Do you want to watch this interview instead? Click here.
Welcome to another edition of Your Business Unleashed a podcast to help entrepreneurs grow their businesses. And today we’re talking specifically to lawyers who own their own law firms. And I’ve got a special guest, David Crawford, with our indirect tax group to talk about indirect taxes for specifically for lawyers. So welcome David, and thanks for coming on.
David Crawford (00:59):
Great, thanks for having me.
Clayton Achen (01:00):
So when we talk about indirect taxes, what are indirect taxes? Can you kind of define that for us?
David Crawford (01:07):
I like to think of it as anything that’s not a direct tax, like income tax. So all your sales taxes like GST/HST, Quebec Sales Tax and Provincial Sales Tax that apply those regimes apply those taxes to legal services across the country.
Clayton Achen (01:25):
Okay. Yeah. Got it. So I mean, the most common one that we’re going to be aware of is in Alberta is obviously GST, but we’re going to get into some of the other ones during this chat. Why do I have you on the call today? Tell me a little bit about your background and why people should listen up when we got David Crawford chatting about indirect tax. So tell me a bit about your background.
David Crawford (01:47):
Yeah, so I joined the firm here as a contractor about a year and a half ago. Happy to be here, growing my own new practice again from the ground up after having worked in big four accounting national accounting firms for quite some time now. And prior to that I was with Darkside with CRA as a large case GST auditor back in the day. That’s a long, long time ago. So yeah, the evolving of provincial sales tax regimes over the years, for instance, is probably the biggest one in particular BC, Manitoba and Saskatchewan and all tax legal services as they define that. So it’s kind important for law firms that operate just out of Alberta, for instance, that may not have that line of sight to the tax requirements or the sales tax registration and collection requirements in those other PST provinces plus all the HST rules and potentially Quebec sales tax as well that may affect them.
Clayton Achen (02:50):
Alright, so you and I, we’ve been working together for, geez, the better part of, it’s got to be over 15 years now, and I’ve always come to you as my indirect tax resource. And I think it is interesting as you start to work with some of our clients, and we’ve had a couple surprising conversations where our customers go, wait a minute, Clayton hasn’t been dealing with our, or Clayton wasn’t aware of these peculiar indirect tax rules. And I go, as with most general practitioners or even tax specialist income tax practitioners, GST is a whole other set of law. It is completely different. Am I right?
David Crawford (03:29):
It’s got its own book, and it’s just as thick if not thicker now than the income tax side.
Clayton Achen (03:34):
Interesting. So am I safe to say that most entrepreneurs who are with most general practitioners, there’s a chance that their indirect tax issues aren’t being properly looked at because this stuff isn’t really talked about. Most of the time amongst general and even tax spec specialists circles, it’s shuffled off to the side and hopefully it never comes up. But then when it does, it sort of bites people.
David Crawford (04:01):
Your average practitioner, in my experience, even at the big firms, I mean they’re very siloed in what they know and they’re really good at that. But there’s some people in firms such as ours, they might practice this 5% of the time, so they’ll never have seen the depth and breadth of all of these taxes and how they affect different clients. So it’s always a surprise to them that say an Alberta law firm might have a Saskatchewan or Manitoba or BC registration and collection requirement on their legal services. And there’s other services, other professional services out there that are taxed as well, but
Clayton Achen (04:35):
Interesting. So did you pick that 5% to the time number on purpose? 5%.
David Crawford (04:42):
It’s not just 5%.
Clayton Achen (04:44):
Yeah, it’s not just 5%. That’s what I’ve come to realize over the years. So it’s interesting that you say that we’re all sort of specialized, and while income tax is certainly out front most frequently in terms of what accountants do or CPAs do with their customers, GST is there and it’s a very serious issue and can make or break your business if things go south. We’re talking to lawyers today and you kind of relate it to lawyers, right? Lawyers practice in a particular area of law. And so I think probably most lawyers who are listening to this can relate to, there’s very separate and individual areas of law that we practice. I don’t practice in indirect tax law. You do, and you’ve been there for the better part of 30 years, I think, right? So
David Crawford (05:29):
All in, yeah.
Clayton Achen (05:31):
Yeah, right on. Okay, well let’s get into it. So let’s talk about how the place of supply rules work for specifically law firms. Can you talk about that a little bit?
David Crawford (05:43):
Yeah. So the GST/HST place of supply rules dictate whether, well all kinds of things, good services and intangibles are taxed at a rate generally where the benefit of the good service or is enjoyed. That’s a good rule of thumb and that’s kind of modeled after OECD type batch machines for sales tax around the world. So to use a really easy example, just think of conveyancing in a law firm with real property. So let’s say you’ve got an Alberta law firm and you’ve got a client that used to live here, but say they moved to Ontario and they’re buying, selling a cottage down there. So you’re performing the service here in Alberta at your law firm, but the real property in question and the person who’s enjoying your service or the benefit of it is in Ontario. So by the way, the place supply rules work from an HST versus GST perspective, you’d be charging or should be charging 13% Ontario HST as an example.
