Books and Records

What records does the Law Society require that I maintain for my practice?
How long must I keep my financial records for my trust and general accounts?
How often must I record transactions to keep my financial books and records "current"?
I made an error in my financial records. What should I do?
May I use my personal bank account for non-trust transactions?
What are "comparisons" and "reconciliations"? Why and when must I do them?
What are the record keeping requirements if I am a lawyer who has control of estate assets or I exercise a power of attorney for property?
My financial institution will not issue certified cheques, only bank drafts. Does this meet the books and record keeping requirements of By-law 9?
Instead of returning to me cashed cheques from my trust and general account, my financial institution provides electronic images of these. Does this meet the books and record keeping requirements of By-law 9?
What can I do if my financial institution does not return to me my cashed or certified cheques, neither in original or electronic form?
I would like to retain the financial records for my trust and general account in electronic format only, instead of printing paper records. Does this meet the books and record keeping requirements of By-law 9?  

 


  
Q:What records does the Law Society require that I maintain for my practice?

A:By-Law 9 sets out the Law Society's record keeping requirements.

Section 18 lists the minimum financial records you must keep to record all receipts and disbursements of trust and non-trust money and other property in connection with your practice. The section includes details required in these records. Detailed duplicate deposit slips should include for each item the source of funds, related client and amount. Further information on electronic trust transfer records and Teranet withdrawal forms can be found in sections 12 and 15 respectively, of By-Law 9.

Section 20 describes the additional records you must keep if you hold mortgages in trust, either directly or through a related person or corporation, and subsection 24(1) sets out the additional records you must maintain in your client file if you act for or receive money from a lender unless the transaction falls under one of the exceptions in subsection 24(2).

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Q: How long must I keep my financial records for my trust and general accounts?

A: According to section 23(2) of By-Law 9, the following records must be kept for at least ten full fiscal years, immediately preceding the most recent fiscal year:

  • Trust Receipts Journal [section 18(1)]
  • Trust Disbursements Journal [section 18(2)]
  • Client Trust Ledger [section 18(3)]
  • Monthly Trust Comparisons, including supporting trust bank reconciliations and client trust lists [section 18(8)]
  • Valuable Property Record [section 18(9)]
  • Source documents, including bank statements or pass books, cashed cheques, and detailed duplicate deposit slips for all trust and general accounts [section 18(10)]
  • Signed electronic trust transfer requisitions and signed printed confirmations of electronic transfers of trust funds [section 18(11)]

Section 23(1) of By-Law 9 requires that the remaining records be maintained for six full fiscal years, immediately preceding the most recent fiscal year:

  • Record of transfers between client trust ledgers [section 18(4)]
  • General Receipts Journal [section 18(5)]
  • General Disbursements Journal [section 18(6)]
  • Fees Journal or chronological file of copies of billings [section 18(7)]
  • Signed authorizations of withdrawals by Teranet and signed paper copies of confirmations of withdrawals by Teranet [section 18(12)]
  • Duplicate cash receipts book [section 19(1)]

Lawyers and paralegals should also consider the relevant sections of the Income Tax Act (Canada), which may impose further requirements.

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 Q: How often must I record transactions to keep my financial books and records "current"?

A: Section 22(1) of By-Law 9 requires that your financial records be entered and posted currently at all times. The Law Society has traditionally required entries to be made at least daily. However, it may be prudent to make entries and postings immediately if you electronically transfer trust funds. See section 12 of By-Law 9 for electronic trust transfer requirements.

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 Q: I made an error in my financial records. What should I do?

A: All errors should be corrected immediately upon discovery. To avoid confusion later, the particulars of the error, how it occurred, and the steps taken to rectify the error should be clearly documented. For bank errors, you should request a letter from the bank to confirm the correction and to retain that in your records. It is generally easier to get this letter immediately than at a later date. If you use an electronic accounting system, you must ensure that your reports show all entries and not just corrected ones.

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Q: May I use my personal bank account for non-trust transactions?

A: You may, but this is not recommended because there are record keeping requirements within By-Law 9 that relate to non-trust accounts. These include the requirement to

  • maintain books of original entry for non-trust receipts and disbursements (e.g. General Receipts Journal and General Disbursements Journal) [section 18(5) and (6)]
  • maintain a Fees Book or a chronological file of copies of billings that shows all fees charged to each client [section 18(7)]
  • retain bank statements/pass books, cashed cheques, including certified cheques, and detailed deposit slips for all trust and general accounts [section 18(10)]

If you use your personal account for the non-trust financial activity of your law or legal services practice, it becomes your general account for the purposes of the By-Law. You must produce the bank statements or pass books, detailed duplicate deposit slips and cashed cheques for your general account when requested to do so by the Law Society, regardless of the type of account you use for your non-trust transactions.

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Q: What are "comparisons" and "reconciliations"? Why and when must I do them?

