Is your money safe with a lawyer? Trust accounts, compensation funds and insurance in Canada

Money you give a Canadian lawyer in advance, such as a retainer deposit, settlement funds or the purchase price for a house, must be held in a trust account that is regulated, recorded and audited under law society rules. If a lawyer steals client money, every law society runs a compensation fund (in Quebec, the Barreau's indemnity fund) that can reimburse clients, usually up to a limit per claim and after an investigation. If a lawyer's negligence causes you a loss, mandatory professional liability insurance in each province is the usual source of compensation. These protections apply to licensed lawyers and, in Ontario, licensed paralegals. They do not protect you if you deal with someone unlicensed.

This guide is part of the costly mistakes guide.

Three layers of protection

Limits and rules change. Check your law society's website for the current compensation fund limits and claim process.

How trust accounts work

• Separate from the firm's money. Client funds go into a trust account at a bank or other approved institution, never into the lawyer's operating account.
• Detailed records. The lawyer must keep a ledger for each client showing every deposit and withdrawal.
• Withdrawals only for proper purposes. Money can be paid out on your instructions, for disbursements on your file, or for fees after a bill has been delivered.
• Regular reconciliation and filings. Lawyers reconcile trust accounts monthly and file annual reports with the law society.
• Spot audits and investigations. Law societies audit trust accounts and investigate irregularities.

For how a deposit is drawn down against invoices, see retainers and trust deposits.

When compensation funds pay

Compensation funds generally cover losses caused by a lawyer's dishonest conduct, such as taking trust money for personal use. They are usually not for:

• Disputes about the amount of a fee.
• Negligence without dishonesty (that is for liability insurance).
• Business investments made with a lawyer acting as a business partner rather than as your lawyer.
• Losses from dealing with someone who was not licensed.

Claims usually have to be made within a time limit after you discover the loss, and the fund may require you to pursue other sources first. Payments are often discretionary and capped.

Worked example (illustrative)

A client deposits $40,000 in trust for a real estate transaction. The lawyer diverts the money and the transaction fails.

1. The client reports the loss to the law society immediately.
2. The law society investigates and may take control of the lawyer's practice and trust accounts through a trustee.
3. Any money still in the trust account is distributed to the clients entitled to it.
4. The client claims against the compensation fund for the shortfall. If, say, $10,000 was recovered from the account, the claim is for $30,000.
5. If the fund's limit per claim is above $30,000 and the claim is accepted, the client may be reimbursed; if the limit is lower, the client recovers up to the limit and may pursue the lawyer personally for the rest.

Title insurance or the other side's lender may also be relevant in real estate cases. Ask independent counsel.

Negligence: the liability insurance route

If your lawyer missed a limitation period, gave clearly wrong advice or made a serious error in documents, and you lost money as a result, your claim is a negligence claim against the lawyer. Lawyers in private practice in Canada are generally required to carry professional liability insurance through their province's program. In practice:

• Notify the lawyer in writing that you believe a mistake was made; they must report it to their insurer.
• Get independent legal advice; a lawyer who did not act on the original matter can assess the claim.
• Watch the limitation period, which in most provinces is two years from when you discovered the loss, and three years in Quebec for many claims.

Warning signs about trust money

• Requests to send a deposit to a personal account or by a method that bypasses the trust account.
• No receipt or trust statement after you pay.
• Long delays in paying out settlement funds without explanation.
• Being told funds are "tied up" with no documentation.
• A lawyer proposing that you invest in their own business, or lend them money.

If you see these signs, ask for a written trust statement. If you do not get one quickly, contact the law society.

Frequently asked questions

Does deposit insurance cover money in a lawyer's trust account?

Trust accounts at member institutions may have special deposit insurance treatment for the beneficiaries of the trust, subject to conditions. This protects against the failure of the bank, not against theft by the lawyer. Ask the institution or the Canada Deposit Insurance Corporation for details.

Who gets the interest on my trust money?

In pooled trust accounts, interest generally goes to the provincial law foundation, which funds legal aid and public legal education. For large sums held long-term, you can ask for a separate interest-bearing account.

Are notaries in Quebec covered?

Yes. The Chambre des notaires du Québec regulates notaries' trust accounts and runs its own indemnity fund and liability insurance program.

How do I find out if my lawyer has been disciplined for trust issues?

Check the law society directory and published discipline decisions, which law societies post online and which are often also on CanLII.

Sources

• Law Society of Ontario — Compensation Fund, trust accounting and By-Law 9
• LAWPRO — professional liability insurance for Ontario lawyers
• Law Society of British Columbia — trust assurance and the Lawyers Indemnity Fund
• Barreau du Québec — indemnity fund and trust accounts
• Chambre des notaires du Québec — notaries' trust accounts and indemnity fund
• Canada Deposit Insurance Corporation — deposit insurance for trust deposits