Updated August 2012
This How-To Brief outlines the basics of how to open and operate a trust account.
1Assess whether your firm requires a trust account
Do I need to open a trust account?
The nature of your practice and the flow of money into your practice from your clients or third parties will dictate whether you must open and operate a trust account. This requirement is set out in s. 7(1) of By-Law 9 of the Law Society of Upper Canada's by-laws, made under the Law Society Act. If you do not receive funds from or for clients for any reason except as payment for your billed and delivered fees and disbursements, you do not need to maintain a trust account.
You are required to deposit funds to a trust account whenever you receive money
- to be held on behalf of a client
- for future disbursements
- for future or unbilled legal services
- for overpayment of your billed services
Some examples of receipts that must be deposited to a trust account include
- settlement funds to be held pending completion of conditions
- funds received pursuant to an escrow agreement
- deposits received from a purchaser under an agreement of purchase and sale
- retainers for future legal services or future disbursements
- funds received for legal services not yet billed to the client
- amounts paid by clients in excess of what was billed and owing to you (overpayments)
- Legal Aid Ontario payments received for disbursements you have not yet paid (as distinguished from incurred)
Once you receive trust funds, you must deposit them to the trust account by the end of the next banking day. In the event that a client provides you with a payment that exceeds the amount you have billed them for legal services rendered (i.e., an overpayment), you must
- deposit the full amount to your trust account
- transfer the amount that belongs to you to your general account as soon as practical
Depending on the client's instructions, you could either hold the overpayment in trust for the client for future fees and disbursements or return it to the client.
Moneys that are deposited to your trust account must be related to legal services. Subrule 2.02(5.0.3) of the Rules of Professional Conduct specifically states that when acting for a client, a lawyer shall not use his or her trust account for purposes outside of the provision of legal services.
Do not deposit funds to a trust account for any money that you receive
- as payment for completed legal services for which you have sent the client a bill
- as reimbursement for expenses you have already paid on behalf of a client
- for your benefit or the benefit of your firm
- as a general monetary retainer
This money must be deposited into your general account (By-Law 9, s. 8(2)).
What is a general monetary retainer?
A general monetary retainer refers only to an amount paid to a lawyer by a client to secure the availability of the lawyer for a specific period of time. A general monetary retainer cannot be allocated to any legal services that are rendered or will be rendered by the lawyer. Before deciding that a payment is a general retainer, you should be aware that the Law Society has established the following criteria for general monetary retainers:
- The onus is on you to establish that the retainer is a bona fide general retainer.
- A written agreement between you and your client that describes the payment as a general retainer will not be accepted as conclusive, and the circumstances surrounding the payment will be scrutinized carefully.
- A monetary retainer is deemed to be a specific retainer, which must be deposited in your trust account, where your client does not understand the nature of the general retainer agreement and intended the payment to cover specific legal services to be provided and where the total amount paid by the client, including the general retainer, is comparable to your usual fee for the services provided.
General monetary retainers are extremely rare since clients are likely to expect that any payment to their lawyer is intended to go toward payment of their legal fees.
How many trust accounts do I need to have?
Subsection 7(5) of By-Law 9 permits a lawyer to keep one or more trust accounts. Whether you open more than one trust account is dependent on the nature of your practice. There are essentially four types of trust accounts:
- Mixed trust accounts:
- The most common type of trust account in a law office is called a "mixed" or "pooled" trust account. These trust accounts hold money for more than one client.
- Interest-bearing trust accounts:
- You may receive more sizable amounts of funds from, or on behalf of a client that you will be required to hold in trust for extended periods of time. When you receive such amounts in trust, you should speak with the respective client about opening a separate interest-bearing trust account or investing the funds in an instrument with a guaranteed rate of interest. Typical separate interest-bearing accounts are passbook accounts, GICs and term deposits. You should get the client's instructions in writing, taking care that the client is not looking to you for investment or financial advice.
