Trust Accounting · 4 min read
How do I run trust accounting under LSO By-Law 9?
To run trust accounting under Law Society of Ontario (LSO) By-Law 9, a licensee must maintain a separate trust bank account and keep meticulous records including trust receipts, journals, and a client trust ledger. All transactions must be recorded promptly, and monthly reconciliations are required to ensure the trust balance matches the bank records and the total of individual client ledgers.
Foundational Requirements for Trust Accounts
Under By-Law 9, the Law Society of Ontario requires every licensee who receives trust money to maintain a trust account in a chartered bank, provincial savings office, or credit union. This account must be clearly designated as a trust account and kept entirely separate from your firm's general operating account. Trust money includes any funds received on behalf of a client, such as retainers for future services, settlement funds, or filing fees for the Small Claims Court or Landlord and Tenant Board. It is a fundamental rule that you must never commingle your own funds with client trust money, nor can you use one client's trust funds to pay for another client's expenses.
When you receive trust money, you must deposit it into the trust account immediately or, at the latest, by the next banking day. Every deposit must be documented with a receipt that includes the date, the name of the person from whom the money was received, the amount, and the name of the client to whom the funds relate. Maintaining these records is not just good practice; it is a regulatory requirement that protects both the practitioner and the public. Practice management tools like DocketPro can assist in documenting these entries as they occur, reducing the risk of administrative oversight.
Essential Record-Keeping and Journals
By-Law 9 is specific about the types of records a firm must maintain. The most critical documents are the trust receipts journal, the trust disbursements journal, and the client trust ledger. The journals act as a chronological record of every cent moving in and out of the trust account. The client trust ledger, however, is organized by client matter. It shows the balance held for each individual file, ensuring that you never accidentally spend more than what is available for a specific client.
In addition to these, you must maintain a record of all transfers between client trust ledgers. If you are moving funds from one file to another for the same client, the paper trail must be clear and justified. Keeping these records updated in real-time is essential. Waiting until the end of the month to record transactions often leads to errors that are difficult to trace during a Law Society audit. Regular data entry ensures that your books are always 'audit-ready.'
Disbursements and Form 9A Requirements
The Law Society of Ontario strictly regulates how money leaves a trust account. You cannot withdraw trust money unless there are sufficient funds held for that specific client. When paying your firm for services rendered, you must first issue a bill to the client. Only after the bill is sent can you transfer the funds from the trust account to your general account.
Electronic transfers are now the standard, but they come with specific requirements. For every electronic trust transfer, you must complete a Form 9A (Electronic Trust Transfer Requisition). This form requires details such as the date, the amount, the name of the recipient, the client file number, and the reason for the transfer. You must also obtain a confirmation from the bank that the transfer was completed. These forms must be signed by a licensee and kept in your records. Automating the generation of these details through practice management software can significantly reduce the time spent on manual paperwork while ensuring compliance with LSO standards.
The Monthly Reconciliation Process
One of the most common areas where Ontario practitioners face issues during LSO audits is reconciliation. By-Law 9 requires that you perform a trust reconciliation every month, within 25 days of the end of the previous month. This process involves three steps: reconciling the trust bank statement to your trust journal, comparing that balance to the total of your client trust ledger, and preparing a detailed list of any outstanding cheques or deposits.
The 'triple reconciliation' is the only way to prove that your books are accurate. If the bank balance, the journal balance, and the sum of the individual client ledgers do not match, you have a 'trust shortage' or an 'unreconciled difference' that must be investigated and corrected immediately. Reporting any trust shortages to the Law Society is often a requirement if they cannot be rectified within a very short window. Regular monthly reconciliations are your best defense against errors and potential disciplinary action.
Avoiding Common Compliance Pitfalls
Even the most diligent paralegal or lawyer can make a mistake, but how you handle those mistakes matters to the Law Society. If you discover you have accidentally paid a filing fee from the wrong client's trust ledger, you must correct the entry and document the correction clearly. If a trust account is overdrawn—even by a few cents—this is considered a trust shortage.
Properly managing your trust account also involves managing your general account. You should never use the trust account to pay for office overhead, staff salaries, or personal expenses. All trust money must eventually be paid out to the client, paid to a third party on the client's behalf, or earned by the firm and transferred to the general account. If you have small balances left in trust for clients you can no longer locate, you must follow the LSO procedures for unclaimed trust funds rather than simply absorbing the money into your firm's revenue.
The bottom line
Compliance with LSO By-Law 9 requires maintaining separate journals and ledgers, completing Form 9A for electronic transfers, and performing a triple reconciliation every month to ensure client funds are handled accurately.
Information only. This article is general information for Ontario legal professionals and is not legal, accounting or other professional advice. Confirm current requirements with the Law Society of Ontario, the relevant court or tribunal, or a qualified advisor before acting.