The PST and Legal Services:

1. Dentons Canada LLP The PST and Legal Services: 18 Months Later Where Are We?

2. Introduction and Outline • Review of key PST concepts and rules that apply to legal services. • Focus is on PST and not GST/HST place of supply, though those rules remain relevant (and will be touched on). • Government Policy – PST Bulletin 106. • Where is government’s policy at? • Disbursements and Charges. • Is the confusion resolved? • Exemptions from PST. • Review of exemptions and consideration of whether they are too narrow. • The Double Tax Issue – does it matter? • Yes. • Other tips, traps and risks. Dentons Canada LLP

3. What is the PST? • As of April 1, 2013, the PST ‘returned’ to B.C. • The PST is different from the GST. It is a Sales Tax, rather than a Value-Added Tax → the PST represents a fixed cost to business clients. • The PST applies to Legal Services at a rate of 7%. • The PST has been referred to as “the same” – but for our purposes it is not – new rules and traps. Dentons Canada LLP

4. Taxation of Legal Services – Key Concepts • First step is to consider the question: What are legal services? • Next step: Is the client (or clients) a B.C. resident? • Two final questions: If the client is a B.C. resident does an exemption apply? If the client is not a B.C. resident what type of work is it? Dentons Canada LLP

5. What are legal services? "practice of law" includes (a) appearing as counsel or advocate, (b) drawing, revising or settling (i) a petition, memorandum, notice of articles or articles under the Business Corporations Act,or an application, statement, affidavit, minute, resolution, bylaw or other document relating to the incorporation, registration, organization, reorganization, dissolution or winding up of a corporate body, (ii) a document for use in a proceeding, judicial or extrajudicial, (iii) a will, deed of settlement, trust deed, power of attorney or a document relating to a probate or a grant of administration or the estate of a deceased person, (iv) a document relating in any way to a proceeding under a statute of Canada or British Columbia, or (v) an instrument relating to real or personal estate that is intended, permitted or required to be registered, recorded or filed in a registry or other public office, (c) doing an act or negotiating in any way for the settlement of, or settling, a claim or demand for damages, (d) agreeing to place at the disposal of another person the services of a lawyer, (e) giving legal advice, (f) making an offer to do anything referred to in paragraphs (a) to (e), and (g) making a representation by a person that he or she is qualified or entitled to do anything referred to in paragraphs (a) to (e). Dentons Canada LLP

6. What are legal services - continued (a) draw instruments relating to property which are intended, permitted or required to be registered, recorded or filed in a registry or other public office, contracts, charter parties and other mercantile instruments in British Columbia; (b) draw and supervise the execution of wills (i)   by which the will-maker directs the will-maker's estate to be distributed immediately on death, (ii)   that provide that if the beneficiaries named in the will predecease the will-maker, there is a gift over to alternative beneficiaries vesting immediately on the death of the will-maker, or (iii)   that provide for the assets of the deceased to vest in the beneficiary or beneficiaries as members of a class not later than the date when the beneficiary or beneficiaries or the youngest of the class attains majority; (c) attest or protest all commercial or other instruments brought before the member for attestation or public protestation; (d) draw affidavits, affirmations or statutory declarations that may or are required to be administered, sworn, affirmed or made by the law of British Columbia, another province of Canada, Canada or another country; (e) administer oaths; (e.1) draw instruments for the purposes of the Representation Agreement Act; (e.2) draw instruments relating to health care for the purposes of making advance directives, as defined in the Health Care (Consent) and Care Facility (Admission) Act; (e.3) draw instruments for the purposes of the Power of Attorney Act; (f) perform the duties authorized by an Act. Dentons Canada LLP

7. What are legal services? • Perhaps the better question is: what services do law firms provide that are not legal services (and therefore potentially not subject to PST)? • There are some items: • Most common are: • Certain Trademark functions; • Immigration; • Arbitration and mediation; and • Corporate record taking (for more see Bulletin PST 106). • The catch: do those services lead to or result in legal services? If so, government’s position is that the services are taxable. • Drawing the line can be a challenge; the more conservative approach is to apply PST if there is a likelihood that the client will receive other taxable services. Dentons Canada LLP

8. Taxation of Legal Services – Who is a B.C. Resident? • “B.C. Resident” → virtually always subject to 7% PST. • B.C. Resident includes three categories: • Resident; • Ordinarily residing; and • Carrying on business. Dentons Canada LLP