- Note that a separate interest-bearing trust account must not hold trust money for more than one client, otherwise it is considered to be a mixed trust account and the interest on the account must be paid to the Law Foundation of Ontario (Law Society Act, s. 57(1)).
- There may be situations where it is permissible to hold funds for more than one client in a separate trust account, such as a joint retainer. In that case, the funds are being held for more than one client in the same account to the credit of the same matter.
- If the client does instruct you to put his or her money in an interest-bearing account, consider whether the money will be required on short notice since some investments have reduced or no interest on early redemption.
- Estate and power of attorney accounts:
- If you exercise a power of attorney or have sole signing authority over estate assets as a sole estate trustee or as a solicitor with control of the estate assets, you should consider placing the estate funds in a separate bank account in the name of the estate.
- Electronic registration mixed trust bank account:
- These are special mixed trust accounts that you may set up for use with the Teraview system to pay for the registration fees and land transfer tax for electronic registrations in Ontario. There are several special rules that apply to these mixed trust accounts that are beyond the scope of this guide. For more information on these types of accounts please refer to the article “Payment of Registration Fees and Land Transfer Tax (PDF).”
What if my client requests that I invest funds in otherincome generating investments?
In these situations, s. 8(1)(a) of By-Law 9 requires you to get written instructions from your client to pay the money into a "non-trust" investment. You must still record these investments in your trust records since it is still your client's money and considered trust funds for the purposes of By-Law 9.
The same precautions that apply to separate interest-bearing trust accounts also apply to these types of investments. Since these kinds of investments are generally not guaranteed, before accepting your client's written instructions, you should ensure your client understands
- how the investment earns and pays income
- the nature of risk associated with the investment
- whether there will be sufficient funds available when the client needs them
2Investigate your options with respect to financialinstitutions
Whether you need to open a mixed trust account for all client funds, or a separate account for one client, you may only open such accounts at a restricted group of financial institutions. Subsection 7(1) of By-Law 9 requires that your trust account be at
- a chartered bank
- provincial savings office
- credit union
- a league to which the Credit Unions and Caisses Populaires Act, 1994 applies, or
- a registered trust corporation
You must ensure that the financial institution you choose for your trust account will allow you to comply with the requirements of s. 57.1 of the Law Society Act (see Step 3, below) and the record keeping requirements of s. 18(10) of By-Law 9 (see Step 7, below).
In addition, all trust accounts, mixed or separate, must be held
- in your name
- in the name of your professional corporation, or
- in the name of the firm where you are a partner or employee
A client might ask you to hold trust funds in an account that is not at one of the above-noted institutions. For example, the client could ask you to hold the trust funds in a mutual fund or investment account, neither of which meets the definition of a trust account in s. 7 of By-Law 9. As noted in Step 1 of this How-To Brief, s. 8(1)(a) of By-Law 9 requires you to get written instructions from your client to pay the money into a "non-trust" investment account other than a mixed trust account. This money must be recorded in your trust records since it is still your client's money and considered trust funds.
3Determine who benefits from the interest earned
Determining who receives the payment of interest or other income generated from trust accounts depends on the type of trust account.
For mixed trust accounts (including electronic registration mixed trust accounts), ss. 57 and 57.1 of the Law Society Act requires that you direct the respective financial institution to pay all interest to the Law Foundation of Ontario. You will have to provide the institution with a letter of direction instructing the institution to credit any interest to the Law Foundation. To avoid misunderstandings and complaints from your clients, you should ensure that all clients for whom you hold trust funds are aware that they will not receive any interest on funds held in your mixed trust account.
The Act also requires the mixed trust account to bear interest “…at a rate approved by trustees of the Law Foundation.” If the financial institution you have chosen indicates that they do not pay interest on mixed trust accounts, you should contact the Law Foundation of Ontario to ensure that the financial institution has been given approval to do this.
