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Trust Account Operation

What goes into the mixed trust account?
Generally, all funds received from, or on behalf of, or in trust for, a client must be deposited immediately into a trust account. See section 7(2) of By-law 9. This includes settlement funds to be held pending completion of conditions, funds received by a lawyer pursuant to an escrow agreement or deposits received from a purchaser under an agreement of purchase and sale, and retainers for future legal services or future disbursements or for legal services not yet billed to the client. Similarly, Legal Aid Ontario payments to reimburse a lawyer for disbursements that have not yet been paid (as distinguished from incurred) go into trust.

As outlined by rule 3.2-7.3 of the lawyers' Rules of Professional Conduct and subrule 3.02(6) of the Paralegal Rules of Conduct, a lawyer or paralegal is prohibited from using his or her trust account for purposes not related to the provision of legal services. Money that is not held by you in your capacity as a lawyer or a paralegal must not be deposited to your trust account. Examples of this type of money would include: a "float" to cover possible bank errors, funds collected from staff for firm charitable events or for coffee supplies, funds that you hold as treasurer for a club or organization, rent or mortgage payments owed to you personally, or funds that are essentially investments for you or your family.
May I deposit my clients' money retainers into the firm's general account?
No. If the client is providing a money retainer for fees for which you have not yet billed the client, or for disbursements which you have not yet incurred, sections 7(1), 7(2)(d) and 7(2)(e) of By-law 9 require that you pay the funds into your trust account. A money retainer for fees and/or disbursements is money held for future legal services or disbursements on behalf of a client or for legal services performed but not yet billed. Note that money retainers are distinguished from other types of payments. Client payments of your accounts for services rendered and billed, or reimbursement of disbursements which you have properly expended on behalf of the client, belong to you and must be deposited directly into your general account and not your trust account.
May I leave the GST/HST and LawPRO® levies in my trust account after billing the client?
No. GST/HST collectible and LawPRO^® transaction levies are not considered client trust monies. Because these amounts are liabilities of your firm, and not the client, they should be drawn from your trust account when billed to the client. You may transfer these funds to a separate interest bearing general account until they are payable if you are concerned about having sufficient funds available when the GST/HST and LawPRO^® levies are due. However, money for future expenses, such as registration fees, are client funds and must remain in the trust account in the client's name until disbursed.
May I open a "miscellaneous" or "sundry" ledger to deal with small amounts I am holding in trust for clients?
No. All trust funds that you receive from clients must be recorded separately in each client's name in the client trust ledger, regardless of the amount of funds provided. Furthermore, it is not proper to use a single trust ledger account (opened as "miscellaneous", "sundry" or in the name of the firm) to record transactions relating to different clients. To ensure that monies relating to one client are not misused to the benefit of another, section 18(3) of By-law 9 requires you to maintain a separate client trust ledger account for each client.
What do I do if my financial institution informs me that a client's cheque has been returned "NSF"?
The financial institution will debit your trust account to reflect the amount of the NSF cheque. This is acceptable. However, you should ensure that any service charges that result are not deducted from the trust account. Either instruct your financial institution to debit the service charge from your general account directly or transfer the amount of the service charge from your general account to your trust account. As with all service charges, they should come from your general account. 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 need not report the transaction to the Law Society.

If you have disbursed funds from your trust account based on a client's cheque that you subsequently learn was returned NSF, you will need to discuss the matter with the payee 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 money 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.

You should be careful not to draw on a client's funds held in your trust account until you know the client's cheque or credit card payment has cleared. Check with your financial institution before disbursing funds to confirm the appropriate clearance periods that should be applied.
When may I transfer funds from the trust account to my general account to reimburse myself for fees or disbursements owed by the client?
Per rule 3.6-10 of the lawyers' Rules of Professional Conduct (lawyers' Rules) and subrule 5.01(5) of the Paralegal Rules of Conduct (Paralegal Rules), neither lawyers nor paralegals may appropriate any funds of the client held in trust, or otherwise under the control of the lawyer or paralegal, for or on account of fees except as permitted by the by-laws under the Law Society Act.

