In a recent decision, the Federal Court of Appeal ruled that the Law Society of Ontario and its subsidiary could not benefit from an income tax exemption afforded to public bodies that perform “a function of government in Canada”.
The Law Society of Ontario is a corporation without share capital created by statute, whose functions, powers and duties are set out in the Law Society Act, in its regulations, and in the by-laws of the Law Society itself.
The Lawyers’ Professional Indemnity Company is a Canadian-controlled private corporation for the purposes of the Income Tax Act (the “ITA”). It is an insurance company, licensed to operate in Ontario, carrying on under the trade name “LawPRO”. While LawPRO is licensed to operate in other jurisdictions in Canada, its income from activities carried on outside of Ontario did not exceed 10% of its total annual income for the relevant years. LawPRO was incorporated by the Law Society in 1990, and the Society owns at least 90% of LawPRO’s capital.
LawPRO provides mandatory professional liability insurance for lawyers and paralegals licensed by the Law Society who engage in the practice of law in Ontario. It also insures law firms in Ontario, and provides comprehensive title insurance to real property owners and lenders in all jurisdictions in Canada, including Ontario.
LawPRO realized revenues of approximately $124 million in 2013 and $143 million in 2014.
The Law Society requires that all lawyers and paralegals engaged in the practice of law in Ontario pay levies for professional liability insurance provided by the Society through LawPRO. The levies are collected by the Law Society, which then pays the monies collected to LawPRO as insurance premiums.
The Law Society has in the past claimed an exemption from income tax as a qualifying non-profit organization, which exemption the Tax Court assumed was pursuant to paragraph 149(1)(l) of the ITA.
LawPRO filed tax returns for its 2013 and 2014 taxation years asserting that it qualified for the exemption provided for in paragraph 149(1)(d.5) of the ITA, on the basis that its parent—the Law Society—was “a public body performing a function of government in Canada”.
LawPRO was initially assessed as filed for its 2013 and 2014 taxation years. However, in October of 2015, the Minister of National Revenue reassessed LawPRO for these taxation years, denying it the paragraph 149(1)(d.5) exemption. The Minister confirmed the reassessments in January of 2016.
LawPRO appealed from these reassessments.
Tax Court of Canada Decision
In its decision, the Tax Court of Canada found that while the Law Society of Ontario was a “public body”, it did not perform “a function of government in Canada”. As a result, the Court concluded that income earned by LawPRO, a subsidiary of the Law Society of Ontario, was not exempt from taxation for its 2013 and 2014 taxation years.
LawPRO appealed the Tax Court of Canada’s decision, arguing that the court had erred in law in concluding that the Law Society of Ontario was not a “public body performing a function of government in Canada”.
The Crown submitted that, when read textually, contextually and purposively, the relevant provision of the ITA limits the tax exemption to entities owned by municipalities, municipal bodies and other public bodies analogous to municipalities and municipal bodies, such as entities charged with governance over a localized geographical area, that govern the public. Therefore, self-regulating professional bodies such as the Law Society of Ontario and their for-profit subsidiaries did not fall within that provision.
Federal Court of Appeal Decision
The court recognized that while the Law Society plays a key role in the protection of the public by ensuring standards of professionalism and competence among lawyers, it does not follow that the Law Society is a “public body performing a function of government in Canada” for the purposes of paragraph 149(1)(d.5) of the ITA.
After reviewing the text, context and purpose of paragraph 149(1)(d.5) of the ITA, the court concluded that the Law Society was not “a public body performing a function of government in Canada”. Therefore, as a subsidiary of the Law Society, LawPRO was not entitled to the benefit of paragraph 149(1)(d.5) of the ITA.
As a result, the appeal was dismissed.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
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