Source of funds verification requirements
Did you know that lawyers are now required to verify the source of client funds on real estate transactions? In 2022, the Law Society of Ontario (LSO) introduced new by-law amendments aimed at combating money laundering and terrorist financing. As a result, lawyers who are retained to provide legal services that involve financial transactions (ie. real estate deals) must now obtain information from the client about the source of funds being received, paid or transferred (subject to a few exceptions).
As a result of the new requirements, when buyers provide their lawyers with the balance due on closing, we are now required to ask a number of questions about the source of the funds and the financial institutions through which the funds were processed (see the LSO sample form in the second photo for a list of the information required). This form must be retained in the file and would have to be produced by the lawyer in case of an audit by the LSO.
So how does this impact you? Buyers must be mindful of the fact that, in most cases, their lawyer is also acting for the lender. As part of the joint retainer, the lawyer has an obligation to disclose to the lender any information that may be of a concern to the lender. This typically includes if a portion of the down payment has been gifted or loaned by a third party. Therefore, it is imperative that any such information that will be disclosed to the lawyer is also disclosed by the buyer to the lender at the outset when arranging the mortgage to avoid any issues which can potentially affect financing down the line. This is particularly important when you consider that you do not meet with your lawyer and provide them with the balance of the funds until only a few days before closing.
If you are a realtor and the Agreement of Purchase and Sale is conditional on financing - make sure that your client is aware of the new requirements at the outset when securing financing and prior to waiving the condition. For mortgage brokers - you already have to inquire about the source of the down payment, but make sure that the information obtained from the client and that is provided to the lender when submitting the mortgage application is complete and accurate, and that the client understands that it must correlate to the source of funds information that the client will ultimately provide to their lawyer before closing.
Werhun Law is a law firm located in Etobicoke serving the Greater Toronto Area. Werhun Law provides services primarily in residential and commercial real estate, mortgages, and wills and estates. If you have any questions or are in need of legal services you can contact us at email@example.com.
The information in this post is for general informational purposes only. It does not constitute legal advice and does not create a solicitor-client relationship.