Audits can be time consuming and frustrating. The best defence is preparation
Audits can be scary – especially for small practices that may not have a sophisticated financial management structure. While most firms are familiar with trust audits, a growing number of firms are facing PST audits as well.
Do your services attract PST?
The growth in PST audits among law firms is fueled by the development of mixed service practices. Not all services provided by lawyers now attract PST. The largest change has been in relation to alternative dispute resolution (“ADR”) services. Where a lawyer acts in the capacity of an independent third party (i.e. not providing legal advice), these services likely do not attract PST. Mediation and arbitration are clear cut examples. However, the issue becomes more difficult when the lawyer’s role is less clear.
For example, workplace investigation covers a multitude of different circumstances. A purely independent investigation is unlikely to attract PST, while one that provides legal advice, or draws a legal conclusion, will likely attract PST.
When in doubt, it is wise to contact PST Taxpayer Services for clarification, toll free at 1-877-388-4440. You can also review the latest PST tax bulletin for legal services at bit.ly/2FzomJL.
Audits are triggered by PST irregularities, complaints or random selection.
An auditor will contact you for a pre-audit discussion. They will ask questions about your practice and how you maintain your records. This process allows the auditor to determine how they will approach your audit. You will receive a letter confirming the audit process and the records required. You will also be provided with a copy of the Taxpayer Fairness and Service Code.
Most audits cover a three-year period. The auditor will select certain months for review. They will focus on the services provided, the PST charged, and the remittance to the government. If concerns arise, they will expand the scope of the review. It makes sense to provide the auditor with direct contact with your bookkeeper or accountant.
The auditor will likely ask to see computerized financial records. It is unlikely that they will want to see specific client invoices. However, they can make that request. It is essential to redact privileged information from these records. This can be a challenge if the auditor is trying to determine if a service attracts PST. Your best defence is a clear retainer agreement.
Many ADR practitioners delineate between ADR and legal advice services by using separate contracts. In their ADR contracts, they clearly articulate the basis for not applying PST. Such a contract is often sufficient for the auditor.
Lawyers generally do well with the collection and remittance of sales tax. Most errors arise from bookkeeping mistakes. However, failing to collect or remit sales tax can result in Law Society scrutiny. This is especially serious when tax is collected, but not remitted. In these situations, you should get advice from a practice advisor, or discipline counsel, as soon as possible.
An area where many people get into difficulty is in relation to purchases. If you purchase an item and you do not pay the requisite PST on the purchase, you have to self-remit that tax. This is a growing problem for purchases made on-line where the sellers do not collect PST. As a rule, you should always confirm that appropriate tax is paid on any out of province or online purchases. This also applies to GST.
Any audit can be intimidating. PST audits can be time consuming and frustrating. The best defence is effective record keeping and regular reviews of your practice’s returns. Co-operation with the auditor will expedite the process. If in doubt at any point in the process, seek professional advice.
Michael Butterfield is a collaborative lawyer, mediator and arbitrator.