Monthly Trust Account Reconciliation
In light of the recent, substantial drop in interest rates, most trustees' trust accounts are no longer earning interest. Prior to this decline, interest earned on a trust account meant that there was at least one transaction per month on the account, and a bank statement was issued. Currently, however, some financial institutions do not issue a monthly statement when there has been no activity on the account. This means that trustees are not receiving a bank statement upon which to base their monthly trust account reconciliation.
Is the trustee required to complete a monthly trust account reconciliation, as instructed by Directive No. 5R4, Estate Funds and Banking, at subparagraph 4(3), even if the financial institution administering the account has not issued a bank statement due to a lack of activity on the account?
Pursuant to section 25 of the Bankruptcy and Insolvency Act (BIA), "a trustee shall, without delay, deposit in a bank all funds received for an estate in a separate trust account for each estate." When a trustee opens a trust account within a financial institution, he/she establishes with the institution details and parameters regarding the account, including fees associated with the account.
Directive No. 5R4 provides the trustee and/or administrator with instructions on how to carry out their duties with respect to the administration of estate funds. Paragraph 2 of Directive No. 5R4 "imposes upon a trustee the minimum standards for the accounting for and the proper custody of estate trust funds."
Subparagraph 4(1) of Directive No. 5R4 maintains that the trustee has a fiduciary relationship with an estate under his/her administration and, as such, has a duty to control and account for the funds under his/her administration in accordance with the BIA. Subparagraph 4(3) of Directive No. 5R4 expressly states that, "The trustee shall complete and sign the reconciliation of all trust accounts, monthly, within forty-five (45) days of the bank statement date" (emphasis added). There is no exception to this requirement, which also falls under the trustee's general statutory obligation to keep proper books and records of the administration of each estate to which he/she is appointed (subparagraph 26(1) of the BIA).
A trust account reconciliation completed by a trustee in the bankruptcy and insolvency context is a process that ensures that the trustee's records and the financial institution's records accurately reflect the amount of money in the trust account (after taking into account uncashed cheques, bank errors, posting errors, delayed deposits, etc.). A proper trust account reconciliation provides the trustee (and the Office of the Superintendent of Bankruptcy (OSB)) with some assurance that there have not been any errors in the handling of funds in the trust account. Specifically, a trust account reconciliation is completed to:
- confirm that current account balances match balances shown on the previous bank statement;
- confirm deposit transactions that occurred in the account;
- update the list of outstanding cheques; and
- avoid any fraudulent activity on the account.
Subparagraph 4(5)(a) of Directive No. 5R4 provides that "Each monthly trust account reconciliation must be supported by an original detailed monthly bank statement for each trust account, supported by cancelled cheques and deposit receipts" (emphasis added). In spite of this, the OSB is aware that some financial institutions do not automatically issue a monthly bank statement for months during which there has been no activity on the account. However, the OSB has been informed that it is possible for a trustee to request from his/her financial institution a bank statement for any month regardless of the activity on the account. Some financial institutions may charge a minimum fee for this service.
Based on the foregoing, trustees must complete a monthly trust account reconciliation for the trust account(s) opened for each estate to which they are appointed, regardless of the activity on the account(s) and regardless of their financial institution' practice with respect to issuing monthly bank statements.
Where a financial institution has a policy of not issuing a bank statement when there has been no activity on the account, the OSB expects the trustee to proceed as follows:
1. Determine if there is an option to receive monthly bank statements from the financial institution, regardless of the activity on the account. If there is a cost for doing so, the trustee may pay the fee from the estate.
2. If no option exists for obtaining a monthly bank statement, the trustee must obtain a printout of the trust account balance and reconcile that balance with the balance shown on the previous bank statement.
The OSB consulted with the Canadian Association of Insolvency and Restructuring Professionals on this issue, and they support this conclusion.
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