Effective July 1, 2010, the Harmonized Sales Tax (HST) will replace the GST and provincial sales tax (PST) in British Columbia.
Some products and services will see an increase in the amount of tax charged as a consequence of the HST, but the taxes on legal services will not increase. Legal services are already subject to both GST and PST and so costs will not increase with the implementation of the HST in B.C. Legal fees for services rendered (lawyer time and disbursements on the clients behalf) prior to July 1, 2010 are being taxed at 12% (GST 5% + PST 7%), and similar charges after the July 1st transition date will be subject to 12% HST.
In order to avoid the complications that result from having pre and post HST time and disbursements recorded on files, our law firm has elected to bill matters with outstanding entries prior to July 1, 2010 to clear accounts up to the effective date.
For clients who are not billed prior to this transition date, their bill may show GST and PST for services rendered up to June 30, 2010, and HST for services rendered after July 1, 2010 but without duplication.
In addition to not increasing the taxes charged on legal services for most clients, the new tax system actually benefits certain clients. For example, businesses who are able to claim for Input Tax Credits (ITCs) were previously limited to recovering the amount charged as GST (5%) will be able to recover the HST (12%), thereby recovering 7% of the amount paid in legal fees. ITCs are available to the extent that the inputs relate to the activity of acquiring, holding or disposing of the shares and indebtedness of the related corporations. For more information, see here.
Moreover, the previous rules of taxation required law firms to clients based on where the services were rendered (the place of supply rule). Under the new taxation rules, there are several factors which contribute to whether the client is required to be charged 12% HST. The proposed place of supply rules for supplies of services are generally based on the home or business address of the recipient (or another address of the recipient) obtained by the supplier in the ordinary course of business of the supplier. In other words, if an individual or corporate client requests legal services in B.C. but provides an address in Alberta, the legal services will not be subject to HST. For more information, see GST/HST Technical Information Bulletin B-103- Harmonized Sales Tax Place of Supply Rules here.
For a more detailed list of how various products and services are affected by the implementation of the HST, see the B.C. Provincial Government’s What’s Taxable under the HST and What’s Not?