Presenting to the Standing Committee on Finance and Government Services on October 6, 2006, President Frits Verhoeven called on government to remove the discriminatory and harmful tax on legal services in preparation for the 2007 Budget. See submission here, and Kunin Report here.

[posted November 14, 2006]

MINUTES [Excerpt]
Select Standing Committee on Finance and Government Services
Friday, October 6, 2006
9 a.m.
Pinnacle 1, Ramada Plaza
36035 North Parallel Road, Abbotsford

B. Ralston (Deputy Chair): Thank you very much for your presentation. You've engendered some lively questioning.

The next presentation is from the Canadian Bar Association, B.C. branch, and Frits Verhoeven is representing that association.

F. Verhoeven: Thank you very much, Mr. Chairman and members of the committee. I have brought with me the presentation in written form.

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As president of the B.C. branch of the Canadian Bar Association, I am honoured to speak to the committee this afternoon — I guess it's still this morning — on the preparation for the budget for this year. As president, I represent all of our members, which are approximately 6,000 lawyers in British Columbia. This is, in fact, the third time I've appeared before this committee, and this is our third prebudget submission.

Last year I was very pleased, and we were very pleased, to see that the committee accepted the gist of our submissions. The committee recommended to the government and the Minister of Finance that the government examine the removal of the PST on legal services. So before I move further into the presentation, I'd like to thank the committee for coming to that conclusion last year, and obviously, I'll be asking the committee to make the same recommendation this year. It's regrettable that despite our recommendations, the Minister of Finance did not see fit to implement that suggestion last year, and so we are here again, still protesting against this unfair tax.

Since last year we also have commissioned a report from Dr. Rosalyn Kunin, a respected economist, that also looks at the tax not only from the point of view of fairness, equity and the cost of doing business in British Columbia but looks at it from an economic point of view as well. That report was submitted to the government last year. I'll just perhaps refer very briefly to the executive summary. That's at tab 2 in the little booklet that I've given.

Dr. Kunin says, and I'm just going to refer to…. I guess the third bullet is probably the key one from a business point of view. "SST on legal services is inefficient as it is not only a sales tax on consumption but also a sales tax on capital investment." So she as an economist is able to look at it from that point of view. That's another way of saying that it raises the cost of doing business in British Columbia for all British Columbia businesses. Being a sales tax, it is something that goes directly into the capital that they have available for their businesses. So it's a damaging form of tax.

A little bit of background for those who may not be familiar with the origins of this tax. In 1992 a 7-percent social service tax on legal services was introduced. Initially the stated purpose was to fund legal aid. That did not happen. That has never happened. We do not advocate that the government should set aside any

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particular tax for legal aid. We say as a bar association that legal aid is an obligation of all taxpayers, not only those who happen to be needing legal services for some reason or another.

There were court challenges, and there continue to be court challenges. There were challenges immediately to the tax. The tax has been widely condemned, and in fact, it is very difficult to find anyone in government, elected or non-elected, who speaks in favour of the tax. Business groups and social activists alike have condemned it.

I can say that I have spoken to several cabinet ministers. I have spoken to numerous MLAs. I've spoken to quite a few people in the policy side of government. No one has ever suggested that the tax makes any sense. There is no rationalization that I've ever heard that defends the tax on any principled basis. The only basis for keeping the tax is the fact that it raises money. But as I'll point out a little bit later, that money that is raised comes at a cost. It's not just a net gain.

The points of principle are set out on page 2. The tax is fundamentally discriminatory and unfair. Legal services, as you probably already know, are the only professional services that are taxed. Accountant services, engineering services, consulting services of any kind are all free of PST. They all attract GST, as legal services do as well, but for some reason in 1992 the government singled out legal services, and the bigger mystery is why it remains.

It's a drag on B.C.'s competitiveness. The tax inflates the cost of doing business in B.C. relative to other jurisdictions. In that respect I think it's notable that there are legal services taxes in other jurisdictions, such as Saskatchewan and Manitoba, but those are in common with other professional services. No other province singles out legal services.

