Over the course of a project, owners and contractors are often responsible for the handling of trust monies as a result of The Builders Lien Act, Saskatchewan. As a trustee, it is vital to be aware of the issues that can arise when trusts monies are maintained in accounts containing trust monies from other projects, and/or non-trust monies.
A common scenario can occur after an owner transfers money to a general contractor. A portion of this money is held in trust by the general contractor (the trustee) for the benefit of the sub-contractors (the beneficiaries). The purpose of the trust is to protect the sub-contractor’s interests. If the same general contractor is working on multiple projects at the same time, it likely that the general contractor is holding trust monies in relation to each project, and for a number of different sub-contractors. In some cases, the general contractor may choose to hold the trust monies from each project in a single account, mixed together. Once this occurs, it can be said that the trust funds have been “co-mingled”.
The issue associated with co-mingling trust funds from different projects is that it can become impossible to differentiate and trace what money is held in trust for each beneficiary/project. As a result, the funds can lose its “trust status”, with the result that the trustee becomes liable. Such a scenario creates several questions worth considering.
How is trust status lost?
Trust monies will lose trust status if there is no longer certainty of subject matter. Although there is some authority for the view that any amount of co-mingling will result in an account losing its “trust” status (Royal Bank of Canada v. Atlas Block Co. Limited, 2014 ONSC 3062), the prevailing view is that funds will maintain their trust status as long as the relevant funds remain traceable. In other words, the co-mingling of trust money with other money can destroy the trust’s certainty of subject matter, but only where co-mingling makes it impossible to identify or trace the trust property (Kel-Greg Homes Inc, Re, 2015 NSSC 274 [Kel-Greg]).
On this basis, co-mingling of trust funds does not, by itself, automatically cause trust money to lose trust status (0409725 BC Ltd, Re, 2015 BCSC 1221 [0409725 BC], at para. 15). Instead, co-mingling is a risk because it makes it more difficult to differentiate and trace the money from each project. Once the funds are no longer traceable, the money will lose its trust status. Overall, whether funds are sufficiently traceable and identifiable will depend on the particular facts of each case (Kel-Greg, at para. 59).
What are the risks when trust monies lose trust status?
When trust monies lose trust status, several risks can arise.
For example, when a corporation goes bankrupt, its assets become divisible amongst its creditors. However, funds held in trust are not the property of the bankrupt, and are generally exempt from being seized by the bankrupt’s creditors (Royal Bank of Canada v Atlas Block Co. Limited, 2014 ONSC 3062, at para. 47; The Guarantee Company of North America v Royal Bank of Canada, 2019 ONCA 9, 144 OR (3d) 225 [Guarantee], at para. 103). If a general contractor were to go bankrupt, any trust monies held on behalf of sub-contractors would generally be exempt from the bankruptcy proceedings. However, if the trust monies were co-mingled to the point that trust status was lost, the protection afforded in bankruptcy might be lost as well because the monies would no longer be trust monies. Consequently, funds that are no longer designated as “trust” funds, could be at risk of being seized by a trustee’s creditors in bankruptcy. If this were to occur, the sub-contractors (beneficiaries) would no longer be secured, and would become unsecured creditors of the bankrupt general contractor (trustee).
A second scenario could involve the flip side, in which a sub-contractor (beneficiary) declares bankruptcy. In such a scenario, the sub-contractor’s trustee in bankruptcy would be looking to seize all available assets in order to pay off the secured and unsecured creditors of the bankrupt sub-contractor. In the course of bankruptcy proceedings, it is possible that the trustee in bankruptcy would look at the “trust” account held by the general contractor because the account would contain monies owing (held in trust) to the bankrupt sub-contractor. If that account was co-mingled to the point that it had lost its “trust” status, the trustee in bankruptcy could potentially seize the entire account. The seized funds would then be used to pay off the bankrupt sub-contractor’s secured and unsecured creditors, which amount may exceed the amount owing by the general contractor to that sub-contractor. Such a result would leave the general contractor with insufficient funds and liable to all the other sub-contractors involved in the numerous projects the general contractor was holding funds in trust for in that co-mingled account.
In either case, if a breach of trust occurs, The Builders' Lien Act, Saskatchewan deems that liability extends beyond the corporate trustee (i.e., the general contractor) to every director, officer, employee or agent of the corporation who has effective control of the corporation or its relevant activities and “who assents to, or acquiesces in, conduct that he knows or reasonably ought to know amounts to breach of trust by the corporation” (s.16). The extended liability associated with breaches of trust is a factor which all affected parties should be educated on.
How to maintain a co-mingled trust account?
Notwithstanding the fact specific question of whether trust funds have lost the certainty of subject matter, a trustee should adhere to the overarching principle that funds are identifiable if it can be established that the money deposited in the account was the product of, or substitute for, the original thing (Guarantee, at para. 99). In order to do so, a general contractor acting as a trustee would be wise to maintain detailed written records respecting trust funds, which detail the amounts paid and received in the fund, as well as any transfer information. These records should be maintained separately in relation to the trust corresponding to each project.
Another option would be to maintain separate trust accounts in relation to each project. Given the lack of guidance in Saskatchewan for what is required in order for monies to be traceable, it could be the safest option.
As noted above, the question of whether funds are being properly handled is often a fact specific question. If you require legal advice or representation on the handling of project trust funds, McDougall Gauley’s Construction Law Group has a number of lawyers that can assist you.
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