What Factors Lead to Exemption From Tax?

Lawyers’ Professional Indemnity Company v. H.M.Q. 2018 TCC 194 (“LPIC”)

LPIC is a relatively straight-forward Tax Court decision penned by Justice D’Arcy.  LPIC is a wholly-owned subsidiary of the Law Society of Ontario (“LSO”) and the provincial insurer of licensed Ontario lawyers and paralegals. The issue in this appeal is whether the Law Society of Ontario satisfied the conditions in paragraph 149(1)(d.5) of the Income Tax Act[1], such that the income of its subsidiary LPIC would be exempt from tax. The provision grants tax-exempt status to a “…municipal or public body performing a function of government in Canada.”  The Court found that the Law Society did not meet the conditions in that provision and therefore LPIC was not a tax-exempt entity under the Act.

The facts were largely undisputed.  Two witnesses testified on behalf of the LSO, namely, Mr. Paul Schabas, LSO Treasurer and Mr. James Varro, the LSO’s corporate secretary.  Both testified as to LSO’s functions and mandate.  Quite understandably, both focussed on the public nature of the functions performed by the Law Society.  According to Schabas and Varro, the LSO assures the competence of its licensees for the benefit of the public.  It keeps them sharp through professional development.  the LSO maintains and advances the cause of justice and has a general duty to protect the public interest.  As an aside, Justice D’Arcy did not find Mr. Varro to be a credible witness, chiefly because he was, in the Judge’s view, trying to support the LSO’s case rather than simply testifying to the relevant facts.

The relevant tax provision allows a corporation, commission or association that is at least 90% owned[2] by a municipality or a municipal or public body performing a function of government in Canada.  The question becomes, is the Law Society a public body performing a function of government? The Appellant argued this was a two-part test, namely, it became necessary for the Court to first determine if a) LSO was a public body and b) whether it was performing a function of government.

Justice D’Arcy employed the textual, contextual and purposive approach to statutory interpretation and concluded that it was indeed a two-part test. To determine if the LSO is a public body, Justice D’Arcy imported a three-part test from Registrar of Trade Marks v. Canadian Olympic Association[3], a case used to determine a public authority.  To be considered a public authority (synonymous with body herein), there must be a public duty owed by the entity, there must be a significant degree of governmental control over the entity and any profit must not be for private benefit.  Justice D’Arcy found that the LSO owes a public duty, pursuant to that precise finding by the Supreme Court of Canada in the Trinity Western[4] decision.  He found that the LSO is under significant control by the government of Ontario, which satisfies the second condition.  Lastly, he found the third part of the test satisfied because the LSO does not share profits with its licensees.  The LSO is therefore found to be a public body.

Does the LSO perform a function of government? Justice D’Arcy finds it does not.  He finds that the benefits derived by the public from the discharge of the LSO’s various duties do not rise to the level of government function.  There was no evidence to suggest that the LSO performed a governing function.  The Government of Ontario performs a governmental function when it decides on the body to regulate a profession, the duties and responsibilities of that body and its rules of operation.  But the actual performance of the duties by the regulatory body does not rise to the level of function of governing the actual people of Ontario.  The appeal was allowed only to provide for a small charitable donation concession made by the respondent prior to trial. As a practitioner, I appreciated the reliance on the test from Trade Marks to determine a ‘public authority’ and extending that test to apply to a ‘public body’.  I was left wondering if there could have been a different finding had the Court adopted the approach of the respondent and treated the provision as singular rather than a two-part test.

[1] R.S.C. 1985, c.1 (5th sup.) as amended  (“Act“)

[2] There was no dispute that the 90% ownership threshold of LPIC by the LSO was met.

[3] [1983] 1 F.C. 692.

[4] Trinity Western University v. Law Society of Upper Canada 2018 SCC 33