9. Who is a B.C. Resident: Resident and Ordinarily Resident • When is a person a resident or ordinarily residing in B.C. ? • Resident → proof of residency: MSP, Home Owner’s Grant. • “Ordinarily reside” → expanded common law definition (Thomson v. M.N.R. [1946] S.C.R. 209). • A B.C. resident is also a person who “enters British Columbia with the intention of residing or carrying on business in British Columbia”. Dentons Canada LLP

10. Who is a B.C. Resident: Carrying on Business • The carrying on business test: • Common law factors → evidence of business presence, storefront, office, in an increasingly online world it can be difficult to determine when a client carries on business in B.C. • Carrying on business test can be complicated and fact driven. • Deeming rule in section 5. • Business name listed in a telephone directory, with an address or telephone number. • Advertising with an address or telephone number. • Employees or “other representatives”. • Warehouse, office, place of business. • Other traps: is the client a general partnership or a limited liability partnership? Or is the client a limited partnership (in which case, look to the general partner)? (Consider Bulletin PST 319). Dentons Canada LLP

11. Carrying on Business – the Phone Book Rule • As noted, there is a special deeming rule in the PST that extends the meaning of carrying on business. • “The Telephone Book rule”. • Name, address and telephone (in B.C. is given). • Also includes advertisements or announcements. • Arguably requires us to check every phonebook in Terrace (!). • A very broad rule that could subject many businesses to PST rules. • Deeming rule also includes the presence of employees or representative or access to a place of business such as a warehouse. Dentons Canada LLP

12. The Resident Rules: Risk Management – Who is a B.C. Resident? • Have to check both “purchaser” and “recipient”. • “Purchaser” (defined in the PSTA). • Buys for the person’s own use or benefit. • Buys for the benefit of another party. • Buys as agent for a principal (whether that person is a principal or agent). • Recipient. • Not defined → generally understood to be the person that “consumes” a service. • This is different from the GST/HST rules which only look to the person with the legal obligation to pay the bill. Dentons Canada LLP

13. How Does PST Apply to Legal Services? • There are three scenarios in which PST applies to legal fees: • Services are provided in B.C. to a person that is a “B.C. Resident”; • Certain services are provided in B.C. to persons that are not a “B.C. Resident”; or • Certain services are provided outside of B.C. to persons a “B.C. Resident”. Dentons Canada LLP

14. Client in B.C.+ Lawyer in B.C.= PST Applies Dentons Canada LLP

15. Client Outside of B.C. PST May Apply(Based on connection to B.C.) Lawyer in B.C.

16. Lawyer Outside of B.C. PST May Apply(Based on connection to B.C. – rules are different!) Client in B.C.

17. Services in B.C. to a B.C. Resident It’s simple – 7% applies! This is true even if the B.C. lawyer’s work relates to other jurisdictions. Risk/tip: is the lawyer getting instructions from a non-B.C. office of the client, but that client has a separate office in B.C.? Dentons Canada LLP

18. Services in B.C. to Non-B.C. Residents • Confirm that neither the purchaser nor the recipient are a “B.C. Resident”. • If neither the purchaser nor the recipient are B.C. residents, wherever they are located, charge PST if: • “in relation to”: • Real property in B.C.; • Certain tangible personal property that is or could be in or delivered to B.C.; • Intangible property that is or could be owned or possessed in B.C.; • An actual or possible court proceeding; • Actual or possible incorporation under the BCBCA or Society Act; or • Prescribed matters – nothing prescribed – possibly something to watch for? Dentons Canada LLP

19. Issue: what does “in relation to” really mean? • The SCC says that both “in respect of” and “in relation to” get the same meaning/interpretation – and it is very broad – requiring a minimal connection (Nowegijick v. The Queen, [1983] 1 S.C.R. 29).  Unfortunately, because of that breadth, the answer is not black and white. •  CRA’s policy positions (which are not law, binding on CRA, or applicable under the PST) suggest that a direct nexus to, for example the real property is required.  CRA says: “there must be more than a mere indirect or incidental nexus or connection between a service and the underlying real or tangible personal property, before the supply of the service will be excluded from zero-rating”. Dentons Canada LLP

20. Example: “in relation to” – the non-resident architect • A B.C. law firm is retained by a non-resident architect. • The architect is doing preliminary design work on a building to be built in B.C. • Is that “in relation to” real property in B.C.? • According to the CRA, no – but remember the CRA does not have authority with respect to PST. • According to the SCC, maybe? • Better view is: not yet. • If the architect’s work continues, and develops into on-site design and build functions, the legal services could become subject to PST. Dentons Canada LLP

