B.C.'s Harmonized Tax Will Not Likely Affect Taxes on Legal Services

The British Columbia Government has announced that it will be harmonizing the provincial sales tax (PST) with the federal goods and services tax (GST).

The combined new rate will be 12% and will apply to most goods and services (there are a number of exemptions). Currently, the PST is 7% and applies to most goods, while the GST is 5% and applies to goods and services. Accordingly, the effect of the harmonization will be to apply provincial taxes to services that were previously not subject to the provincial tax.

But this should not affect the taxes that lawyers have to apply to their bills. This is because years ago the provincial government singled out legal services, and required lawyers to collect the PST on their fees. Lawyers are accordingly already required to add the 5% GST and 7% PST to their accounts. [But see Mr. Laarakker's comment in the comments section below concerning the increased tax on disbursements, which I had overlooked when I wrote this post.]

The harmonization should (at least in theory) be beneficial to law firms and many other small business by reducing the administration involved in collecting and remitting two separate taxes.

I am concerned about the effect of the harmonized taxes on the affordability of houses. The Provincial Government's press release indicates that there will be a rebate on new residential housing as follows:

A partial rebate of the provincial portion of the single sales tax for new housing to ensure that new homes up to $400,000 will bear no more tax than under the current PST system, while homes above $400,000 will receive a flat rebate of about $20,000.

Although I have not been able to find up-to-date statistics, I have no doubt that the median price of new single detached residences is well in excess of $400,000 for greater Vancouver, Victoria and Kelowna.

Sales of used residential houses are exempt from GST, and I assume will be exempt from the new harmonized tax.

The Provincial Government also announced that there will be additional tax credits for low income earners.

Wills Variation Act: Moral Claims of a Common Law Spouse

In assessing a spouse's moral obligations under the Wills Variation Act in British Columbia it doesn’t make much difference whether the claimant was legally married to the deceased or living in a common law relationship with the deceased. That is the inference I draw from the British Columbia Court of Appeal decision in Picketts v. Hall (Estate), 2009 BCCA 329, released last Thursday, July 16, 2009.

In his will, Coleman Hall left his common-law spouse, Helen Picketts, his residence, $2000 per month indexed for inflation, the use of his condominium in Hawaii for up to three months of the year, and, on the sale of the condominium in Hawaii, 10% of the sale proceeds up to $75,000 USD. He left the residue of his estate to his two sons, both of whom were financially well off.

When he died at age 91, his estate was worth somewhere in the neighbourhood of $18 million. Ms. Picketts was 75, and they had lived together in a marriage-like relationship for 21 years. Mr. Hall had at one point said he would marry Ms. Picketts, but they never did get married.

The case went to trial in the Supreme Court of British Columbia. The trial judge awarded Ms. Picketts an additional $405,000 out of Mr. Hall’s estate to make renovations to her residence. The court also increased the monthly payments to the equivalent of $175,000 per year indexed for inflation.

The trial judge drew a distinction between the claims of a married spouse to those of a spouse living in a marriage-like relationship. (See my previous post on this case).

Ms. Picketts appealed to the Court of Appeal.

The Court of Appeal allowed the appeal and awarded Mrs. Picketts a lump sum of $5 million in addition to the gifts in the will, but eliminated the support payments.

Mr. Justice Low in his reasons for judgment in the Court of Appeal considered the legal and moral obligations of the deceased as set out in the Supreme Court of Canada decision of Tataryn v. Tataryn, [1994] 2 S.C.R. 807. Marriage is significant to the assessment of the legal obligations. In this case Mr. Hall did not have the same legal obligations to sharing the family assets under the Family Relations Act, with its presumptive equal share, as he would have if they had been married. Ms. Picketts’ legal claim was limited to support. Any unjust enrichment claim she might have had was satisfied by the gift of the house.

But, Ms. Picketts’ moral claim was not affected by their marital status. Mr. Justice Low wrote at paragraph 40:

It is an important consideration that the Act itself makes no distinction between the two definitions of spouse. The distinction between them is to be found in the interpretation of the Act in Tataryn to which I shall presently come. At this stage of the discussion, however, I would say that, depending on the circumstances of the particular case, a married spouse might have less of a claim to an interest in his or her spouse’s estate than a marriage-like spouse might have in his or her spouse’s estate. Similarly, a marriage-like spouse might have a better claim for receipt of a lump-sum remedy than a married spouse might have.