You are required to complete and file Form 1 (Annual Report to the Law Foundation of Ontario) with the Law Foundation by March 31 each year regarding the interest earned on your mixed trust account if you had one in the previous calendar year. This is filed with the Lawyer Annual Report (LAR) to the Law Society of Upper Canada. Lawyers can comply with this annual reporting requirement through the online LSUC Portal.
In addition, the Law Foundation requires you to complete the following forms (prescribed by O.Reg. 59/08) for any mixed trust account where applicable:
- Form 2, Reporting on Opening a Mixed Trust Account
- Form 3, Reporting on Closing a Mixed Trust Account
- Form 4, Supplementary Report on a Mixed Trust Account (to be completed upon request)
You may contact the Law Foundation of Ontario for further information on these forms.
NOTE: No service charges are to be charged to the mixed trust account, and any service charges not waived by the financial institution must be charged to your general account.
For all other trust accounts and income-generating investments held in trust, the interest (or income, if it is an investment in a money-market fund) must be allocated to the client or the party who will ultimately benefit from the funds.
When you obtain written instructions from your client to put the funds in an interest-bearing account, you should also obtain the client's Social Insurance Number, Corporation Number or Business Number. You should discuss with the client how the interest is to be allocated for income tax purposes. This is especially important where the funds being held are in dispute. You should also find out from the financial institution how much notice is required to have the funds released and whether earlier redemption will affect the interest paid.
As the trustee, you will receive a T5 supplementary income slip from the financial institution for the interest earned. You must then issue T5 slips to the recipients of the interest in accordance with the regulations of the Canada Revenue Agency (CRA). Please contact the CRA or your accountant or bookkeeper for further information on this issue.
4Anticipate the needs of clients concerning methods ofpayment
Given the changes to the way people are banking, it is essential to consider whether your clients will wish to pay for retainers, other moneys to be held on behalf of clients or even payments on account by methods other than cheque.
It is possible to accept trust moneys on behalf of clients by any of the following methods:
- bank draft or money order
- wire or other electronic (web-based) transfer
- credit card
- debit card
By providing your clients with more convenient payment options, you increase the likelihood of getting full payment for services in advance and reduce the likelihood of receiving cheques with insufficient funds. If your clients are in remote locations, they may appreciate the option to pay by credit card or by electronic transfer.
See Step 5 for additional requirements and recommendations regarding various payment methods.
5Understand your responsibilities when handling trustfunds
Part IV of By-Law 9 sets out the rules and responsibilities of members who receive and disburse trust funds on behalf of clients. Part V of By-Law 9 sets out the requirements for maintaining the specific financial records and source documents to record these transactions (records requirements are addressed in Step 7, below).
What are my responsibilities for handling money I receive in trust?
When you receive money in trust (see Step 1, above) from a client or a party on behalf of a client, you must deposit the funds immediately to a trust account at an appropriate institution (see Step 2, above) as required by s. 7(1) of By-Law 9. "Immediately" means no later than the following banking day. You can make deposits in person at the branch or by deposit at an automated bank machine (ABM).
As noted above, you may receive trust funds by any of the following methods:
- bank draft or money order
- wire or other electronic (web-based) transfer
- credit card
- debit card
For the purpose of By-Law 9, all of these methods of payment will constitute the receipt of "money."
There are special requirements that you must be aware of when handling certain types of receipts:
Cheques: Regardless of what your perception of the client's ability to pay may be, there always exists the possibility that a cheque received from a client will not clear. This may be due to a bank error, the cheque being filled out improperly or insufficient funds (NSF) in the client's account. In the case of an NSF cheque, the financial institution will debit your trust account to reflect the amount of the NSF cheque. Ensure that you record the reversal of the NSF funds in your books and records and that there is a detailed explanation for the reversal. You do not need to report an NSF transaction to the Law Society.
If you have disbursed funds from your trust account to a third party based on a client's cheque that is subsequently returned NSF, you will need to discuss the matter with that third party and arrange for a deferral of the payment or, in the event that the cheque has been negotiated, you will need to make up the funds from your own resources and recoup the payment from your client. Otherwise, the trust account will be short, and you will have, in essence, misused or misapplied funds belonging to your other clients. If you cannot correct an overdrawn client trust ledger account, you should report this fact to the Law Society.