The jurisdictions that I would say we compete with most for things like head offices and for legal services would be Alberta and Ontario — Calgary and Toronto, specifically, when we're looking at the market for legal services on the corporate level; for example, multinationals and so on. Those provinces have no tax on legal services. Obviously, Alberta has no PST at all. Ontario does not tax legal services.

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It's a drag on B.C.'s competitiveness. It's poor tax policy. It defies fundamental economic principles by taxing capital investment, and I mentioned the Kunin report in that context. It's bad for the economy. It doesn't represent lost revenue for lawyers, but it is, in fact, a growing cost to the economy. And the reference there again is to the Kunin report. It's regressive. Poorer people, people least able to pay, are going to have a harder time acquiring legal services. If they can manage to afford it at all, this just puts another roadblock in their way.

The biggest reason to get rid of the tax is because it's an impediment to access to justice. Access to justice is a fundamental right, and in that context, there is no reason why the government would want to put an additional roadblock against access to justice. If one — and I've made this point before — were to pick services that one were to single out for taxation, legal services might be the last one, not the only one. Access to justice is a fundamental principle in our society. That's set out in the Charter. That's been confirmed by the courts.

As you may have heard, the late Dugald Christie, who was very committed to access to justice, has brought legal challenges to the tax. Those legal challenges have had some success. The courts have affirmed that access to justice is a fundamental constitutional principle and that the tax is, in some measure, illegal as being an impediment to that.

The matter is still before the courts and will go to the Supreme Court of Canada next spring. In the meantime the revenue that the government used to rely on is not really so reliable anymore.

The government claims it must defend its right to tax, and we say that that's true, but this is the wrong tax with which to make that argument. Why waste money to defend a bad tax? Our view is simple: when you're in a hole, stop digging. This tax has been in place for far too long. It doesn't make sense to defend it any further.

We reject the concept that because it's being litigated, the government can't reassess its policy. I have heard ministers say: "Well, it's before the courts." That's true, but that doesn't mean the government can't decide to get rid of it.

This year the Minister of Finance asks: what changes would you make to this? We respond, to no one's surprise: eliminate this tax. The minister asks us how to replace the lost revenue. We say that given the court rulings, the government can no longer depend on the tax as a reliable source of funding and, in short, there may be very little to be replaced.

We could add that if the minister is preoccupied with raising revenue to pay for important public services — as, of course, she should be — she should not be singling out the people and businesses that use legal services. Taxes should be applied fairly, either across all professional services and across all taxpayers or not. The objective has to be to deliver greater fairness to the tax system in B.C.

We oppose the tax on legal services, but we do say this. The government really has two choices. Either tax all services so that all users of professional services bear the burden of taxation equally, or get rid of this tax. No other solutions make any sense.

The tax on legal services must rank as the most anomalous and unfair tax in this province. When in opposition, the B.C. Liberals railed against it. This committee was right last year to recommend that the government examine its removal. In my respectful submission, the fact that it still remains before the courts is no reason not to make that very sound recommendation again.

I've already dealt with the point about the fact that it's before the courts. I want to emphasize that this is not a matter that is a question of lawyers losing income. Clients pay this tax, and oftentimes, as I said last year, people who need legal services are those who are most in need. There is no reason to assume that a person who is using legal services is especially wealthy

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or fortunate and therefore can afford this additional burden.

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From a business point of view, again, as Dr. Kunin points out, it's bad for business and makes B.C. less competitive. If we want to attract legal industries, if we want to attract head office industries or keep those that we have, or high-tech industries or biotech industries — those sorts of businesses that use legal services most heavily — we need to make this province a good place to do business.

I hope that the members of the committee will have a few questions — hard questions, if possible. I say that we look forward to reviewing your report later this fall, and we hope that once again you will recommend that the government examine the removal of this tax.

Thank you for your time, and I'll certainly be glad to answer questions.

I. Black: Is it your view that spending the $100 million by eliminating the tax will provide more access to justice to our most disadvantaged versus, say, spending the $100 million by leaving the tax in place and instead increasing the funding for legal aid by the same amount?

