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The security Tarion, your purchasers and your municipality require, arranged so it doesn't consume your construction financing.
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Residential surety is the security a home builder or land developer posts to guarantee its obligations to homebuyers, the new home warranty program and municipalities. In Ontario it typically means surety bonds that satisfy Tarion's security requirements, excess deposit insurance that lets developers use purchaser deposits above Tarion's limits, and pay-on-demand bonds that secure subdivision, servicing and site plan obligations instead of bank letters of credit.
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Ontario home builders and developers owe security to three different parties. Tarion requires it before you sell or enrol homes. Purchaser deposits must stay in trust unless they are secured. Municipalities require it for subdivision, servicing and site plan obligations. Residential surety meets those requirements with bonds and excess deposit insurance instead of cash or letters of credit, which keeps your bank facility free for land and construction loans.
Since November 2024, Ontario's O. Reg. 461/24 lets landowners and applicants stipulate a pay-on-demand surety bond to secure municipal planning obligations. We set up the Tarion, deposit and municipal security for each project and place it alongside the builder's risk and liability coverage the project also needs. Builders who also bid public work should see our contract and commercial surety page.
Residential surety products guarantee a builder's promises to three different audiences. Each has its own rules, and most builders need more than one.
Residential surety doesn't insure the homes themselves. The building under construction needs builder's risk, and the builder's liability to buyers and neighbours needs commercial general liability.
Tarion administers Ontario's new home warranty and deposit protection. Before a builder can sell homes or enrol them, Tarion reviews the application and builds a risk assessment, then issues a notice of proposal setting out the conditions the builder must meet. Security is the most common condition.
| Term | What it means | Why it matters to the builder |
|---|---|---|
| Risk assessment | Tarion's profile of the builder after reviewing its application | The amount of security depends on the score, builder experience and home value |
| Registrar Bulletin 11 | The binding rules on taking and releasing security; versions exist for different types of construction, including 11-FH for freehold | Sets when security is released, so it drives how long your bond stays outstanding |
| Qualification for enrolment (QFE) | Tarion's approval for a builder to sell | Security is often due before QFE or at enrolment |
| Accepted security | Tarion typically accepts a surety bond or letter of credit in a Tarion-approved format, or a certified cheque if the security is $250,000 or less | A bond can keep bank lines free for land and construction financing |
| HCRA licence | Licence issued under the New Home Construction Licensing Act | Tarion requires an active licence to issue conditions and maintain enrolment |
Tarion bonds exist only in Ontario, and not every surety writes them. Underwriting looks at the builder's equity, project pipeline and experience, and the bond can often be packaged with excess deposit insurance for the same project.
Section 81 of Ontario's Condominium Act, 1998 requires a declarant to have its solicitor or a trustee of a prescribed class hold every payment for a proposed unit in trust. The money stays in trust until it is paid out under the agreement, or until the declarant provides security of a prescribed class for it. That second route is what excess deposit insurance is for: once deposits are secured, the developer can draw them to fund construction.
Tarion's own protection is a backstop with fixed limits, so deposits above those limits are exactly what excess deposit insurance has to cover.
| Home type | Purchase agreement | Tarion deposit protection |
|---|---|---|
| Condominium unit | Any date | Up to $20,000 |
| Freehold home | Signed before January 1, 2018 | Up to $40,000 |
| Freehold home, price $600,000 or less | Signed on or after January 1, 2018 | Up to $60,000 |
| Freehold home, price over $600,000 | Signed on or after January 1, 2018 | 10% of the purchase price, to a maximum of $100,000 |
Excess deposit insurance can also cover projects Tarion doesn't, such as some condominium conversions and commercial condominiums. Outside Ontario, Aviva notes that developers in British Columbia and Alberta also hold deposits in trust unless deposit protection insurance is in place, so the same product exists there under each province's rules.