Mr. Justice Low also noted that Ms. Picketts would have had the same rights as a legally married spouse to a share of the estate if Mr. Hall had died without a will. He wrote at paragraphs 55 and 56:

[55] In the unlikely event that Mr. Hall had died intestate, Ms. Picketts would have received one-third of the entire estate. This is because the definition of “common law spouse” in the Estate Administration Act was amended by the Definition of Spouse Amendment Act, S.B.C. 1999, c. 29, to mean, inter alia, “a person who has lived and cohabited with another person in a marriage-like relationship, including a marriage-like relationship between two persons of the same gender, for a period of at least 2 years immediately before the other person’s death”. This is essentially the same definition as the definition of “spouse” in the Wills Variation Act. The two definitions became law on the same date.

[56] Although the intestacy provisions of the Estate Administration Act do not directly affect the legal considerations under Tataryn, it is significant that the Legislature chose to amend both statutes at the same time. This can be seen as a dovetailing of the two statutes to reflect the social norms of the day and, to repeat the quote from Tataryn at p. 822, to “reflect a clear and unequivocal social expectation, expressed through society’s elected representatives ...”

In arriving at the $5 million lump sum award, the Court of Appeal considered the length of the relationship, the sacrifices Ms. Picketts made in her own career, and the care she provided to Mr. Hall in the last years of his life.

This case is in my view the most significant case to date on the issue of the entitlement of a common law spouse in a Wills Variation Act claim. There remains some distinction between married and common-law spouses in how the courts may assess the deceased’s legal obligations. But in practice, where a common law spouse has a strong moral claim based on the nature and extent of the relationship, the difference may be more theoretical than real when the court determines the amount of the award. I would argue that the difference in treatment between married and common law spouses should be even smaller when the estate is more modest than it was in Picketts v. Hall (Estate).

CBC Story on the B.C. Public Guardian and Trustee

I heard a story the other day on the Canadian Broadcasting Corporation airing complaints about the Public Guardian and Trustee of British Columbia. I heard the story on radio and television. I have since found it on the CBC website here.

Some of the criticisms were directed at the Public Guardian and Trustee’s handling of allegations of financial abuse, and of the Public Guardian and Trustee’s powers. These powers include the power to become appointed as a guardian of a mentally incapable person, even if that person has already appointed an attorney under a power of attorney.

I do not know anything about the specific cases referred to in the CBC’s story, and my comments are not directed at those cases.

But there is another perspective. I say this despite the frustrations I sometimes feel in dealing with the Public Guardian and Trustee’s office (or with many other large bureaucracies).

I will illustrate by making up a fictional case, but it is based on a variety of circumstances that I have come across in my law practice.

Steve is concerned about his aunt, who is 95, and lives alone. She is a widow, with no children. In the last three years, Steve has noticed that she has memory problems. Steve is close to his aunt. She remembers him, but she can’t seem to remember his children’s names when they visit her.

Steve recently learned that his aunt gave her niece (Steve’s cousin) a power of attorney, and transferred her house into a joint tenancy with the niece about six months ago. His cousin has been doing some of his aunt’s banking for her.

Steve’s aunt had not been particularly close with her niece, until about a year ago, when her niece started to visit her aunt several times a week. The niece recently bought a Porsche. Steve does not know where his cousin got the money to buy a Porsche, but he does not believe that his cousin has substantial wealth.

Steve suspects, but cannot prove, that his cousin is taking financial advantage of their aunt. He does not have a power of attorney for her.

Steve goes to a lawyer for advice.

Even if Steve were inclined to sue his cousin, he cannot do so. He has no authority to act on his aunt’s behalf. In British Columbia, there is a legal presumption that Steve’s aunt has capacity to make her own decisions, and only she can sue.

Nor does Steve have any real way of investigating what has happened. He has no right to review his aunt’s bank accounts, or insist that his cousin provide him with an accounting.

If Steve wants authority to investigate or sue on behalf of his aunt, he could apply to the Supreme Court of British Columbia to have his aunt declared incapable of managing his affairs, and for him to be appointed as her committee (or adult guardian). He would need affidavit evidence from two doctors that his aunt is incapable. The application would cost thousands of dollars, and likely take at least a couple of months. His cousin may contest his appointment. If appointed, Steve would have the significant responsibilities of managing his aunt’s finances.

Alternatively, Steve could contact the Public Guardian and Trustee’s office and ask for an investigation.

The Public Guardian and Trustee has the powers to investigate, and if there is evidence of abuse, to have Steve’s aunt’s bank accounts and other assets temporarily frozen to prevent further abuse.