And there’s a host of other rules in there for other property besides real property. But that’s just a quick and dirty example. And the same would be true for you did it in BC, it would only be 5% GST, but then the question would become is, well, do I need to register for BC PST and do my legal services that I’m providing in respect of say a property in BC, take that same cottage owner, put them in BC and it’s like, alright, well the subject of the property or subject of my service of conveyancing, the real property and closing a deal is about a VC piece of real property. So it’s subject to PST and do I need to register and charge that to my client?
Clayton Achen (07:22):
Interesting. And you gave two different examples, and I don’t know much about indirect tax, but what I do know is that HST, while it’s a different rate mechanically from a compliance perspective, it’s fairly simple. It goes on the same return as the normal GST return that you’re filing. But when we get into PST provinces, which I hope you’re going to talk a bit about, and we’ll get there, now I’ve got to register for a whole new system and remit a whole other tax return gs, sorry, PST return, and the same types of input tax credits that you would get on a GST/HST return that’s maybe not applicable in that jurisdiction. You need to understand the interworkings of all of that. So all of a sudden you go, all I’ve done is sell something to somebody in BC, I’m in Alberta, holy smokes, I’m potentially into this whole world of other compliance issues that I wasn’t contemplating.
David Crawford (08:14):
And in the last several years, all the PST provinces have kind of widened their net to sort of catch companies operate, we’ll just pick on Alberta because that’s where we’re sitting that are selling taxable things to their residents and there’s tax leakage because the residents don’t just voluntarily pay the tax to the BC government, for instance. So if you’re not charging them BC saying, well, we’re going to make the registration net a lot wider for other companies in Canada, including companies outside of Canada that don’t have a place of business in BC as an example, and Manitoba has expanded their registration requirements for all things, Saskatchewan’s done that, and Quebec has done that too. So if we take our cottage owner for instance, or let’s say have multiple cottage owners, and for whatever reason you’re at Alberta law firm dealing with Quebec law, unlikely to happen. But just as an example, if you’re selling $30,000 worth of these legal services to cottage owners in Quebec, and these are individual persons that aren’t registered for Quebec sales tax, you have to register for Quebec sales tax as an elder law firm and collect and charge that tax after you get $30,000 in Quebec sales to those types of individuals. So that’s another example where again, the net’s been cast a lot wider and it’s been cast a lot wider for non-residents of Canada
Clayton Achen (09:35):
Too. And I guess it makes sense because you go, well, I’m a former resident of Alberta and I don’t like paying that PST and HST stuff. I like to stick with my GST, so wherever possible, I’m just going to source my supplies, whatever they might be out of Alberta and avoid all this nasty extra tax. Well, that doesn’t hang, does it? Because the supplier, in a lot of cases, I’m generalizing here and I’m sorry because I know that generalizing doesn’t work in your field of business, but I’m generalizing here and saying, you know what, there could actually, that doesn’t necessarily get you out of paying PST or the HST component, the provincial portion of the HST.
David Crawford (10:17):
Yeah, and I think individual consumers always see it as a tax grab by the government. It’s like, well, if you went to a BC law firm that is registered for PST and you got service done there, would you pay PST? And it’s a yes. And so it’s like to stop that tax leakage, and I guess the competition, I guess if you will, if everybody said, oh, I’m not going to use a BC law firm. I’m just going to go get my work done in Alberta by a lawyer that’s answered to the bar in BC, for instance, that can practice BC law in Alberta, then everybody would do that, right? So to make that tax leakage stop and the same answers, Quebec, et cetera, it’s still leveling the playing field. And it’s not a lot different than what’s called, or they call the Netflix tax.