Per By-Law 9, the requirements to withdraw funds from trust to pay fees for legal services or for disbursements are different. Disbursements can be paid directly from trust, upon the client's instruction or consent, as they are expenses incurred on the client's behalf. However, a lawyer or paralegal may pay his or her fees from trust only if
- he or she has completed the legal services for which the fee is being charged
- he or she has sent a bill or statement of account to the client, and
- there is sufficient funds in trust to the credit of the client available for the payment of the fee being charged
If all services relating to the file have not yet been completed, an interim bill that reflects services performed and disbursements paid to date can be prepared and delivered to the client (i.e. it is not sufficient to merely place the interim bill in the client's file). If a fee bill is delivered to a client personally, the lawyer or paralegal should consider having the client sign and date the file copy to establish its delivery.

In addition, lawyers and paralegals should not withdraw funds from trust to pay themselves for fees or reimburse themselves for disbursements if the money is earmarked for some other purpose, such as settlement funds provided by your client in anticipation of payment to a third party or proceeds from the sale of property that you have agreed to hold until certain conditions are met.
When and with whom may I share a trust account?
Section 7(1) of By-law 9 states that trust monies must be deposited immediately into an account, designated as a trust account, "in the name of the licensee, or in the name of the firm of licensees of which the licensee is a partner or by which the licensee is employed."

In a ruling in June 1985, affirmed by the Chair of the Committee in April 1995, the Discipline Policy Committee ruled that lawyers may not hold a trust account in the name of a "firm" or entity which is not a true partnership. The ruling was based on the decision in Re: Ontario Securities Commission and Greymac Credit Corp.(1985), 51 O.R.(2d) 212 (H.C.J.), affirmed (1986), 55 O.R.(2d) 673 (C.A.), affirmed (1988), 65 O.R.(2d) 479 (S.C.C.) which held that shortages in pooled funds are to be pro rated amongst the persons beneficially entitled to funds from the account. The Greymac case was affirmed by the Ontario Court of Appeal in The Law Society of Upper Canada v The Toronto Dominion Bank (1998) 169 D.L.R. (4th) 353 which held that co-mingled trust funds in a mixed trust account lose their identity with respect to a particular client.

Sharing of trust accounts places clients at risk of misapplications or misappropriations of trust funds by a lawyer or paralegal with whom the client may not have any professional relationship. In order to protect your clients' funds in trust, section 7 of By-law 9permits you to share a trust account with another licensee only if he or she is your partner, or if you and the other licensee are in an employer-employee relationship. You may not share a trust account with a non-licensee.

If you are a sole practitioner who shares facilities and practises law or provides legal services "in association" with other licensees, you must not share a trust account. You must maintain your clients' trust funds in a trust bank account in your own name as required by By-law 9. If your firm is a limited liability partnership (LLP) or a professional corporation, this should be included in your firm's name on the trust bank statement along with an indication that it is a trust account.
I am changing financial institutions for my trust account. What are the steps involved?
Once you have opened the new trust account at your chosen financial institution, assuming that you have ensured that it fulfills the requirements of By-law 9, you should discuss with a representative of that institution the methods available for you to transfer the full balance from your existing trust account to your new trust account. These may include writing a trust cheque for the full balance from the original account, made payable to you or your firm in trust and deposited to the new account or an electronic or wire transfer of the full account balance from one financial institution to the other. You should discuss the clearance periods that will apply to each type of withdrawal and deposit and the supporting source documents that will be generated by each, both from the originating financial institution and the receiving one.

Prior to transferring funds from the original trust account to the new, you must ensure that any trust cheques drawn on the account have been cashed. If not, you must wait until the outstanding cheques have cleared before transferring the full balance, or ensure that sufficient funds remain in the original trust account to cover the outstanding cheques while transferring the remaining balance. It may also be possible to arrange with an individual payee for the return of any outstanding cheque so that you may provide a replacement cheque drawn on the new trust account.

Once the original trust account is at a zero balance, you may instruct the financial institution to close the account, and should request written confirmation of the closure. In addition, you will need to inform the Law Society of Ontario that the new mixed trust account has been opened and that the original trust account has been closed. See Report on Opening or Closing a Trust Account.

Where you are transferring trust funds from one named trust account to a trust account in the same name at the new financial institution, client authorization and direction to transfer the funds is not required. However, where you are transferring the trust account balance from one institution to another as a result of a change in your business name or structure (e.g. your sole proprietorship has become a professional corporation, or you have formed a partnership), where the name of the new trust account may be different, individual client authorization and direction may be required.

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