Be careful not to disburse funds for a client matter from your trust account until you know the client's cheque has cleared. It is best to check with your financial institution before disbursing funds if you are unsure of the clearing rules. If you are unclear about your obligations under the by-law, contact the Law Society's Practice Management Helpline for guidance.
Cash: Cash payments received from your clients are subject to special rules. Sections 4–9 of By-Law 9 prohibit a lawyer from receiving or accepting cash in an aggregate amount of $7,500 or more from a person, in respect of any one client file, unless the lawyer receives cash
- from a public body, an authorized foreign bank or a bank to which the Bank Act applies, a cooperative credit society, savings and credit union or caisse populaire that is regulated by a provincial Act, an association that is regulated by theCooperative Credit Associations Act, a company to which the Trust and Loan Companies Act applies, a trust company or loan company regulated by a provincial Act or a department or agent of Her Majesty in right of Canada or of a province where the department or agent accepts deposit liabilities in the course of providing financial services to the public
- from a peace officer, law enforcement agency or other agent of the Crown acting in an official capacity
- pursuant to an order of a tribunal
- to pay a fine or penalty
- for fees, disbursements, expenses or bail provided that any refund out of such receipts is also made in cash.
NOTE: There are no prohibitions to receiving any amount of cash if the cash is for your fees or disbursements in relation to a particular client matter. If you receive cash from or on behalf of a client for any other purpose, it is best to review the by-law to see if it is permitted.
Regardless of the amount of cash received, any time you receive cash, whether in trust or otherwise, s. 19 of By-Law 9 requires you to prepare a set of duplicate cash receipts. You must provide the person paying you the cash with one copy of the receipt slip and maintain the other as part of your financial records. The slip must include the following details:
- the date on which cash is received
- the person from whom cash is received
- the amount of cash received
- the client name or any file number in respect of which cash is received
- signature of the licensee or the person authorized by the licensee to receive cash
- signature of the person from whom cash is received
Keep in mind that you are not obliged to accept cash. If a client comes to you with a large amount of cash, it is best that you direct the client to take the funds to the bank and issue a bank draft or certified cheque to you.
Credit cards and debit cards: If you accept credit or debit card payments from clients, you must make arrangements with your credit card/debit card service provider to ensure that
- payments for retainers or future disbursements are credited directly into your trust account and
- payments for your bills to clients are paid directly into your general operating account.
You cannot deposit both retainers and payments into one account and then immediately transfer the funds that do not belong in that account to your other account.
If you accept both types of payment by debit card, you will likely have to use two machines: one for your trust account and one for your general account. If your point of sale machine can be linked to both your general and trust accounts and allows you to select to which account the funds will be deposited at the time of the transaction, you must ensure that adequate training and controls are in place to ensure that retainers are properly deposited to trust while payments for services already rendered are deposited to your general account.
If permitted by your credit card service provider, you can use a manual imprint machine and deposit the vouchers through your deposit book to the appropriate bank account. As with any trust receipt, be sure to verify that the funds are properly credited to your account before you make any disbursements on behalf of the client.
You may wish to review the document "Use of Credit Cards in The Legal Practice," or contact your financial institution for additional information.
When can I disburse trust funds?
As set out in ss. 9(1)–(2) of By-Law 9, you can only withdraw funds from trust if the disbursement meets any one of the following conditions:
- for payment to a client or to a person on behalf of a client
- to reimburse you or your firm for money properly expended or incurred on behalf of a client
- for payment of fees for services performed for which a billing has been delivered
- to transfer into another trust account and held on behalf of a client
- to correct funds inadvertently paid into a trust account
- is authorized by the Law Society of Upper Canada
What are my responsibilities for handling money I disburse from trust?
