Since damage deposits are unlawful, it would be better if you returned that amount to the tenant as soon as possible. If the tenant is still in possession of the rental unit, you can serve the N5 notice for damage and proceed to the LTB with the L2 application if the tenant fails to follow the instructions in the notice.
As of September 1, 2021, section 88.1 of the Residential Tenancies Act allows you to file a claim with the LTB within one year from the date the tenant moved out of the rental unit. The tenant must have moved out of the rental unit on or after September 1, 2021. However, you will need to know the tenant’s new address or place of work so you can send them a copy of the documents.