Further update on provincial sales tax on legal services
January 13, 2006
This notice is provided to update the legal profession on the status of Christie v. British Columbia, the recent decision of the BC Court of Appeal respecting provincial sales tax on legal services. At this time, the order has yet to be finalized and entered. The Law Society understands that the Court of Appeal has agreed to consider written submissions from the parties as to the terms of the order. Submissions are to be concluded by Tuesday, January 17. The Law Society is not a party to the litigation and is not involved in finalizing the order. The Consumer Taxation Branch of the Ministry of Small Business and Revenue has advised on January 12 that:
- The next PST remittance date is January 16, 2006.
- After the order is finalized, the government will issue guidelines, based on the Court of Appeal decision, regarding the circumstances in which tax should and should not be collected. The guidelines will be developed in consultation with the legal profession.
- Lawyers will not be charged penalties or interest for the failure to remit amounts they are holding in trust pending publication of the guidelines.
The Consumer Taxation Branch's notice is available online at: www.rev.gov.bc.ca/ctb/Legal_Services_Provided_to_British_Columbians.htm. Assuming that it would be a relatively short time before the order would be entered and the Branch issued guidelines, the Law Society suggested that it may be prudent for lawyers to collect the tax and hold it in trust pending clarification of whether it was payable. However, members should be aware of section 96(7) of the Social Service Tax Act, which states that "if a person collects an amount as if it were a tax imposed under [the] Act, the person must remit to the commissioner the amount collected at the same time and in the same manner as a tax collected under [the] Act." In addition, section 102 states that taxes collected and amounts collected as if they were taxes under the Act are deemed to be held in trust for the BC government. Failure to remit tax in accordance with the Act may attract penalties (see section 117 of the Social Service Tax Act). It is, however, likely that lawyers who fail to collect tax based upon a reasonable interpretation of the Court of Appeal's judgment would have a defence of due diligence should it later be determined that tax was applicable.In light of these provisions, it may not be prudent for lawyers to continue holding money in trust in cases where applicability of the tax is in question. Lawyers may wish to consider the following three options:
1. Bill clients for social service tax in accordance with the Court of Appeal's decision and remit that amount as required by the Act.
This option accords with the government's advice on the Consumer Taxation Branch page of its website. It also appears to be in the interests of clients and in accord with the apparent objective of the Court of Appeal judgment to improve access to justice and legal services. The Law Society recognizes that, from a practical standpoint, it may be difficult to determine which services fall within the definition of legal services that do not attract the tax. The sanction for failing to collect tax under the Social Service Tax Act is a penalty equal to the uncollected tax, plus accrued interest. Applying the Court of Appeal judgment reasonably and in good faith in light of the Consumer Taxation Branch advice, though, would likely give lawyers a defence of due diligence to this penalty if the tax is eventually found to be payable.
There are differing opinions on the scope of the judgment. Some lawyers, including those advancing the litigation, are of the opinion that it applies to all legal services. Others would narrow its applicability to those legal services directly related to the determination of legal rights by a court or independent administrative tribunal. Still others would take an intermediate view.
2. Bill clients for social service tax on all matters not clearly exempt from the tax, collect and remit the tax to the government and inform the client how to request a refund.
While this approach best protects lawyers against the possibility of liability, it raises serious issues lawyers must discuss with their clients. Those issues include the disclosure of privileged or confidential client information in order to obtain the refund and any delays obtaining the refund may entail. In some cases, it may be necessary for clients to obtain independent advice.
Lawyers should note that section 82 of the Social Service Tax Act imposes strict time limits - as short as six months in some cases - on claims for refunds of taxes paid because of a mistake of law. The application forms for a refund are available on line at: www.rev.gov.bc.ca/ctb/forms/0413FILL.pdf.
3. Hold in trust for the client an amount of the client's money equal to the tax to be applied against any future claims for taxes owing.
In situations where the applicability of the tax is not clear and the lawyer has concerns that he or she may not be able to collect from the client should it ultimately be concluded that tax is owing, and the law firm has money in trust to the credit of the client (for example, as part of a retainer or settlement funds) the lawyer could, without billing or collecting the tax, retain sufficient funds in trust as an indemnity against any future tax claims.
The lawyer may also be able to have the client put him or her in sufficient funds to cover possible future tax claims, provided that those funds are not collected as though they were a tax, which could be caught by section 96(7) of the Act.
The Attorney General's Ministry has not yet indicated whether it will seek leave to appeal the decision to the Supreme Court of Canada or what position it will take on recovery of any uncollected tax should any appeal be successful. The Law Society is following up with the Consumer Taxation Branch with respect to the application of the court's decision and has offered assistance and expertise from within the profession on this issue.
Further information will be posted on the Law Society's website when it becomes available: www.lawsociety.bc.ca. Lawyers requiring further information should contact the Law Society's practice advisors Dave Bilinsky (604 605-5331 or firstname.lastname@example.org) or Barbara Buchanan (604 697-5816 or email@example.com).