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Trust Balances and Shortages or overdrafts

What Is an Overdraft?

An overdraft occurs when you do not have sufficient funds in your trust account to meet your obligations with respect to money you hold in trust for each of your clients individually. According to the definition of overdraft in the Rules, your account may be overdrawn even if your financial institution records do not show a negative balance in your trust account.
 
Prior to disbursing any money from your trust account, make sure that:
  • funds have actually been deposited or wired, and that they have cleared;
  • the withdrawal is coming from the same account where the deposit was made;
  • the funds on deposit are sufficient to cover the withdrawal;
  • the trust funds can be used for the purpose of the withdrawal (i.e. the funds are not impressed with a trust for a different purpose, there is no court order, contractual obligation or other charge prohibiting withdrawal); and
  • the withdrawal will not breach an undertaking.
 
Always review the individual client trust ledger card before issuing a trust cheque. The individual client trust ledger card must show sufficient funds to cover the cheque. You will have a shortfall if there are not sufficient funds to the credit of that particular client, or if funds deposited to your client’s credit have not cleared. In other words, you must not only ensure that your trust account is never overdrawn, you must also ensure that you never disburse funds for one specific client in excess of the funds you hold on deposit for that client. 
 
To clarify, to avoid an overdraft, you must have sufficient money to pay each client’s obligations. You should ask your financial institution to provide you with the applicable clearance periods that apply to different types of deposits. If you are certain that deposits have cleared and are careful about keeping your accounting records, you should avoid the possibility of your trust account being in an overdraft position. 

Reporting an Overdraft

If you become aware of an overdraft in any trust account, you must report it to the Executive Director of the Law Society in accordance with section 5 of the Rules. The reporting is done by sending a letter addressed to the Executive Director in which you advise of the overdraft and give a full explanation for how the overdraft occurred. The Law Society will review your correspondence and advise you as to how to proceed, and whether any further action is required.

When Do You Not Need to Report an Overdraft?

In certain circumstances, you are not required to report an overdraft. Subsection 5(2) lists these circumstances. You are not required to report a transaction that creates an overdraft if you rectify the situation within three banking days of having been made aware of the overdraft and if the overdraft is caused by:
  • a debit memo for financial institution charges or service charges;
  • an error made by the financial institution;
  • a delay caused by the financial institution in posting a cheque you deposited to the account; or
  • a cheque you deposited which is returned by the financial institution it was drawn upon.
 
Under these specific circumstances, you are not required to report an overdraft to the Executive Director. If you are in doubt as to whether to report the overdraft, it is always good practice to do so. If the Executive Director finds that the reported overdraft falls within the exception provided by subsection 5(2) of the Rules, he or she will write to you to confirm that no further action is required on your part.