Once you have ascertained that you have sufficient funds held in trust for a particular client to make a disbursement or to pay yourself for fees already billed, you may disburse trust funds by cheque, bank draft, wiring funds through your bank and Internet banking. You may not disburse trust funds from an ABM or by telephone banking since these methods do not leave an adequate audit trail. You should only withdraw funds from trust in cash if the initial retainer was paid to you by your client (or a person on behalf of your client) in cash.
Always check your clients' trust ledger to ensure you hold sufficient funds in trust for a particular client before disbursing funds for that client. You should confirm your financial institution's holding periods on funds to be sure that cheques you have deposited from clients into your trust account have cleared and will not be returned NSF.
There are special considerations that you should be aware of when handling certain types of withdrawals:
Cheques and bank drafts: You should be aware that cheques leave a better audit trail (clear documentation of the original transaction) than bank drafts. Cheques, including certified cheques, are your records and you must arrange for your financial institution to provide you with the cancelled cheques (or cheque images—both front and back) along with your bank statements each month as required by s. 18(10) of By-Law 9 (see Step 7, below).
Bank drafts are the financial institution's records. Financial institutions do not usually retain their original records for the 10-year time period that you are required to keep your trust records. Returned cheques confirm that the funds have cleared and have the endorsement details on the back. Your copy of a bank draft will not confirm any of this information, and you may have to spend time and money to obtain a copy of the bank draft from your financial institution to prove payment.
You must not issue cheques or bank drafts payable to "cash" or "bearer," and you should not withdraw cash from the trust account unless the initial retainer was received by you in cash. In the event a client has paid you a retainer in cash and wishes any unused portion of that retainer to be refunded to them, they should confirm, in writing, that the balance of the retainer was returned to them in cash and you must ensure that you retain the documentation from your institution acknowledging the withdrawal of cash, noting the name and file number of the client.
NOTE: Most financial institutions are returning only the scanned copies of cancelled cheques (cheque images) to account holders. While these cheque images are sufficient to meet the requirements of s. 18(10) of By-Law 9, you must ensure that you obtain original copies of the cheque images (both front and back of cheque) and keep them on file for the required period of time (see Step 7, below). If you choose to maintain imaged cheques in an electronic format rather than a paper copy, you should check with your financial institution to determine how long the images will be accessible through the financial institution's website and, if necessary, make arrangements to download the images for compliance purposes. Law firms must ensure the cheque images can be printed, if required, during the ten-year retention period and to ensure that the printed images will be legible.
For more information on cheque images and record keeping requirements, view the Books and Records FAQs.
Internet trust disbursements: If you disburse any funds through your financial institution's online/Internet banking system (referred to as an "electronic transfer"), you must satisfy the minimum requirements of s. 12 of By-Law 9.
The process must be initiated by a prescribed requisition form (Form 9A) to be signed by a lawyer. The Internet platform must require two persons to effect the transfer: one person (identified by a password or other means) to input the transaction details and a second person (identified by a different password) to authorize the transaction. The system must generate a confirmation of the details of the transaction which the lawyer must compare with the corresponding Form 9A to confirm that the particulars of the transaction were properly conveyed to and received by the financial institution. Consult By-Law 9 for the complete procedure.
If you are a sole practitioner and you personally enter all of the details to transfer or disburse funds from your trust account online, you are not required to have a two-person password system.
Even if you do not want to transfer funds electronically, you may want to take advantage of Internet banking to be able to view your trust account online at any time to assist you in completing your monthly trust comparisons on time.
6Establish procedures and internal controls to minimizeyour risk
Given the responsibilities you have with respect to handling trust funds, it is essential that you establish procedures to minimize the risk of significant errors or fraud from occurring. While passwords and cheque requisitions should be familiar to you, there are other procedures you should become familiar with if you employ one or more individuals in your firm. The following sections outline just a few examples of internal procedures you can use to minimize your risk. For a complete list, refer to the Law Society's Internal Control Self-Assessment Tool.
