Running a law firm means running a trust account, and the Law Society watches it closely. We work with lawyers and law corporations across BC, Alberta, Saskatchewan, Manitoba, and Ontario on trust compliance, incorporation, and tax, many of them remotely.
Key takeaways
- BC law firms must prepare a trust reconciliation every month, within 30 days of the reconciliation date, matching the bank, the books, and the client trust ledgers.
- Every practising lawyer files an annual trust report within three months of period-end, and in defined situations it requires an independent CPA Accountant’s Report.
- A law corporation pays about 11 percent on the first $500,000 of active income, and about 27 percent above.
- Because a law corporation is a professional corporation, the usual dividend-splitting route with family is limited by the tax on split income rules.
Trust accounting is where the risk lives
Client trust money must be held in a designated trust account, kept separate from the firm’s own funds, and never used to cover operating costs. The Law Society Rules set out how it is recorded and reconciled. The parts that catch firms out:
- A monthly three-way reconciliation, prepared within 30 days, comparing the trust bank statement, the trust books, and the list of client trust ledger balances, with a written explanation of any difference.
- Trust transactions recorded promptly, not left to month-end.
- Any trust shortage corrected immediately, and a significant shortage reported to the Law Society.
Why this matters: trust compliance is not a tax question, it is a licence question. A clean, on-time reconciliation each month is the cheapest insurance a practising lawyer can buy, and it is the work we do quietly in the background so it is never a scramble at reporting time.
Your annual trust report, and when you need a CPA
Every practising lawyer files a trust report each year, within three months of the firm’s reporting period end. One report is filed per firm, and a lawyer who holds no trust account still files to confirm that.
The report is either a self report or an Accountant’s Report. An independent CPA has to complete a defined section of the Accountant’s Report in specific situations, such as the first years after a trust account is opened, when a practice is wound down, or where past compliance fell short. Preparing that report, and getting the trust records ready for it, is a core part of what we do for law firms.
Should you incorporate your practice?
A lawyer can practise through a law corporation, but only with a permit from the Law Society, and the ownership rules are strict.
- All voting shares, all directors, and the president must be practising lawyers.
- Non-voting shares can be held by the lawyer, family members who reside with them, or family holding companies and trusts.
- The corporate name must include the words law corporation, and it must meet the marketing rules in the Code of Professional Conduct.
The permit lapses if the sole voting shareholder stops being a practising lawyer, so the structure has to be maintained, not just set up once.
How incorporating is taxed
| On | Rate |
|---|---|
| Active income up to $500,000 (BC CCPC) | about 11% (9% federal + 2% BC) |
| Active income above $500,000 | about 27% (15% + 12%) |
The benefit is deferral: income left in the corporation is taxed at about 11 percent instead of your personal rate. Two points specific to lawyers:
- Income splitting is limited. A law corporation is a professional corporation, so the excluded shares route used by other business owners to pay dividends to a spouse is not available. Splitting works only where a family member genuinely works in the practice, within a defensible reasonable return, or once you reach 65.
- Legal services are taxable for GST. Unlike medical or chiropractic services, legal fees carry GST once your revenue passes $30,000, and you register, collect it, and claim input tax credits on your costs. Disbursements and trust flows are handled separately.
Selling or winding down a practice
On a sale of qualifying shares, the lifetime capital gains exemption can shelter up to $1,275,000 of the gain for 2026, subject to the asset and holding-period tests. Whether your shares qualify usually needs attention well before a sale, and a practice wind-down also triggers a final trust report.
Common questions
How often do I have to reconcile my trust account in BC?
Every month. The reconciliation must be prepared within 30 days of the reconciliation date and must match your trust bank statement, your trust books, and your client trust ledger balances.
Do I need a CPA for my trust report?
Not always. Many lawyers file a self report. An independent CPA must complete part of an Accountant’s Report in defined situations, such as the first years after opening a trust account, on winding down a practice, or where compliance has been an issue.
Can I incorporate my law practice?
Yes, with a law corporation permit from the Law Society. All voting shares, directors, and the president must be practising lawyers, and the name must include the words law corporation.
Can I pay my spouse dividends from my law corporation?
Only within limits. A law corporation is a professional corporation, so the excluded shares exception does not apply. Paying family generally requires them to work in the practice, a reasonable return on their shares, or the age-65 rule.
Do lawyers charge GST?
Yes. Legal services are taxable, so once your revenue passes $30,000 you register for GST, charge it on fees, and claim input tax credits on your costs.
Work with a firm that understands trust accounting
We keep the trust reconciliations current, prepare the annual trust report, complete the Accountant’s Report when it is required, and handle the corporate tax and GST. Offices in Abbotsford, Langley, and Brampton, serving lawyers across Canada. Call 778-779-4212 or use the form below.
General information only. Talk to us about your situation.