Litigation Services Supplied to Non-Resident Individuals

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

Please note that the final version of this policy statement and sample rulings have the effect of restricting the relief tax, as compared to the original draft of November 1995. If you require additional information, please contact your local Tax Services Office.

GST/HST Policy Statement P-206

Date of Issue

July 11, 1997

Subject

Litigation services supplied to non-resident individuals

Legislative Reference(s)

Paragraph 23(a) of Part V of Schedule VI to the Excise Tax Act (Act) -- export of advisory, professional or consulting services -- formerly included in section 7 of part V of Schedule VI to the Act, as it read prior to amendment by S.C. 1993, c.27, s.196(1).

Subsection 123(1), definitions of "individual" and "recipient".

Subsection 165(2) -- zero-rating authority.

National Coding System File Number(s)

11640-3 and 11645-4

Effective Date

This policy is applicable to the supply of an advisory, professional or consulting service the performance of which begins after June 9, 1993.

Text

Effective June 10, 1993, section 23 of Part V of Schedule VI to the Act zero-rates certain supplies of advisory, professional or consulting services made to non-resident persons. Prior to that date, these types of supplies were zero-rated under former section 7 of that Part.

Section 23 also provides that a supply of the above mentioned services, when rendered to a non-resident individual in connection with, and after the commencement of, criminal, civil or administrative litigation in Canada, is excluded from this zero-rating provision and is therefore taxable at 7% or 15% on the basis that such a supply is not considered to be exported. Given that litigation conducted in Canada takes place in Canada, these services should be taxed when supplied to non-resident individuals.

However, when these advisory, professional or consulting services are rendered to a non-resident person other than a non-resident individual, or to a non-resident individual in connection with litigation and before the commencement thereof, they may be zero-rated if not specifically excluded from being zero-rated under any of paragraphs 23(b) through to 23(d).

The purpose of this Policy Statement is to provide the necessary interpretative guidelines with respect to the meaning of the words "a service rendered to an individual in connection with criminal, civil or administrative litigation and the commencement thereof":

1) Meaning of the phrase "service rendered to an individual".

a) Meaning of the term "rendered":

The Department considers that the person who is provided with and who receives the advice, service, etc., is the person to whom the service is rendered.

For purposes of determining to whom the service is rendered, one must look to the particular facts of the situation, such as:

- Who is party to the agreement? An examination of the agreement, contract, invoice, etc., should reveal who the supplier is, who the recipient-customer is and who the actual person might be to whom the supply is rendered -- other than to whom the supply is made.

- To whose need is the object and purpose of the supply directly related, the recipient's or somebody else's? Situations do arise where the recipient of a supply is only the intermediary, where some other associated or related person may actually benefit from the supply.

b) Meaning of "individual":

Subsection 123(1) of the Act defines an "individual" as a natural person. A "natural person" at law excludes a corporation, a partnership, unincorporated association, unincorporated syndicate or an unincorporated organization.

2) Commencement of Criminal, Civil or Administrative litigation.

Criminal litigation:

The Department considers that criminal litigation commences on the day an "information", for Summary Conviction Proceedings, or an "indictment", for Indictable Offences, is filed or sworn with the court. The resulting laying of the complaint, charge or accusation has the effect of crystallizing the commencement of criminal litigation.

Civil litigation:

The Department generally considers that civil litigation commences on the day that the originating process (i.e., Statement of Claim, Writ of Summons in the province of Quebec, Notice of Application, Petition, etc.) is filed with the court in accordance with the rules of civil procedure in a particular provincial or territorial jurisdiction.

Administrative litigation:

To determine the time when the administrative litigation commences, the Department will normally look to the procedural requirements imposed by the relevant legislation, or the "rules" of natural justice if no legislation exists, under which the administrative litigation will be brought.

The following are events that the Department would consider to constitute the commencement of administrative litigation:

- Under the Competition Act,R.S., 1985, c. C-34, section 10 authorizes the Director of Investigations to conduct an inquiry into allegations brought forth by a complainant. The day the Director of Investigations receives the complaint will be the day on which administrative litigation commences.