Segregation and rotation of duties
If you have more than one staff member performing record keeping and/or money handling duties, you can segregate the duties that each staff member performs in order to eliminate the associated risks of error or fraud.
For example, if the same individual who receives and processesreceipts also records and deposits payments, it is possible for thatindividual to omit the receipt of a payment (either in error orintentionally) without it being detected by you for some time. Toeliminate this risk, you should ensure that the responsibilities forreceiving and depositing payments are assigned to two separate people,especially if you receive cash in your practice on a regular basis.
It is also beneficial to rotate some tasks between staff members on aregular basis, in particular where tasks may seem mundane or routine butcritical to the integrity of your record keeping system for trust funds.Rotation also encourages individuals to cross-train other co-workers,which ensures that more than one individual knows how to perform a taskin the event of an absence by the other. For example, if only one personknows how to properly record receipts in your accounting software andthat individual takes an unforeseen leave, you may be unable to meetyour minimum record maintenance requirements.
Reconciliation and comparison of your trust account
Each firm is required to produce a monthly report that compares the firm’s total trust liability to clients, with the reconciled amount of trust funds held by the firm in bank accounts and other negotiable instruments (including GICs, mortgages and estate bank accounts). See Step 8 for further information on the trust reconciliation and comparison. You may also refer to the How-To Brief "How-To Reconcile a Trust Account."
The members of the firm are responsible for the amount of funds held in trust. If you or another lawyer in your firm with signing authority do not prepare the monthly trust reconciliation and comparison, it is essential that you review this report in detail. You should be aware of all reconciling items that appear on the report. A reconciling item is any item that causes a difference between the actual balance in your bank and the balance of your trust liability to clients (bank errors, posting errors, service charges, outstanding cheques and receipts). All reconciling items should be listed in detail, showing the amount, the date and a brief description. You should question all items that are not clearly explained and are carried on the report for more than one month. Cheques that have remained outstanding (uncashed) for over six months may become stale dated (not negotiable) and may have to be cancelled and reissued.
It is also helpful to skim through the individual client ledger accounts to identify negative (overdrawn) balances or amounts that remain unchanged for several months. Debit balance accounts should be corrected by depositing funds to the trust account as soon as the amount is identified. Unchanged balances should be reviewed to determine if the funds can be returned to the client or applied to previously issued billings.
Working for several months without a break can be stressfulregardless of where you work. While different individuals have differentneeds as far as work-life balance, it is critical that we all be given abreak to rest and regroup. Having a mandatory vacation policy can helpyou ensure that you and your staff do not suffer from job-related stressor burn-out. Increased stress or burn-out can lead to mistakes or evenapathy towards work.
Cheque signing in the event of absence
Only a member of the Law Society in good standing is permitted to have signing authority on a trust account. If a trust cheque must be issued during your absence, you cannot simply leave behind a stack of blank trust cheques with your signature to be filled in by a staff member. This would constitute an abdication of your duties as a trustee. The only option is to grant a temporary power of attorney to a member of the Law Society to sign on your behalf on your trust account. You may add a staff member who has knowledge of your matters as a co-signer on the trust account for the duration of your absence to further reduce the risk of error on the part of the member with temporary signing authority.
7Ensure that you maintain all required source documentsand financial records
Part V of By-Law 9 references all of the documents andrecords you are required to either retain or prepare with respect toyour trust account. It also sets out requirements to maintain therecords current and preserve them for a set period of time.
Note that By-Law 9 also requires that you maintain other financial records and source documents in relation to your general operating account as well as for private mortgages where you act for the lender, collect payments for the lender or hold the mortgage in trust. You can view a sample of these records in the Law Society's Bookkeeping Guide at the Sample Books and Records section.
Books and records can be maintained manually or by using accounting software. If you maintain your financial records manually, the records must be posted in ink and not in pencil.