A: A reconciliation is  a process used to ensure that your accounting records and the financial institution's records agree as to the amount of money in the trust bank account. A proper reconciliation provides you with some assurance that there have not been any errors in the handling of funds from the account as well as a measure to test the accuracy of your records. Every month, you will receive a statement from your financial institution showing all transactions processed through the account during the month, as well as the balance of funds in the account at the end of the month. You must ensure that your records agree with the bank statement, after taking into account uncashed cheques, bank errors, posting errors, and delayed deposits on the last day of the month.

Once you have reconciled your trust bank records with the trust bank statements you must then prepare a list, from your client trust ledger, of all your clients with trust balances at the end of the corresponding month and total these balances. This total must then be compared to your trust reconciliation balance. If these two amounts do not agree you must determine the reason for any discrepancy. Any client trust balances that are overdrawn must be investigated and corrected immediately.

Section 18(8) and 22(2) of By-Law 9 together require that the reconciliations and comparisons of all of your trust accounts be prepared monthly and within 25 days of the end of the period covered by the financial institution's monthly statement. The By-Law is silent with respect to the general account but it would be prudent for you to reconcile this account monthly as well to maintain proper controls over your business. For more information, see the Law Society's How-To Brief on How to Reconcile a Trust Account. A sample trust reconciliation and comparison is also available in the Law Society's Lawyer Bookkeeping Guide and the Paralegal Bookkeeping Guide.

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Q: What are the record keeping requirements if I am a lawyer who has control of estate assets or I exercise a power of attorney for property?

A: If you have control of estate assets, either as an estate trustee or estate solicitor, or have control of a client's property through the exercise of a power of attorney, you should keep proper records as you would for any trust funds and reconcile your records monthly with the bank accounts. Section 18 of By-Law 9 requires that you keep financial records for all money and other property received and disbursed in connection with your practice.

Your obligations as a trustee and as a solicitor require that you be able to account promptly to clients or beneficiaries. When handling estate assets it is prudent to keep the records in court passing form, listing original assets, capital receipts and disbursements, revenue receipts and disbursements, investments and compensation claimed.

If you are both solicitor and estate trustee, or if you perform any of the estate trustee duties on behalf of the estate trustee, you must distinguish between your services as solicitor and as estate trustee to avoid double charging the estate for the same services. If you are claiming compensation for your services as estate trustee, the case of Re: Knoch (1982), 12 E.T.R. 162 (Ont. Surr. Ct.) states that you must either have the consent of all the beneficiaries who must all be adults and not under a disability, or you must apply for court approval on a passing of accounts.

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Q: My financial institution will not issue certified cheques, only bank drafts. Does this meet the books and record keeping requirements of By-law 9?

A: Yes, but you should be aware that certified cheques provide a better audit trail for your business than do bank drafts. Originals of bank drafts are the property of the financial institution and will not be returned to your firm. You may never know when, or if, or by whom the bank draft is negotiated. Also, financial institutions often do not retain their documents beyond five years, whereas you are required to maintain your trust records and related source documents for ten full fiscal years. You should consider whether you may later require the better evidence of a negotiated certified cheque to establish when and by whom the cheque was negotiated. You should ensure that your financial institution is returning all your cashed cheques, including certified cheques.

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Q: Instead of returning to me cashed cheques from my trust and general account, my financial institution provides electronic images of these. Does this meet the books and record keeping requirements of By-law 9?

A: Section 18(10) of By-Law 9 requires that lawyers and paralegals maintain "bank statements or pass books, cashed cheques and detailed duplicate deposit slips for all trust and general accounts" for at least the ten-year period prior to the firm's most recent fiscal year end. Legible paper or electronic copies of imaged cheques, both front and back, will satisfy this requirement. Firms that choose to maintain imaged cheques in an electronic format should check with their financial institution to determine how long the images will be accessible through the financial institution's web site and if necessary, make arrangements to download the images for compliance purposes. Firms must ensure the cheque images can be printed during the ten-year retention period, if required, and that the printed images of both sides of the cheques will be legible.

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Q: What can I do if my financial institution does not return to me my cashed or certified cheques, neither in original or electronic form?

A: Section 18(10) of By-Law 9 requires that lawyers and paralegals maintain "bank statements or pass books, cashed cheques and detailed duplicate deposit slips for all trust and general accounts" for at least the ten-year period prior to the firm's most recent fiscal year end. Legible paper or electronic copies of imaged cheques, both front and back, will satisfy this requirement. You should advise your chosen financial institution of this regulatory requirement and ask for arrangements to be made so that you can meet the requirements of the By-Law. If your chosen financial institution cannot or will not oblige, you may be precluded from using that institution for your trust and general accounts.

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Q: I would like to retain the financial records for my trust and general account in electronic format only, instead of printing paper records. Does this meet the books and record keeping requirements of By-law 9?

A: Yes. Subsection 21(1) of By-law 9 allows you to maintain your financial records by manual, mechanical or electronic means. However, subsection 21(2) requires that you produce your records promptly when requested to do so by the Law Society. The Law Society recommends printing monthly reports and retaining paper copies for the required retention periods set out in section 23 of By-law 9 to avoid the problems of data inaccessibility due to computer failure, incompatible hardware and software upgrades or data corruption. You should also implement proper security, backup and purging procedures for your system.

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