- The date on which a notice, appeal, application, request, etc. is received by the administrative body.

For example, where a neighbourhood association disputes a new municipal by-law that will allow for the development of a parking lot on land reserved for recreational activities. Once the association files its brief with the provincial Municipal Board, litigation will have commenced.

- The date on which the Board or Tribunal's clerk or registrar receives a copy of the application or complaint.

For example, where a taxpayer initiates an appeal to an assessment with the Tax Court of Canada, litigation will have commenced on the day the registrar of the Tax Court accepts receipt of the appeal, etc.

- The date on which the aggrieved party files a complaint with a Board.

For example, where a tenant wishes to object to a landlord's rent increase before a Rent Control Hearings Board, litigation will have commenced on the day the tenant lodges his objection or complaint with the Board.

- Where no specific statutory procedure dictates the date on which litigation commences, the Department's position is that, under these circumstances, litigation will have commenced on the day a board, body or agency which is empowered or authorized to act is made aware of a complainant's intentions.

3) Meaning of the expression "in connection with" criminal, civil or administrative litigation

According to the Concise Oxford Dictionary the expression "in connection with" generally means that which is in relation between things, one of which is bound up with, involved in another, or again having to do with. The words include matters occurring prior to as well as subsequent to or consequent upon, so long as they are related to the principal thing.

However, before a service can be considered to be "in connection with" litigation, there should be evidence to the effect that from a particular point in time the object of the supplier's services directly relates to the intended or contemplated legal or administrative proceedings for litigation purposes.

For greater certainty, the Department will consider the following guidelines as a means of determining whether the services rendered are in connection with criminal, civil or administrative litigation:

a) Was the service designed, developed or undertaken to meet the need or requirement arising from criminal, civil or administrative litigation? In other words, were the services rendered in order to comply with the rules of criminal, civil or administrative procedure?

b) Is the relationship between the purpose or object of the service and litigation sufficiently close? For example, in preparation for the trial, a lawyer consults with a specialist on maritime law to confirm whether he can act as an expert witness on the client's behalf. Since the purpose of the consultation is to enable the lawyer to obtain a witness necessary to advance his client's case, a reasonable functional relationship exists between the legal service and litigation.

c) In criminal matters, the supply of most if not all of the legal services made by a defence lawyer in a specific case would, usually, be in connection with criminal litigation; the object and purpose of the services directly relate to criminal matters.

d) Documentation such as copies of agreements, requests for advisory, professional or consulting services, the supplier's accounting records, demand letters, copies of objections or appeals, etc., would usually indicate the purpose or objective of the service rendered in relation to Civil or Administrative proceedings.

SAMPLE RULINGS

Criminal Litigation:

Example 1

Our understanding of the facts is as follows:

Statement of Facts

1. A non-resident individual, residing in Chicago, Illinois, retained the services of a Canadian defence lawyer to defend him in the case involving white collar crime.

2. The accused received the summons on June 7,1993, indicating that an indictment was filed with the court on June 2, 1993.

3. At the time of the alleged crime, the accused had been hired by a Canadian financial institution as a financial analyst, with respect to overseas investments.

4. The accused was charged with embezzlement of $200,000 in financial instruments and was to appear in Provincial Court, to answer to the charge, on August 17, 1993.

5. On June 10 ,1993 the accused retained the services of a Canadian defence lawyer to represent him in Canada. The services rendered by the defence lawyer are as follows:

- June 10, 1993, met with the accused to go over the summons and to obtain additional information;

- June 14, 1993, the lawyer informed the Crown Prosecutor that he had been retained to defend the accused and requested copies of documents filed with the court;

- June 20, 1993, researched case law and consulted with the accused on specific matters;

- July 18, 1993, prepared character witnesses for defence purposes;

- August 17, 1993, accompanied by the accused, appeared in court and entered plea of not guilty;

- August 23,1993, in view of the factual circumstances of the case, contacted the prosecution to negotiate a plea bargain.