But when the federal government came July, 2021, and they said, all non-residents of Canada, if you’re doing this, this, and this, and you’re making $30,000 in sales to these people, we want you to register because if it’s coming in over the airwaves or the internet, et cetera, and it’s being a remote service, but you’re enjoying that in Canada, there should be tax on it. So from I guess a communications perspective and whatever, so Netflix, for instance, before these rules came in, they could just cast their signal into Canada and nobody would pay GST on it. But if they were watching that on Shaw, that same movie or streaming service or whatever, they would pay GST or HST or whatever. And so it was a bit of a competitive thing, right? So would I brief for no GST if I’m sitting in Quebec and no QST from Netflix, but if I go through Videotron, I got to pay them both. So Videotron saying, well, there’s a 15 point advantage to non-residents that aren’t caught by these rules. So that’s just an example of the widening of the net and about where consumption takes place and where the tax should
Clayton Achen (12:10):
Occur. I could see a lot of lawyers getting tripped up by this because maybe they don’t have a robust internal finance department. Some of the bigger law firms do, and they’ve got their BC bar and they’re able to practice for BC customers or provide services to BC customers, and their finance department might not be picking this up, and all of a sudden you could be running amuck of some PST rules. So, okay, so we’ve addressed the general place of supply rules, which is, forgive me for paraphrasing, but wherever the service is being enjoyed or consumed, you need to consider in that jurisdiction whether or not you’ve got a registration obligation beyond basic GST and or a collection obligation for the provincial component of the HST. So where is it being consumed? So that’s the place of supply stuff, but then the Indirect tax Act, and I really don’t like it because there’s not a lot of logic to the indirect tax Act from where I’m sitting as an income tax guy.
I like to tie it back to some logic. And when you get into the reason that your act is so big is because there’s so many service level peculiarities or product level peculiarities that apply, and they’re different for every jurisdiction. And I think the same’s true, even in law where certain services attract in certain jurisdictions, other ones don’t, and they might in one jurisdiction and they don’t in another jurisdiction. Can you talk about that a little bit or give some examples of common services that might apply or might not apply on that a little bit? Let’s start out with what are the PST provinces? Let’s start
David Crawford (13:51):
There. Yeah, let’s do that. So British Columbia to our west, Saskatchewan to our east and Manitoba further east. And some people refer to Quebec as a provincial sales tax province, but it’s not technically, it’s more like a value added scheme like GST and HST. Right.
Clayton Achen (14:07):
Got it. Okay. So BC, Saskatchewan, Manitoba, and Quebec is really what we’re talking about. Everywhere else that is in Alberta is HST, but the rates vary where it’s, yeah,
David Crawford (14:18):
So basically excluding Quebec, just take Ontario to the Atlantic is all HST different rates. The Maritimes are all 15, Ontario’s 13, and Quebec’s effectively 15%. If you include GST in there territories,
Clayton Achen (14:38):
David Crawford (14:39):
Clayton Achen (14:40):
David Crawford (14:41):
5% GST technically.
Clayton Achen (14:44):
Got it. Okay. So talk about if I’m a law firm owner and I’m providing services into these different jurisdictions, what type of things that I sell are going to be exempt or eligible or whatever you call it? Talk about that a little bit.
David Crawford (14:59):
Yeah, so like I said, each of those provinces, well, let’s start with Quebec because that’s easy. It’s going to be like GST or HST, pretty much everything subject to tox. There’s really no exemptions per se, unless, or there may be relief of tax if you’re providing a legal service to say a First Nation individual or a band or corporation, First Nation corporation situated on a reserve so they don’t pay tax on those types of services. And then from Manitoba PST, they specifically define what is and what isn’t a legal service. And each province has, they follow the legal professions act in their province to say, if it’s in this act and it’s defined there, then we tax it. If it’s not, then we don’t, right. And Saskatchewan basically the same thing. BC the same thing, but the same concept applies is if the individual or the object of the service, such as real property or whatever, it could be like an employment matter in BC for a BC employee area and their employer, it’s about where that benefit is enjoyed generally, or where the object of the service is located.
Clayton Achen (16:04):
David Crawford (16:07):
Ins and outs, but each province sort of defines them differently.
Clayton Achen (16:11):
Right. Okay. We did come across even, we deal with a lot of lawyers and we’ve smartened up and started just putting you in front of them right at the start of our relationship and see who’s practicing extra provincially because it’s just a good idea. But we have come across certain scenarios where they were selling exempt services for the purposes of PST, but I think in that case it related to First Nations work or something like that. And I guess the point is is not all legal services are caught, but a lot are, and can you Google this stuff? Is it easy to find?
David Crawford (16:54):
Yeah, each of the provinces has publications on it, which generally reflect the law, but not necessarily
Clayton Achen (17:01):
Is the language simple or is there an act of definitions to understand the language on the website.
David Crawford (17:09):
Everything on the publications is kind of plain language and generally a reference is back to specific legal definitions in those acts. I’d say probably, I’d say BC does the best job of publications and then maybe Manitoba second and then Saskatchewan third. But they’re all pretty good. They’ve got publications for every industry. Right.
Clayton Achen (17:34):
Are there any big opportunities for recoveries that you’ve seen in this area?
