Interest-Bearing Trust Accounts
The Real Estate and Business Brokers Act, 2002 (the “Act”), which came into force on March 31, 2006, contained new provisions regarding any interest generated on money held in trust by a brokerage.
Under Subsection 27 (1) of the Act, brokerages are required to deposit “all money that comes into the brokerage’s hands in trust for other persons in connection with the brokerage’s business” into a designated trust account. Sec. 27(2) and (3) further state:
27. (2) Brokerages shall fully and clearly disclose in writing to a person depositing trust money the terms on which the brokerage deposits the money, including whether the money is deposited in an interest bearing account and the interest rate that the brokerage receives on the money.
(3) Unless otherwise provided by contract, all interest on the trust money referred to in Subsection (1) shall be paid to the beneficial owner of the trust money.
Consistent with Subsection 27 (2), brokerage’s must disclose to clients and customers in writing whether their money is being deposited in an interest bearing account and what interest rate the brokerage is receiving on the money.
With respect to disclosure of the interest rate, Sec. 16 of Ontario Regulation 567/05 (GEN) made under the Act further states:
16. A brokerage that complies with section 27 of the Act through a variable interest rate account shall, on the request of a person for whom money is held in trust, inform the person of the current interest rate.
Subsection 27(3) means that unless a client or customer has agreed through contract to other arrangements, the interest received on the money shall be paid to the beneficial owner of the trust money. In a normal transaction, the beneficial owner of the trust money would be the buyer until the closing date of the transaction at which point the beneficial owner would normally be the seller.
In order to comply with the above sections of the Act and its regulations, brokerages should endeavour to ensure that the interest conditions associated with trust accounts are clearly disclosed to persons depositing money with the brokerage. Furthermore, the clearer contracts are about what happens to trust account interest, the less likely there are to be disputes between the brokerage and clients and customers about what happens to interest associated with trust deposits.
Please Note: It is not enough for a contract to state that a person will receive a particular interest rate related to their trust deposit. Contractual agreement to a specific interest payment in the absence of disclosure regarding the interest rate the brokerage’s account generates would not comply fully with Sec. 27 requirements.
The brokerage has to provide written disclosure of the interest rate the brokerage’s account generates. If there is a difference between the interest generated by the account and the interest paid by the brokerage to the beneficial owner of the trust money, then the brokerage needs to both disclose the account interest rate and obtain contractual consent to the difference in the interest the account generates and the interest the brokerage pays out with the deposit.
If for example, a brokerage’s trust account generates 3% interest annually and the brokerage intended to pay out 2% interest on a particular trust deposit, then the 3% interest rate must be disclosed and the client or customer must contractually agreed to the 2% payment.
If the brokerage has trust deposits placed in an account with a variable interest rate, it would be acceptable for the brokerage to disclose to a client or customer that the trust money is placed in an account with a variable rate (i.e. prime plus 1%) which is currently generating 4% interest. The brokerage would then need to have the client or customer’s contractual consent to the interest paid, for example 4%.
If the brokerage has its trust monies placed in an interest bearing account and cannot reach contractual agreement with a client or customer regarding the payment of interest on a particular trust deposit, then all of the interest that accrues to that particular deposit must be paid to the beneficial owner of the trust money. In a normal transaction, the brokerage would be required to forward an interest payment to the buyer at closing or disperse the interest in accordance with the buyer’s instructions.
Please note that there is no obligation under Sec. 27 of the Act for brokerages to place trust money in an interest bearing account. Brokerages, however, are required by the section to disclose in writing to clients and customers what interest terms apply to the brokerage’s account.