Taking a deposit on a used car in Ontario: the dealer's rules, before and after the contract

Every small lot takes deposits. A customer calls on a car, likes the price, and sends $500 or $1,000 so you'll hold it until Saturday. It feels like commitment. Legally, until there is a signed contract, it isn't. This guide is the dealer's side of that money: what you can and can't do with it before the contract, what changes after, when it has to go into trust, and how to write a deposit policy that holds up when a customer changes their mind.

Before the contract: section 38 means the money isn't yours yet

Section 38 is one sentence long, and it is the rule most likely to turn a deposit into a complaint. If a customer who is not a dealer gives a registered dealer a deposit, or a vehicle as a trade-in, before entering into a contract to buy or lease, and then asks for it back before entering into the contract, the dealer shall immediately return it. Two clarifications are written into the section itself: it applies even if a different dealer ends up selling the customer a car, and even if the customer never buys anything at all.

Three things follow, and they are where small lots get caught:

• “Non-refundable” does nothing on its own. A salesperson saying it on the phone, a line on a deposit receipt, a text message: none of them is a contract to buy the vehicle, so section 38 still applies.
• Your costs don't change the answer. If you ordered parts, booked a safety inspection or turned away another buyer on the strength of a pre-contract deposit, that was a business risk you took, not a deduction you can make.
• “Immediately” means now. Not after the car sells to someone else, not at the end of the month when the books close.

A recent Ontario thread on r/legaladvicecanada shows how this plays out in practice. A first-time buyer sent a $1,000 phone deposit, was told it was non-refundable, then pulled the vehicle history report and wanted out. The dealer first said the deposit was burned because safety parts had been ordered, then refunded it within minutes once the buyer said the request was going in writing to OMVIC. Every commenter in the thread, correctly, pointed to the same thing: no signed contract, no right to keep the money. The dealer spent an hour of goodwill defending a position section 38 had already decided.

After the contract: the deposit is whatever the paper says

Once a contract is signed, section 38 stops applying and the contract takes over. OMVIC's position is that there is no cooling-off period in Ontario once a buyer signs, and that if a dealer agrees to let a buyer out of a signed deal, the dealer may claim liquidated damages and keep part or all of the deposit to cover costs such as advertising, freight and lost profit. That is a real protection, but it only exists if the contract is complete. Three requirements carry the weight:

• The deposit is on the contract. Section 40(2) pulls paragraph 17 of section 39(2) into every used-vehicle retail contract: the down payment or deposit, if any, paid by the purchaser. Paragraph 18 then shows the balance still owing.
• The delivery date is on the contract. Paragraph 7 of section 39(2), also pulled in by section 40(2), requires the date the vehicle is to be delivered or a way of determining it. That date is what a buyer measures you against if the car isn't ready.
• Every condition is on the contract. Section 40(8) requires each used-vehicle contract to include, in a clear, comprehensible and prominent manner, all restrictions, limitations and conditions imposed on the purchaser. If the deal depends on financing approval, an inspection, or a repair you promised, write it down. OMVIC's guidance on cancellations treats documented conditions (financing, mechanical inspection, repairs, insurance) as legitimate grounds for a buyer to walk away if they aren't met.

Note what isn't in that list: a regulation that lets you keep a deposit by default. If you want the right to keep some or all of a deposit when a signed buyer backs out, the contract has to say so, clearly, and the amount you keep should bear a real relationship to what the cancellation cost you. Your bill of sale is the only document that gives a deposit any staying power.

Deposits over $10,000 go into trust, all of it

Section 58(4) is the second rule dealers miss, usually because it rarely comes up on a small lot. If a registered dealer receives, from a purchaser, a deposit greater than $10,000 toward the purchase of a vehicle, the dealer shall hold the entire deposit in trust until the purchase is concluded. A $12,000 deposit means $12,000 in trust, not $2,000. The account has its own prescribed name and a monthly reconciliation requirement, both covered in the trust accounts and consignment guide.

Section 58(1) exempts dealers registered only as brokers, wholesalers, exporters, outside Ontario dealers, lease finance dealers or fleet lessors. A general dealer who also does the odd export deal doesn't get that exemption, which matters most for export buyers, who are the customers most likely to send a large deposit from abroad before the car is ready.

When you can't deliver

The reverse case is the one that reaches OMVIC's compensation fund. Section 79(3), paragraph 6 lists, as an eligible claim, a customer's demand for the return of a deposit under a contract where the dealer has not delivered the vehicle, or an alternative the customer accepts, within the time the contract requires, and the dealer has refused without legal justification to refund it or can't because of bankruptcy or insolvency. Read that from the dealer's side: a missed delivery date plus a refused refund is the fact pattern the fund exists to pay out on, and the Registrar will want to know why it happened. If the car you sold fails its safety, or the trade you were waiting on falls through, call the customer before the delivery date passes, not after.

The deposit decision table

No regulation lays this out as a table. It is the set of situations a small lot actually runs into, with the rule that decides each one.

A written deposit policy that holds up

Most deposit disputes start with a salesperson improvising. A one-page policy, the same for everyone on the lot, removes the improvising. This is the version that matches the rules above:

1. Hold, don't sell, on a pre-contract deposit. Tell the customer plainly: “This holds the car until [date]. If you change your mind before you sign, you get it back.” Saying it out loud costs you nothing section 38 hadn't already taken, and it ends the argument before it starts.
2. Don't spend money on a held car. No parts, no safety, no detailing until there is a signed contract. If the customer wants the car certified, that is a condition on the contract, not a favour on a deposit. (Remember the safety certificate's 36-day window when you schedule it.)
3. Put a date on the hold. A hold with no end date is a car you can't sell. A hold that ends Saturday at 5 p.m. is a decision point for both of you.
4. Convert the hold into a contract fast. The sooner the deposit is on a signed contract with its conditions and delivery date, the sooner it means anything.
5. Refund through the channel it came in. E-transfer back to the same address, card refund to the same card. Save the confirmation in the deal file.
6. Watch the $10,000 line. Any deposit above it goes straight to the trust account the day it arrives, not after the weekend.

A note from the lot floor

On the two lots Lot Jacket runs inside, Afghan Automotive in Toronto and Momo Cars in Niagara Falls, the deposit conversation is the one most likely to be handled by whoever happens to answer the phone. That is exactly why it needs to be written down. The customer who sends money for a car they haven't seen is the customer most likely to change their mind once they see it, and the honest answer, “until you sign, it's yours,” tends to make them more comfortable signing, not less. The deposits that cause trouble are the ones where somebody promised more than the regulation allows and then had to walk it back.

How Lot Jacket handles it

In Lot Jacket, money in and out of a deal goes in the deal's ledger rather than a notebook, and the bill of sale is generated from the same deal data, so the deposit on the contract is the deposit you recorded. The e-transfer screenshot or refund confirmation is a document like any other: scan it into the audit-ready deal file and it sits next to the contract it belongs to. Section 38 is a promise you keep at the desk; the software's job is to make sure the paper trail shows you kept it. For the trade-in side of the same conversation, see the trade-in paperwork guide.

Book a free 15-minute demo and we'll walk a deposit from the first phone call to the signed contract.

This guide is general information for Ontario used-car dealers, not legal or compliance advice. Whether you can keep any part of a deposit after a contract is signed depends on that contract's terms. Confirm current requirements with OMVIC or a qualified advisor.