Required trust records and source documents
||Name of Documents/Records
||Trust Cash Receipts Journal
||A book of original entry identifying each date on which money is received in trust for a client, the method by which money is received, the person from whom money is received, the amount of money received, the purpose for which money is received and the client for whom money is received in trust
||Trust Cash Disbursements Journal
||A book of original entry showing all disbursements out of money held in trust for a client and identifying each date on which money is disbursed, the method by which money is disbursed, including the number or a similar identifier of any document used to disburse money, the person to whom money is disbursed, the amount of money that is disbursed, the purpose for which money is disbursed and the client on whose behalf money is disbursed
||Client Trust Ledger
||A ledger showing separately for each client for whom money is received in trust all money received and disbursed and any unexpended balance
||Trust Transfer Journal
||A record showing all transfers of money between clients' trust ledger accounts and explaining the purpose for which each transfer is made
||A record showing a comparison made monthly of the total of balances held in the trust account (s) and the total of all unexpended balances of funds held in trust for clients as they appear from the financial records together with the reasons for any differences between the totals, as well as the records to support the monthly comparisons
||Client Trust Listing
||A detailed listing made monthly showing the amount of money held in trust for each client and identifying each client for whom money is held in trust
||A detailed reconciliation made monthly of each trust bank account
(See Step 8 for additional information on these documents)
||Bank statements or pass books, cashed cheques and detailed duplicate deposit slips for all trust and general accounts
||Signed electronic trust transfer requisitions and signed printed confirmations of electronic transfers of trust funds.
||Trust Cash Duplicate Receipts Book
||Book of duplicate receipts, with each receipt identifying the date on which cash is received, the person from whom cash is received, the amount of cash received, the client for whom cash is received and any file number in respect of which cash is received and containing the signature of the member or the person authorized by the member to receive cash and of the person from whom cash is received
Records must be kept current
Current records and timely reports are a requirement under s. 22(1) of By-Law 9. In any business environment, it is critical to have accurate financial information available at any given time. This requires that you record all transactions in your financial system as they occur, not when time permits.
Reviewing the information contained in the reports can help your firm prevent the occurrence of serious errors such as overdrawn client trust accounts and misapplied funds. Current records and reports can also provide early warning signals of any potential liquidity problems.
Preservation of records
Section 23 of By-Law 9 sets out the parameters for the retention of all source documents and reports produced by your firm. Any reports, journals, ledgers or source documents pertaining to the trust account must be maintained for a minimum of 10 years. This applies to both manual and computerized financial reporting systems.
If your system is computerized, you may have additional record retention concerns. Certain software packages may alter or delete information from your system if a client file is closed or remains inactive for a period of time. You must ensure that you gain a solid understanding of the retention capabilities of your software, perform back-up functions prior to any fiscal period closings and maintain paper copies of your books and records where possible. Your computerized system should be able to produce a copy of all original reports for the specified periods noted in this section.
Note that you may need to keep other client file information beyond the 10-year period. There is additional information available on the preservation of accounting records and client file information in the Guide to Retention and Destruction of Closed Client Files available in the Practice Resources section of the Law Society's website.
8Review the activity of the trust account on a regularbasis
As noted above, a monthly review and reconciliation of all assets you hold in trust and comparison with your client trust obligations according to your records is required under s. 18(8) of By-Law 9. Each firm is required to produce a monthly report that compares the firm's total trust liability to clients with the reconciled amount of trust funds controlled by the firm in bank accounts and other negotiable instruments (including GICs, mortgages and separate interest-bearing trust accounts). According to s. 22(2) of By-Law 9, this report must be completed each month within 25 days of the month end.
Lawyers in the firm with signing authority over the assets held in trust bear the responsibility to ensure that there are enough funds in trust to cover amounts held on behalf of clients at all given times. If the reconciliation and comparison report is prepared by someone other than a lawyer in the firm with signing authority, it is essential that you or a lawyer with signing authority review this report in detail. You should be aware of all reconciling items that appear on the report. A reconciling item is any item that causes a difference between the actual balance in your bank and the balance of your trust liability to clients (bank errors, posting errors, service charges, outstanding cheques and receipts).