F. Verhoeven: No. I've said it earlier in my remarks. There are a couple of different things that are involved, I think, in your question. First, as you put it, spending $100 million by not taxing. I reject the premise, which is that if you reduce the taxes by $100 million, then that's going to be a net cost to the treasury of $100 million.

If you make B.C. a better place to do business, there's going to be a gain. A substantial portion of that cost is paid by business, so it reduces their bottom line. It reduces productivity. It reduces their ability to compete. So it's not just a loss of $100 million.

The other side of it, of course, is the question of legal aid. The government said, when they brought it in, that this was intended to raise money for legal aid but hasn't applied it for that purpose. I don't say that the government should. There is no sense to that.

If a person has, for example, family problems — let's say it's a divorce — and they have to pay money for legal services, how is that connected to the need for somebody else to be defended in a criminal matter or someone else who has a custody problem or something like that and can't afford a lawyer? There's no reason to impose on people who use legal services the cost of legal aid. The connection that was made when the tax was introduced is a false one.

I hope that answers the question.

R. Hawes: My question, actually, is something for the Bar Association, I think, but is not related directly to that tax. That would be that the MIA, Municipal Insurance Association, has put forward the premise, as have engineers and others, that joint and several liability increases costs dramatically to taxpayers and others, and they're advocating for proportionate liability.

I know that this has been a matter of discussion with the Bar Association and the government. I'm not sure where it sits today. What is the Bar Association's position on that today?

F. Verhoeven: I don't think we have a position on that. There's obviously a bunch of competing policy questions involved in that issue. We have 6,000 members, and we have 68 sections all involved. We call them sections, where groups of lawyers are involved with different areas of the law. Those sections provide input on potential legislation, and they have discussions with government about these sorts of policy issues. The long and short of it is that I don't know the status of those discussions.

I know that with respect to that issue, it's been kicked around for some time. I think the former Attorney General, Geoff Plant, as I recall, raised it initially. It does have pros and cons. It might reduce liabilities for some, such as municipalities, but from the plaintiff's side, obviously, it makes recovery a lot harder.

As a civil litigator, there are concerns I have as to the fact that it might make litigation a lot more complicated and expensive, because a plaintiff would be forced to go after every conceivable defendant. Right now you don't necessarily have to do that.

Also, insurance companies would, I think, be very pleased, because some defendants are insured, and others aren't — right? Obviously, from the plaintiff's side of things, it's a bad thing. From a defendant's side and an insurance side, it's probably a good thing. It may very much depend on whose side you're on.

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It's a fairly complicated question. There are a bunch of different models, I think, for dealing with that issue. I don't pretend to be up on all of those issues. There are people in our civil litigation section and insurance section who are looking at it, and I'd be happy to provide further information on that point.

B. Ralston (Deputy Chair): Time for one further question before our recess.

J. Horgan: We heard a presentation from one of your members in Williams Lake, who said, surprisingly, to this committee that there weren't enough lawyers. I don't know what the bar's position is on that, but I'd like to go back to Iain's question. You gave an answer to the tax portion of his question, but I'd like to know what the bar's position would be with respect to increasing funding for legal aid in British Columbia, separate and distinct from the tax issue.

F. Verhoeven: Well, there's no question. As you may know, the Canadian Bar Association, the national association, has brought a legal challenge in British Columbia saying that there is a constitutional right to legal aid. We've put our money where our mouth is in that respect.

Our position, absolutely, is that funding for legal aid is insufficient. A number of years ago the government

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cut back legal aid funding and really cut it down to the constitutional minimum, which was criminal defence, and left civil legal aid almost unfunded completely. There's been some small restoration of the funding, but it isn't anywhere near what it should be.

We would like to see access to justice viewed by people in the same plane as education and health care — as being one of the fundamentals of our society. We don't think that the resources are nearly sufficient for that. But we reject the idea that it's only our clients who should pay for it.

B. Ralston (Deputy Chair): Thanks very much. I think that really concludes the time we have for your presentation and questions.

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