Subdivision and site plan agreements require the builder to secure its obligations, traditionally with a bank letter of credit. Section 70.3.1 of the Planning Act and O. Reg. 461/24, in force since November 20, 2024, changed that. Owners of land and applicants for planning approvals may now stipulate that a surety bond meeting the regulation's requirements be used to secure an obligation the municipality requires as a condition of a land use planning approval.
| Feature | What the regulation requires |
|---|---|
| Issuer | An insurer licensed under the Insurance Act to write surety insurance |
| Credit rating | Rated at least A by DBRS, A- by Fitch, A3 by Moody's, A- by Standard and Poor's, or A- by A.M. Best |
| Default | The municipality decides, in its sole discretion, whether the principal has defaulted |
| Payment | The insurer pays the amount demanded within 15 business days of written notice, despite any objection by the principal and without raising any defence |
| Termination | The insurer must give at least 90 days' written notice, and the principal must deliver acceptable replacement security at least 30 days before termination |
| Reductions | The bond must set out how and when its amount can be reduced as work is completed |
In practice that is a pay-on-demand instrument that behaves like a letter of credit for the municipality. For the builder, the difference is that the surety's underwriting relies on your balance sheet and indemnity rather than your bank's lending limit.
| Surety bond | Letter of credit | |
|---|---|---|
| Effect on financing | Usually sits outside your bank facility, leaving it free for land and construction loans | Reduces your available credit, often dollar for dollar |
| Collateral | Set by the surety; often indemnity plus financial covenants | Often cash or a charge on assets |
| Municipal acceptance in Ontario | Applicants may stipulate a bond meeting O. Reg. 461/24 | Accepted by municipalities |
| Tarion acceptance | Accepted in a Tarion-approved format | Accepted in a Tarion-approved format |
| If it is drawn | The surety pays, then recovers from you and your indemnitors | The bank pays, then recovers from you under your facility |
Neither option transfers the risk of default away from you. What a bond changes is how much borrowing capacity the security consumes while the project is underway, which can decide how many projects a builder can carry at once.
Residential sureties use the same three tests as contract sureties, character, capacity and capital, but apply them to a development business. Expect to provide year-end and interim financial statements for the developer and its project companies, a project pro forma, construction financing terms, the status of presales, and the experience of the builder and its key people.
Every facility comes with an indemnity agreement, usually signed by the project company, the parent and often the principals personally. It obliges them to repay anything the surety pays under a Tarion bond, deposit policy or municipal bond. Our contract and commercial surety guide explains indemnity and bonding limits in more detail.
| Not covered by the bond | How to cover it |
|---|---|
| Fire, theft or weather damage to homes under construction | Builder's risk for each project or on an annual reporting form |
| Bodily injury or property damage claims from buyers, trades or neighbours | Commercial general liability with completed operations |
| Deposits above Tarion's limits | Excess deposit insurance, required before deposits leave trust |
| Theft of tools, equipment and site materials | Tools and equipment and builder's risk |
| Completed homes sitting unsold | A vacant property or completed-value policy once builder's risk ends |
| Amounts the surety pays on your behalf | Nothing: you repay them under the indemnity agreement |
A hypothetical developer is launching an 80-unit condominium in Ontario. Purchasers will pay deposits of 15% to 20% across several instalments, so deposits per unit will soon pass Tarion's $20,000 condominium limit.
If the project failed, Tarion, the deposit insurer and the municipality would each have a direct claim, and each surety would then look to the developer's indemnitors for repayment. That is why sureties study the pro forma as closely as a lender does.
Premiums are charged as a rate on the bond or insured deposit amount for the time it is outstanding. The rate follows the credit risk, set by:
Insurabiz is an independent brokerage that works only in business insurance. We set up residential surety alongside the builder's risk, liability and tools and equipment coverage each project needs.
Our post on insuring the project before it exists covers the property side of a new development.
Our claims team stays involved from the first notice.
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This page is general information, not insurance or legal advice. Coverage depends on your policy wording and the insurer. Speak with a licensed broker about your situation.
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