Records required to prepare a reconciliation and comparison
- Trust bank statements and cancelled cheques, cheque images or bank drafts for the most recent month end and any other bank confirmations confirming the value of assets held in trust.
- Deposit books and/or other confirmations of deposits (ABM slips, teller receipts and web confirmations).
- Clients' trust ledger indicating the balance held in trust for each client or matter and detailing the trust transactions on behalf of that client or matter.
- List of any outstanding cheques (issued and posted as disbursements from trust, but have not been cashed by the payees).
- List of all other bank charges, processing errors or posting errors with basic explanations.
How to prepare the reconciliation and comparison and trust list
Essentially, the trust comparison is a comparison of
- your reconciled trust bank balance, and
- your client trust listing total.
These two amounts must be the same. This is one of the most important trust records, and you must complete it by the 25th of each month for all trust funds you held at the previous month's end. You should correct any trust shortages immediately and correct any bank or posting errors before the next month end.
To prepare the trust reconciliation:
- Check off all of the returned cheques on the trust bank statement for the previous month, noting any discrepancies in the amounts from your trust disbursement journal, and identify any cheques you have issued that have not yet cleared the bank (outstanding cheques). Be sure you are using the complete and original bank statement to do this. If you do not receive paper statements, be sure to obtain an account activity statement for your account directly from your financial institution’s website.
- List the outstanding cheques by cheque number, payee, date of issue and amount, and add up the amounts of all the outstanding cheques.
- From your deposit book, check off all deposits on the bank statement, noting any discrepancies in the amounts.
- List any deposits for the previous month, by date and amount, that are not recorded on the bank statement—these are your outstanding deposits.
- List any bank errors and/or posting errors individually by date of occurrence and provide a brief explanation. A copy of any supporting documentation, such as a bank memo, should be attached to your reconciliation.
- From the balance on the trust bank statement, subtract the amount of the outstanding cheques, add any outstanding deposits and adjust for any bank and posting errors to calculate your reconciled trust bank balance
To prepare the client trust listing:
- From the clients' trust ledger, identify any client for whom you held trust funds at the previous month end.
- List the clients' names in a logical order, with the unexpended trust balance for each client as at the previous month end.
- Include the last activity date for each client's trust balance on the client trust listing to help you monitor inactive or dormant amounts.
- Total the client trust listing.
What to look for
Once you prepare the bank reconciliation and the trust listing, compare your reconciled trust bank balance with the client trust listing total. If these two amounts are not the same, you must find and correct the discrepancy. All reconciling items should be listed in detail, showing the amount, the date and a brief description. You should question all items that are not clearly explained and are carried on the report for more than one month. Cheques that have remained outstanding for over six months may become stale dated (not negotiable) and may have to be cancelled and reissued.
When comparing the firm's trust holdings (as shown in the bank statements, passbooks, GICs, etc.) to its trust liability (as shown in the client trust listing), it is also helpful to skim through the individual client ledger accounts to identify debit (negative) balances, or amounts that remain unchanged for several months. Debit balance accounts should be corrected by depositing funds to the trust account as soon as the amount is identified. Unchanged balances should be reviewed to determine if the funds can be returned to the client or applied to previously issued billings.
A sample of a trust reconciliation and comparison and client trust listing are available in the Sample Books and Records section of the Bookkeeping Guide. For a more detailed review of the reconciliation process, refer to the How-To-Brief "How to Reconcile a Trust Account."
Statutes and Rules
- Law Society Act, R.S.O. 1990, c. L.8
- By-Law 9, Financial Transactions and Records, made under the Law Society Act
- Cooperative Credit Associations Act, S.C. 1991, c. 48
- Trust and Loan Companies Act, S.C. 1991, c. 45
- Credit Unions and Caisses Populaires Act, 1994, S.O. 1994, c. 11
- Bank Act, S.C. 1991, c. 46