David Crawford (17:41):
Recoveries meaning that they’ve overpaid or overcharged their customers, perhaps. It’s usually a risk-based issue where they haven’t and should have, or should have been registered and haven’t collected the tax. If you’re doing business for companies, you may be able to recover it later on if you get caught and assessed. If you’re dealing with general individuals like somebody buying a cottage and you didn’t, might not ever recover that. Right. They might tell you story.
Clayton Achen (18:10):
Yeah, I mean, I guess it would be more for non Alberta companies who have charged an Alberta client or charged into a different jurisdiction at their own rate where they could have been taking, they could have been charging at a lower rate, for example. But I guess once you’ve charged your customer, there’s no getting it back. Right?
David Crawford (18:28):
Yeah, you raised a good question there. And there’s a lot of Calgary, its that own BC properties. So you’ve got that Alberta law firm and just say they use the billing addresses where the person lives, say 10 months out of the years in Calgary, but the object of the service related to their property in BC. And it could be a statement of claimant on insurance policy, it could be whatever, and they would just say, well, the person’s sitting in Calgary, but the property’s in BC and you just charge ’em 5%, but let’s say you’re supposed to be registered for BC PST, well then you should have charged an additional 7% as well for the BC PST.
Clayton Achen (19:08):
Okay. Well, I mean, I think this is about as simple as we can make this issue this very, very complex issue with very peculiar issues in each province. What do we do if we want to reach out to you? What would be your approach? If I was a law firm owner and I heard this podcast and I went, we might have some issues here. What would be my next steps?
David Crawford (19:28):
It depends on the issue. If you’re not supplying legal services to customers or objects of the service, being in a PST province, you really just got to figure out how your billing system or how your people are operating, the billing system is figuring out the place to supply of G SS T province versus an HST province, and particularly Quebec, where you’re selling to individuals, in particular for Quebec. And then from a P S T perspective, it’s like, okay, well do I need to register? Because chances are what you’re supplying is taxable. Then the question becomes is, and it relates to something in BC is do these rules catch me and force me to register? So that’s the question is it’s likely taxable. And then your next question is, do I have to register?
Clayton Achen (20:20):
Okay, so I’m not equipped to answer those questions as a law firm owner and I don’t have time because I’m busy servicing my clients. Do you do a quick look under the hood or what do you offer in
David Crawford (20:30):
That regard? Yeah, we can do even just a half hour consult just to have a quick look under the hood and find out how you run your business and whether some of these exceptions, some of these rules might catch you. And a, is it a taxable thing that you’re providing? And if it is, do you need to register?
Clayton Achen (20:50):
David Crawford (20:51):
Clayton Achen (20:52):
We can. Alright, well I think, is there anything else that I’ve missed here?
David Crawford (20:56):
Yeah, it’s a complex topic because you’ve got multiple jurisdictions that all have different rules. It’s Quebec, for instance. You need to basically find out if you’re, and I can see this happening, say in around the Ottawa gat, no area where you’ve got law firms practicing in Ontario that can do Quebec civil law and lots of things like cottages. So it’s like, all right, well if you’re doing a bunch of work there and you’re over $30,000 on sales to individual persons that aren’t registered for Quebec sales tax, then the rule, say if you hit that 30 in any 12 month rolling period, you need to register and begin charging tax to all your Quebec customers. So you need to a know that person in the property, or the issue is in Quebec. And number two is, is that individual registered for Quebec sales tax?
Clayton Achen (21:48):
Interesting. So this is kind of a knowledge of client thing, right? It’s almost worth, if it isn’t already in your knowledge of business checklist, when you’re doing intake for a new customer, you really got to find this stuff out. Where’s the property located? Where are they located primarily, or where would they be enjoying the service? So it’s almost worth taking a look at the K O B checklist that you’re doing on the way in for new clients, right?
David Crawford (22:15):
Yeah. And I guess the question becomes, is coming back to that, do I need to register and then that knowledge of business or knowledge of the subject matter of the service, does that relate to a PST process? Well, if I’m registered, then the chances are is that there should be PST applying on that invoice in addition to GST, right? Or HST is the case maybe.
Clayton Achen (22:40):
Well, thank you so much. I appreciate you making the time, David, and where can we get ahold of you if we have any questions about this stuff, where can we find you or some information relating to it?
David Crawford (22:51):
Yeah, visit our website. There’s various articles in our blog section, AchenHenderson.ca, and there’s lots of good articles there, particularly one on this issue. And then otherwise, contact me, email@example.com.
Clayton Achen (23:06):
Alright, that’s it for today. I hope you’ve gained something invaluable from this, and we’ll look forward to talking to you on the next podcast.
Call us today for help getting your sales tax collection and reporting right, so that you can rest easy by ensuring your business is not offside with these rules across Canada.