Step | What Happens |
|---|---|
| Offer accepted | Deposit is due (usually within 24 hours of acceptance) |
| Deposit delivered | Buyer provides a bank draft or certified cheque to the listing brokerage |
| Held in trust | Deposit sits in the brokerage’s trust account — not the seller’s pocket |
| Deal goes firm | Deposit remains in trust until closing |
| Closing day | Deposit is credited toward the purchase price and released |
| If deal collapses | Deposit returned to buyer (if condition not met) or forfeited (if buyer breaches) |
Deposit disputes
If there is a disagreement about who gets the deposit:
- The brokerage cannot release the deposit without written agreement from both parties or a court order
- In Ontario, if there is a dispute, the deposit may be paid into court for a judge to decide
- Until resolved, the money stays in trust — neither party has access
Closing trust accounts (lawyer’s role)
On closing day, the buyer’s lawyer serves as the escrow intermediary:
| Function | Description |
|---|---|
| Receives mortgage funds | Lender sends mortgage proceeds to buyer’s lawyer in trust |
| Receives buyer’s closing funds | Buyer provides the balance of the closing funds (down payment minus deposit, plus closing costs) |
| Prepares closing documents | Transfer deed, mortgage registration, title insurance |
| Exchanges with seller’s lawyer | Documents and keys exchanged once funds are confirmed |
| Distributes funds | Pays seller (minus outstanding mortgage), pays real estate commissions, pays land transfer tax, pays HST (if applicable) |
| Registers title | Title transfer registered with the provincial land registry |
Flow of funds on closing day
| Source | Amount (Example: $600,000 Purchase) |
|---|---|
| Deposit (from brokerage trust) | $30,000 |
| Buyer’s own funds (balance of down payment + closing costs) | $100,000 |
| Mortgage proceeds (from lender) | $480,000 |
| Total in buyer’s lawyer trust | $610,000 |
| Disbursement | Amount |
|---|---|
| Seller’s lawyer (sale proceeds minus seller’s mortgage and commissions) | ~$545,000 |
| Land transfer tax (Ontario example) | ~$8,475 |
| Legal fees and disbursements | ~$2,000 |
| Title insurance | ~$500 |
| Adjustments (property tax, utilities) | Varies |
Holdbacks
Holdbacks are a specific form of escrow used to protect buyers (and sometimes sellers) when certain obligations must be fulfilled after closing.
Common holdback scenarios
| Scenario | Holdback Amount | Held By | Released When |
|---|---|---|---|
| Seller must complete repairs | Cost of repairs + buffer | Buyer’s lawyer | Repairs completed and verified |
| Outstanding work order or permit | Estimated resolution cost | Buyer’s lawyer | Issue resolved |
| Final walkthrough reveals damage | Repair estimate | Buyer’s lawyer | Repairs completed |
| New construction deficiencies | Varies by builder | Builder or lawyer | Deficiencies addressed |
| Lien holdback (construction) | Construction Act mandatory % | Owner or lawyer | Lien period expires (Ontario: 60 days) |
How holdbacks are structured
The holdback is negotiated before closing and documented in the closing paperwork:
- Both parties agree on the holdback amount and conditions
- The buyer’s lawyer retains that amount in trust after closing
- When conditions are met, the seller (or their lawyer) provides proof
- The buyer authorizes release
- The lawyer releases the funds
Property tax escrow accounts
Some Canadian lenders require borrowers to escrow property taxes:
| Feature | Details |
|---|---|
| How it works | Lender adds 1/12th of annual property tax to each mortgage payment |
| Where funds go | Held in a tax account managed by the lender |
| Payment to municipality | Lender pays property tax directly when due |
| Required for | Usually high-ratio mortgages (< 20% down); some lenders apply to all mortgages |
| Can you opt out? | Some lenders allow opt-out on conventional mortgages (≥ 20% down) — ask at application |
| Interest earned | In some provinces, lender must pay interest on tax account balance (rates vary) |
Pros and cons of property tax escrow
| Pros | Cons |
|---|---|
| Automatic — no missed tax payments | You lose control of the cash flow |
| Forced budgeting for large lump-sum bill | Lender may overestimate and hold excess funds |
| No risk of tax arrears creating a lien | Some lenders do not pay interest on the balance |
Escrow in new construction purchases
New construction has its own escrow mechanisms:
| Feature | Details |
|---|---|
| Deposit protection | Ontario: deposits protected by Tarion (up to $100,000 for freehold, $60,000 for condos). Other provinces have similar programs. |
| Interim occupancy (condos) | Buyer moves in before condo registration, paying occupancy fees — not mortgage payments. Purchase funds held pending registration. |
| Construction lien holdback | Mandated by provincial Construction Acts — typically 10% of contract value held for 60 days (Ontario) to protect against trade liens |
| Deficiency holdback | Builder may agree to a holdback for items on the deficiency list (PDI — Pre-Delivery Inspection) |
Canada vs US escrow comparison
| Feature | Canada | United States |
|---|---|---|
| Who handles escrow | Real estate lawyers / notaries | Escrow companies / title companies |
| Deposit held by | Listing brokerage trust account | Escrow company |
| Closing managed by | Buyer’s and seller’s lawyers | Escrow officer / title company |
| Property tax escrow | Optional (sometimes required by lender) | Very common — standard with most mortgages |
| Insurance escrow | Rare | Standard with most mortgages |
| Title insurance | Common but not mandatory in all provinces | Required by virtually all lenders |
| Regulation | Law societies and real estate regulators | State-specific escrow regulations |
Key takeaways
- Canada does not have separate escrow companies — lawyers and brokerages handle escrow functions
- Your deposit is protected in a trust account and cannot be released without your consent or a court order
- Holdbacks protect you if the seller has post-closing obligations
- Property tax escrow may be required by your lender — ask upfront if you want to manage taxes yourself
- Always use a real estate lawyer — they are your escrow agent in Canada