Subject to double tax?
The Canadian Bar Association has passed a resolution titled: “Double Taxation on Legal Fees and Other Professional Services.”1 What is double tax? How does it apply to British Columbia legal services? Both Provincial Sales Tax (“PST”) and Goods and Services Tax (“GST”) or Harmonized Sales Tax (“HST”) apply to legal services. The rules that say when PST applies are different from the rules that say whether it is GST or HST that applies. This can cause double tax: PST and HST (of a province other than BC) applying to one legal bill.
PST applies to legal services provided to clients in BC. PST can also apply when a client is not in BC. In that case, PST applies if the services have certain connections to BC. For example, PST applies when a non-BC client gets advice from a BC lawyer relating to real property, goods, or litigation (including potential litigation) in BC.2
The GST/HST rules are quite different. For Canadian clients, services are deemed to occur in a particular province, regardless of where the services actually occur. The GST or HST of that province will then apply. The default province is where the client is. This rule is then modified in a number of situations. For example, services related to real property are deemed to occur wherever the real property is. Litigation services are generally deemed to occur in the province of the court with conduct of a matter, after the court action commences.
The following are some examples of how subtle differences in the rules can cause double tax.
BC Law LLP has a client with one address in Ontario. The client wants advice about selling products in BC, which it plans to do. The GST/HST rules will say to charge Ontario HST. The PST rules will say PST applies because goods may be sold in BC. 20% tax is applied to the legal bill (7% PST + 13% HST).
The Ontario client is also considering a lawsuit in BC. The client would prefer to settle rather than litigate, but is thinking about litigation. PST applies. However, the GST/HST rule says before a notice of civil claim is filed, HST applies. After the notice of civil claim is filed GST applies. Both 20% and 12% tax could apply to the same retainer.
If the client wants assistance with a BC real property sale, no double tax arises: PST and GST apply.
For many lawyers, this issue may rarely arise. Also, many clients get an input tax credit (“ITC”) for GST and HST paid in the course of commercial activities, recovering the non-PST tax regardless of whether GST or HST applies.3 There is also a rebate some clients (who cannot get an ITC) may claim to get back some of the HST. Claiming this rebate may be tricky. Several conditions must be met.
Lawyers have a duty to collect and remit PST and GST/HST. Though situations of double tax may be few and far between, failure to detect the issue could create lurking liabilities for lawyers.1
1 A full copy of the text of the resolution is available by clicking here.
2 The rules for determining whether and how PST and GST/HST apply are complex. A full discussion of these complicated rules is well beyond the scope of this article. Readers should review the relevant rules.
3 Not all clients will be entitled to an ITC, including some that may appear to be in business.
Alexander Coombes practises at Dentons Canada LLP and is a member of the CBABC Business of Law Committee, which is exploring this issue.