G. Trust Accounts

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 242-244

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Trust accounts, in which funds are held in trust explicitly for a third party to the bank and customer account agreement, are opened for

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many purposes by various categories of trustees: insolvency or receivership; by legal guardians of infants or others who lack legal capacity; by trustees themselves; by estate trustees; or by one or more individuals holding funds on behalf of an unincorporated association or community group; a religious organization; or some other person pursuant to a private arrangement for which no formal legal documentation is available. By opening a trust account, the bank is told, ipso facto, that the customer is a trustee, but the bank does not otherwise become involved, and from the bank’s perspective, the customer operates the account like any other account. The customer is the trustee, not the bank, and the bank assumes that there is compliance with the trust in the operation of the account.

The Bank Act expressly prohibits banks from engaging in fiduciary activities such as being trustees directly⁹⁸and further provides that a bank is not bound to see to the execution of any trust, whether express or arising by operation of law, to which any deposit under the Act is subject.⁹⁹

Nor is a bank bound to see to the execution of any trust of which it has notice if it acts on the order of the holder of the account into which deposits are made.¹⁰⁰Prima facie, a bank is statutorily exempt from any liability for breach of trust by a trustee, whether the funds are held in trust in a trust account or in any other account and for trust funds. This exemption codifies the earlier common law, which held that a bank is not prima facie responsible for ensuring that funds are properly applied within the terms of a trust, when it knows that funds are held in trust or in a trust account.¹⁰¹

However, as discussed earlier,¹⁰²while banks are not liable for breach of trust by a trustee, when they have notice of the existence of a trust or open a trust account, they may themselves become constructive trustees for a third party in relation to funds deposited in an account not designated as a trust account. As a constructive trustee, a bank is required to hold the funds for the third party and not allow them to be used for some other purpose, although they are not obliged to carry out the trust purposes. Suspicious circumstances may result in a duty of inquiry in respect to funds and liability to the true owner or...