21. Legal Services Provided Outside of B.C. • Confirm that either of the purchaser or the recipient are in B.C., then consider if the matter relates to: • Real property in B.C. • Certain tangible personal property that is or could be in or delivered to B.C. • Intangible property that is or could be owned or possessed in B.C. • An actual or possible court proceeding. • Actual or possible incorporation under the BCBCA or Society Act. • Prescribed matters. • Also: • Interpretation or application of B.C. law. • Or any law if related to: a physical or legal presence in B.C., an activity or transaction in B.C. or thinking about the abuse. • An actual or possible contract or convent related to a physical or legal presence, activity or transaction or the possibility of such a presence or activity. • Legal services provided outside of B.C. can have pro-rated PST. Dentons Canada LLP

22. Disbursements and Charges • Confusion leading up to the implementation of the PST – multiple changes to Bulletin PST 106. • Mostly this confusion has been resolved. • True third party disbursements charged on a cost recovery basis are not subject to PST. • Non-taxable charges: • Printing, photocopying, faxing – charged on a “reasonable basis” – which is different from third party disbursements, which must be charged on an exact cost recovery basis. • Everything else is generally taxable. Dentons Canada LLP

23. The Risk of Double Tax • When HST rules came into force in 2010, the Federal government enacted a set of rules referred to as the ‘place of supply’ rules. • The purpose of the place of supply rules is to allocate (GST/HST) taxing jurisdiction among Canadian provinces. • Rules look to location of a client, but also consider the location of property and litigation. • The problem? The PST rules do not match the GST Rules. Therefore, the PST could sometimes apply along with Ontario HST (or PEI etc.). • This means that B.C. legal bills could be subject to tax at a rate of 20% +/. Dentons Canada LLP

24. Place of Supply Rules (brief, high level review) • Generally, the client’s address determines location for GST/HST purposes. • Specific rules vary this: • The more than one address test. • Location of real property (50% rule). • Location of tangible personal property (50% rule). • Location of commenced litigation (not applicable to federal courts). • The rules are much more complex than this simple summary. Dentons Canada LLP

25. Double tax: examples • B.C. law firm is retained by Ontario client, with only one address in Ontario. • The place of supply rules will say that Ontario HST applies. • Ontario client wants to sue a B.C. supplier, but does not want to start litigation right away. Rather, the client would prefer to mediate or negotiate a settlement. • Until litigation commences, the place of supply rules will say Ontario HST and not GST apply. • After litigation commences, only GST will apply. • For the entire time, PST will apply. • Important to note that “commencement” means filing with a court – not opening a file or accepting a retainer. Dentons Canada LLP

26. Double Tax and the Ontario Client: Continued • If the client is contemplating shipping products to B.C. and wants B.C. advice on B.C. regulatory or other issues, PST and HST apply. • If the client is protecting intangible rights in multiple jurisdictions including B.C., both PST and HST can apply. • For some clients this may not matter (if they get an input tax credit). Other clients may be entitled to a rebate – but complications can arise. • Firm risk: penalty for failure to levy PST can be 110% of the PST(!); potential penalties for GST/HST as well – also interest. Dentons Canada LLP

27. Exemptions for Employees • Employees providing legal services to employers are not considered to be providing legal services. • Employees can also provide legal services to “related corporations” – however, this is a potential trap: • The definition of related corporation is narrower in the PST context than in other situations. Dentons Canada LLP

28. Associate Counsel – Exemption: Does it work? • Legal services provided to a law firm by an individual that is not an employee but only provides services to the law firm; or a law firm that only provides services to the law firm may be exempt. if the purchase price to the receiving law firm is included in the purchase price of legal services billed or otherwise charged to the client (should be separately identifiable). Issue: the exemption says that the associate counsel must only provide services to a “particular client”. -PST Bulletin appears to read this broadly, which is a good thing. • The Bulletin says “particular client” means any client of the law firm and not associate counsel. • Can also charge as a disbursement. Dentons Canada LLP

29. First Nations Exemption • Some legal services provided First Nations are exempt: But only if purchased by the band or an individual and relate to real property on First Nations Land or are performed on First Nations Land OR Purchased by an “aboriginal organization” if in relation to treaty claims or negations with government. Dentons Canada LLP

30. First Nations Exemption Trap: First Nations Limited Partnership For PST purposes services to the limited partnership are considered to be provided to the general partner, a corporate general partner is not able to get a First Nations PST exemption. (See Bulletin PST 319). First Nations Band Limited Partner First Nations General Partner First Nations Limited Partnership Dentons Canada LLP

31. Questions? Comments? THANK YOU Dentons Canada LLP