In the circumstances described above, the Public Guardian and Trustee’s office might find that Steve’s aunt is still capable of making her own decisions, and that Steve’s cousin has done nothing wrong. Steve’s aunt’s memory loss may be minimal, and her functioning otherwise good. Steve’s aunt might have transferred the house into a joint tenancy knowing full well what she was doing, as part of her estate planning (although it is probably not estate planning that I would recommend). Steve’s cousin may be using the power of attorney solely for the purpose of helping her aunt. His cousin may have had other funds to buy the Porsche. In these circumstances, the Public Guardian and Trustee would need not do anything more.

But if Steve’s aunt were not capable of managing her own affairs, and if a director of a mental health facility or psychiatric unit signs a certificate that his aunt is incapable, then the Public Guardian and Trustee could be appointed as her guardian.

The Public Guardian and Trustee could then sue Steve’s cousin for the return of the title of Steve’s aunt’s house back into her own name. If Steve’s cousin received money from their aunt, the Public Guardian and Trustee could also sue for that money. It would ultimately be up to the court (not the Public Guardian and Trustee) to decide whether Steve’s cousin is entitled to keep her interest in the house and any funds she received after a trial.

I stress that I am not commenting on the specific cases referred to in the CBC story. Nor am I suggesting that the current legislation in British Columbia does not need reform. It does. In fact the Legislative Assembly has passed new legislation, but the government has not brought the new legislation into effect.

But I do think it is necessary for the Public Guardian and Trustee to have sufficient powers to investigate, and where necessary to take steps to remedy, allegations of financial abuse.

New Civil Procedure Rules in British Columbia, Effective July 1, 2010

The British Columbia Ministry of Attorney General has announced that new rules of civil procedure for Supreme Court of British Columbia proceedings will be brought into effect on July 1, 2010. There is also a new fee schedule for court fees. You can read the press release here.

The intent of the changes is to modernize the rules, reduce the expense to litigants, and make the amount of process involved in a lawsuit proportionate with the importance of the suit and the amount in dispute.

I have skimmed the new rules. My initial reaction is that some of the changes may reduce expense, but some may have the opposite effect. Some of the rules are clearer than the current rules. The language is more modern, but some anachronisms remain.

I plan to write posts on some of the rules and forms, especially as they relate to estates and estate litigation.

You can read the rules here. You may also wish to refer to the B.C. Justice Review Forum, which includes some key features here.

Michael Jackson's Estate Plan

I don’t know if an estate plan has ever received as much media attention as Michael Jackson’s. Yet, the way he set up his estate plan the media are left to speculate, at least for the time being, on the identity of his beneficiaries. I hope he finally does get some privacy.

Michael Jackson set up a trust during his lifetime. A trust agreement is a private document. It does not need to be filed in court. I assume that he held substantial assets in the trust, but because it is private, I don’t know what assets are in it.

His will was made public. You can look at it here. It tells us the names of his executors, and the names of the people he wished to appoint as guardians of his children. But according to the will, any assets he held in his name at death will go to his private trust. This is sometimes called a “pour-over will.” So we don’t know who the ultimate beneficiaries are.

How well would this plan have worked if Michael Jackson were a British Columbian, instead of a Californian?

Probably not as well.

We do of course have trusts in British Columbia, and well developed trust laws (with the same antecedents in English law as California). You could also do a pour–over will naming the trust as your beneficiary.

The difficulty is with the Canadian income tax system. In Canada if you transfer assets into an inter vivos (or living) trust, you are deemed to have disposed of those assets at fair market value. This may trigger capital gains or other taxes if the assets have increased in value. Furthermore, if you hold the same assets in the trust for twenty one years or more, the trust is deemed to have disposed those assets every twenty one years, again triggering taxes.

There are some exceptions to these tax rules such as alter-ego and joint partner trusts, but you must be at least 65 to set up one of these trusts. Sadly, Michael Jackson was only 50 when he died.

I am not saying that Michael Jackson couldn’t do similar estate planning in British Columbia. He could of course pay the taxes when he transferred the assets into the trust, and as well any deemed dispositions every twenty one years. He could also have transferred assets that do not appreciate much, or perhaps he could have transferred just a nominal amount into the trust. He could leave the other assets in his own name, and do a pour-over will. He might have thereby been able to keep the identity of his ultimate beneficiaries confidential.

But if Michael Jackson’s will were probated in British Columbia, the assets he owned in his name flowing to the executors would have to be listed in a disclosure document exhibited to an affidavit filed in court. This disclosure document would be public.

Furthermore, his executors would have to pay a tax in British Columbia, called probate fees, of about 1.4 percent of the value of the assets passing to the executors when the court issued the grant of probate. (The probate fees would not necessarily apply to all of his assets, but if he were a resident of British Columbia they would apply to his shares of any companies holding his substantial copyright interests.)