There is provision in the Real Estate and Business Brokers Act, 2002 for the establishment and maintenance of a Commission Trust Account. The matter of commission protection insurance is dealt with under Ontario Regulation 579/05, and basically that is the only reference. In a general way, the same regulation deals with “other property in trust” and sets out what type of records must be maintained. It does not specifically deal with the commission trust account.
The account itself is really a creature that is borne out of the insurance policy that RECO maintains with its insurer, rather than the Act. The insurer quotes a premium for certain coverage based on stolen and missing commissions. It ensures that the money is placed in trust and stays in trust. That way it can trace the money and eventually secure a Judgment to ensure its return.
This is an account held by a brokerage. The Real Estate Council of Ontario (RECO) has mandated the participation of all of its registrants in an insurance program that includes among other coverages, a “Commission Protection Insurance Policy”.
This policy is designed to safeguard registrants in the event of the theft, confiscation or mismanagement of their commission in a real estate transaction. So, if a commission is to be paid to a registrant, then it is generally protected under the insurance policy.
However, the insurance only applies if the brokerage has set up, uses and continues to maintain its Commission Trust Account. If there is no such account, then there is no insurance.
This commission protection insurance policy is designed to respond to a claim only if the commission is protected under a commission protection trust arrangement. So, the insurer here will only pay if the commission was held in trust. What that means is the trust arrangement must be satisfied just like the deposit before payment. In most cases, the funds will rank as trust funds in a bankruptcy, and eventually when distribution is made, these funds will be forwarded to the insurer.
The entitlement to the claim is an occurrence which is defined in the policy as follows:
• “….the insolvency of a registrant
• or the theft, fraud, misappropriation or wrongful conversion
• directly or indirectly by a registrant
• or present or former employee, director, officer, or manager of a registrant
• of moneys or other property
• entrusted to or received by the registrant
• in the registrant’s professional capacity”
So, the intent here is to cover all moneys advanced to a registrant in the course of trading in real estate at such time as there is an obligation to hold such funds for another registrant. It applies to trust money (entrusted) and also money that was supposed to be held in trust but was not (received).
There are several additional defined terms under the policy: commission, commission trust, and commission trust account:
a) commission – is the remuneration owing to, to be paid to, or earned by a registrant for a trade in real estate in Ontario. The obvious exclusions would be fees, appraisals, and opinions. Referrals from out of Province transactions would not be covered.
b) commission trust – means a constituted trust where all deposits and other monies received by or due to a brokerage directed to satisfy commission payable or damages or other compensation in lieu of commission and applicable HST on any trade and real estate are received and held by the brokerage in trust.
The provision goes on to confirm that the beneficiaries of the trust shall be the listing brokerage, co-operating brokerage, the listing salesperson and the co-operating salesperson. You will find this particular document contained in the standard form agreement of purchase and sale. If it is not signed, then there is no commission trust established. And, if there is no commission trust, then the policy of insurance will not respond to the loss.
c) commission trust account – means a trust account maintained at a Canadian chartered bank or trust company and designated as a “commission trust account”. The commission trust account shall be used only for the receipt and disbursement of commission trust funds, and kept separate and apart from the statutory trust account that a brokerage is required to maintain for customer funds.
The general operating requirements for the account are not onerous. The minimum books and records that should be maintained are:
1) duplicate bank deposit book,
2) cheque book with stubs attached,
3) monthly bank statements,
4) cancelled cheques, and
5) monthly written bank reconciliation.
Listing Brokerage Procedures
The operating procedures are relatively straightforward. All deposits and other monies that are directed to satisfy commission payable plus the HST shall be placed in the commission trust account.
There should be a specific written policy or trust agreement related to the operation of the account. It should specify that the beneficiaries of the trust are the co-operating brokerage, the listing sales representative and the listing brokerage.
The agreement should also deal with priorities in terms of payment:
First, the co-operating brokerage,
Second, the listing sales representative, and
Third, the listing brokerage.
No bank charges of any kind or nature whatsoever shall be charged or assessed against the account. Any charges shall be assessed against the general account. Further, this account shall not be pledged by the listing brokerage for any reason.
Monies may be received from the Real Estate Trust Account after the transaction has been closed or a third party (usually law office) in respect to commissions and HST.
Monies may only be disbursed as provided in the sequence above.
Co-operating Brokerage Procedures
When a co-operating brokerage receives commission and HST, it shall be deposited into its Commission Trust Account. Here, the beneficiaries are the referring brokerage (if any), the co-operating sales representative, and the co-operating brokerage.
There should be a specific written policy or trust agreement related to the operation of the account. It should specify that the beneficiaries of the trust are the referring brokerage (if any), the co-operating sales representative and the co-operating brokerage.
The agreement should also deal with priorities in terms of payment:
First, the referring brokerage (if any),
Second, the co-operating sales representative, and
Third, the co-operating brokerage.
No bank charges of any kind or nature whatsoever shall be charged or assessed against the account. Any charges shall be assessed against the general account. Further, this account shall not be pledged by the co-operating brokerage for any reason.
Monies may be received from another brokerage after the transaction has been closed or a third party (usually law office) in respect to commissions and GST. Monies may only be disbursed as provided in the sequence above.
Almost all real estate brokerages will maintain a commission trust account. Only very small firms will avoid this and often, they do not employ any sales representatives because their commissions are not covered under the RECO Insurance Program.
Brian Madigan LL.B., Broker