Ruling Requested

All of the services supplied to the accused non-resident by the Canadian criminal lawyer are zero-rated, by virtue of Schedule VI, Part V, section 23.

Ruling Given

Based on the above set of facts, we rule that all of the services that were rendered after June 2, 1993 to a non-resident individual, in connection with criminal litigation, are either taxable at the GST rate of 7% or at the HST rate of 15%, depending on whether the criminal litigation services were performed in a non-participating province or a participating province.

This ruling is subject to the general limitations and qualifications outlined in the GST Memorandum Series (1.4). We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transactions for which you requested a ruling

Rationale

Criminal proceedings were instituted against the accused on

June 2, 1993 therefore, criminal litigation commenced at that time. The Department considers that criminal litigation commences at the time the complaint, charge or accusation is filed or sworn with the court. This has the resulting effect of crystallizing the laying of the charge and triggering the commencement of criminal litigation. Therefore, all of the services which were rendered to the non-resident individual after June 2,1993 are subject to tax at either 7% or 15%, depending on where in Canada the criminal litigation services were performed.

Civil Litigation:

Example 1

Our understanding of the facts is as follows:

Statement of Facts

1. On March 15, 1994, a non-resident individual retained the services of a Canadian lawyer in connection with the preparation of a proposal for purposes of settling of a dispute between the non-resident individual and a Montreal couple.

2. The non-resident individual, who owns a condominium in Whistler BC., had originally sold a two week ski package from February 10 to February 24, 1994, to the Montreal couple on May 5, 1993. However, having received a more lucrative offer, the non-resident sold the same package to a Japanese couple for double the price on September 16, 1993. Without being notified of the above, the Montreal couple arrived at the condominium on February 10, 1994, only to find it occupied by the Japanese couple.

3. On March 2, 1994, the Montreal couple, through their lawyer, sent a demand letter to the non-resident individual requesting compensation totalling $8,000. Through his Canadian lawyer, the non-resident offered a $5,000 proposal, in settlement of the dispute. The Montreal couple refused the $5,000 proposal and filed their Statement of Claim with the provincial court in Montreal, on March 21, 1994.

4. Details of the civil litigation services that were rendered to the non-resident individual are as follows:

- March 15, 1994, consulted with client concerning the dispute;

- March 18, 1994, prepared offer of settlement for $5,000, which was delivered to the Montreal couple that same evening;

- March 19, 1994, attempted to negotiate settlement with the couple's lawyer;

- March 21, 1994, offer refused and civil action filed with court;

- March 23, 1994, accepted service of the plaintiff's Statement of Claim on behalf of the defendant-client;

- April 10, 1994, consulted with client and prepared Statement of Defence with Counterclaim;

- May 6, 1994, served with request for discovery of documents.

Ruling Requested

Under the above circumstances, the non-resident individual's lawyer correctly zero-rated all of the services which have been rendered to date.

Ruling Given

Based on the above set of facts, we rule that only the services rendered prior to march 21, 1994, to the non-resident individual are zero-rated.

This ruling is subject to the general limitations and qualifications outlined in the GST Memorandum Series (1.4). We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transactions for which you requested a ruling

Rationale

The non-resident individual retained the services of a Canadian lawyer to expressly resolve the issue out of court. For purposes of paragraph 23(a) of Part V of Schedule VI to the Act, the legal services that were rendered prior to the actual filing of the statement of claim with the Court (i.e., on March 21, 1994), contemplated settling a controversy that existed between the Montreal couple and the non-resident. The Department, therefore, considers that all of services rendered are in connection with civil litigation.

Also, the Department considers that civil litigation commences on the day the Statement of Claim is filed with the court. This has the result of crystallizing the civil action and has the effect of triggering the commencement of civil litigation. Under the factual circumstances this event occurred on March 21, 1994. Therefore, pursuant to paragraph 23(a) of Part V of Schedule VI, the services rendered to a non-resident individual that were in connection with civil litigation, and before commencement of such litigation (between March 15, 1994 and March 20, 1994) are zero-rated, pursuant to paragraph 23(a) of Part V of Schedule VI to the Act.

