Direct deposits and the Travel Industry Act

We recently had occasion to revisit a 2017 decision of the Licence Appeal Tribunal (LAT), on which we have not yet commented in these pages. It involves the way in which a TICO Registrant handles consumer money. Whether the fact situation applies to your business, the decision ought to be of interest to you.

The fact situation is applicable mainly to larger operations that seek to maximize the financial benefit of holding consumer money in trust, often for a lengthy period of time. All Registrants know that consumer money must be held in trust. Section 26 of the Regulations under the Travel Industry Act, 2002 (the “Act”) obliges a Registrant to:

• Establish Bank accounts in Ontario (subsection 1) and
• “Promptly deposit all funds received as payment for travel services into such an account” (subsection 3).

So long as the Act and its Regulations are not breached, a Registrant is free to reduce its costs of compliance and/or increase the revenue it can generate on those in-trust funds.

TICO takes exception

One Registrant sought to do so by processing credit card payments through a Bank of America branch in the US. The BOA would then transfer the accumulated amounts to the Registrant’s Ontario-based Trust Account within two banking days of receipt, as per section 27(3) of the Regulations.

TICO took exception to this process. It contended that the consumer money ought to go DIRECTLY into the Ontario-based Trust Account, and that the two-day grace period (that the Registrant was taking advantage of) was a carry-over from the 1970s, when credit cards were in their infancy and most transactions involved cheques, or even cash. It argued that the BOA account was beyond its jurisdictional reach, was not recognized by the BOA as a Trust Account, and was thus exposed to the Registrant’s creditors.

Lessons learned

No doubt, TICO took this position based on the lessons learned in the Conquest Vacations file. There, an account that TICO believed was impressed with a consumer-friendly trust was found not to be, costing the Compensation Fund more than a million dollars in claims.

Conversely, the Registrant contended that its process complied literally with all aspects of the statutory regime, and noted that even though BOA did not recognize the account as a formal trust account, the evidence indicated that it (the Registrant) treated it at all times as such.

The Tribunal found in favour of TICO, declaring the Registrant’s practice of routing credit card payments via the BOA account to be non-compliant with the Act. It did so by inserting the word “directly” into its interpretation of the s. 27(3) obligation to: “… hold all money received … for travel services in trust and … deposit all such money into the trust account within two banking days …”

Degree of clarity

This Licence Appeal Tribunal (LAT) decision brings a degree of clarity to the issue. However, the relevant wording of the Act and Regulations remains unchanged, and, as noted above, the Registrant complied literally with what that wording said, and yet was still sanctioned.

It was prior to this LAT decision that the ongoing overhaul of the Act was commenced, but passage of Strengthening Protection for Ontario Consumer Act took place some six months after this LAT decision was issued.

It may be that the review process had by then passed the point at which this issue could be addressed. Whatever the reason, it was not dealt with.

Meeting the deadline

That said, the existing Act already contains in s. 43(11) the authority for amending s. 27(3) through the overt insertion

of “directly” into it. If this is not done, another Registrant may feel emboldened to adopt the same “routing” practice that was rebuffed in the 2017 LAT decision.

When challenged by TICO, it will likely contend that if the Legislature has not inserted “directly” into s. 27(3), so many years after the LAT had to interpret its insertion, it will be clear that the Legislature does not want “directly” to be part of that section’s language.

In the absence of that key word – overtly, or by LAT interpretation – the detouring of consumer money en route to the Ontario-based Trust Account may well be legal, so long as the two-banking-day deadline for deposit is met.

Heifetz, Crozier, Law is a Toronto law firm that has for years represented all aspects of the Canadian travel industry. The lawyers at HCL also maintain a non-travel practice, covering litigation, real estate, Wills, corporate/commercial matters, etc. To contact HCL, e-mail [email protected].