Civil litigation services rendered on or after March 21, 1994, are excluded from zero-rating and taxable at either the GST rate of 7% or the HST rate of 15%, depending on where in Canada the civil litigation services were performed.

Administrative Litigation

Example 1

Our understanding of the facts is as follows:

Statement of Facts

1. On July 14, 1993, a non-resident self-employed consultant was hired by a Canadian manufacturer on a contractual basis, until July 14, 1994, to oversee the installation and operation of a widget on one of the manufacturer's turbine engines.

2. Because of the non-resident consultant's suggestion, the widget, following several installation attempts, was returned to the supplier on September 20,1993.

3. The supplier on November 30 1993, wrote to the manufacturer stating that the consultant used the wrong installation procedures for the widget.

4. Once the widget had been properly installed, the manufacturer terminated the consultant's contract on February 14, 1994, five months prior to the conclusion of the contract.

5. On April 4, 1994, the non-resident consultant retained the services of a Canadian lawyer as he believed that the contract was breeched because of his race.

6. On April 22, 1994, the lawyer, following a review of the employment contract and relevant case law, contacted the non-resident suggesting that he first pursue the matter before the Canadian Human Rights Commission and Human Rights Tribunal.

7. On May 4, 1994, the lawyer attended a hearing of the Human Rights Tribunal, regarding a similar issue of discrimination based on race, as an observer on the non-resident's behalf, for purposes of determining the appropriate approach to take in his client's case.

8. On May 24, 1994, the lawyer filed a complaint with the Human Rights Commission on his client's behalf.

9. The Commission sent a copy of the complaint to the manufacturer which was delivered on May 31, 1994.

10. Following an investigation into the non-resident's allegations, the Commission referred the matter for a hearing to the Human Rights Tribunal on August 14, 1994.

11. The Canadian manufacturer received a copy of the Tribunal's letter on August 22, 1994.

12. The non-resident remained outside Canada during the administrative litigation process.

Ruling Requested

Pursuant to paragraph 23(a) of Part V of Schedule VI to the Excise Tax Act, the Canadian lawyer can zero-rate all of the services he rendered to the non-resident individual.

Ruling Given

Based on the above set of facts, we rule that only the services that were rendered prior to May 24, 1994, are zero rated pursuant to paragraph 23(a) of Part V of Schedule VI to the Excise Tax Act.

This ruling is subject to the general limitations and qualifications outlined in the GST Memorandum Series (1.4). We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transactions for which you requested a ruling

Rationale

Generally, for purposes of paragraph 23(a) of Part V of Schedule VI to the Act, the Department considers that professional services are said to be in connection with administrative litigation when the services rendered are in contemplation of litigating a controversy. According to the above facts, the event that confirms the services are in connection with administrative litigation is when the non-resident consultant retained the services of the Canadian lawyer to pursue the matter before the courts. At that time, litigation was contemplated to seek redress, etc. Therefore, only the services that were rendered from that point onward are in connection with administrative litigation.

The Department also considers that commencement of administrative litigation occurs at the time the aggrieved party lodges a complaint with an administrative body, in this case the Human Rights Commission.

In light of the above facts, commencement of administrative litigation occurred on May 24, 1994, when the lawyer filed the complaint with the Human Rights Commission on behalf of the non-resident individual.

Any services rendered to the non-resident individual on or subsequent to that date are excluded from zero-rating pursuant to paragraph 23(a) of Part V of Schedule VI to the Act,and taxable at either the GST rate of 7% or at the HST rate of 15%, depending on where in Canada the administrative litigation services were performed.

Other services that may have been rendered prior to commencement of litigation and which are not in connection with litigation, may, nonetheless, be zero-rated under section 23 of Part V of Schedule VI, as advisory, professional or consulting services, if not excluded by virtue of paragraphs 23(b) to 23(d).