LPIC v. R. – TCC: Ontario’s insurer of lawyers is not exempt from income tax, despite being owned by the Law Society of Ontario

LPIC v. R. – TCC:  Ontario’s insurer of lawyers is not exempt from income tax, despite being owned by the Law Society of Ontario


Lawyers’ Professional Indemnity Company v. The Queen (September 26, 2018 – 2018 TCC 194, D’Arcy J.).

Précis:  Lawyers’ Professional Indemnity Company (LPIC) has apparently claimed an exemption from federal income tax pursuant to paragraph 149(1)(d.5) of the Income Tax Act (the Act), as a “public body performing a function of government in Canada” for some time.  CRA reassessed its 2013 and 2014 taxation years denying it the exemption.  D’Arcy J. agreed with CRA’s position, finding:

  1. The Law Society of Ontario (the Law Society) owns in excess of 90% of LPIC’s capital;
  2. The Law Society is a public body within the provision of paragraph 149(1)(d.5);but
  3. The Law Society did not at the material times perform a function of government in Canada;

and dismissed LPIC’s appeal (apart, that is, from a few small concessions made by CRA) with costs to CRA.

Decision:   This is quite an odd decision.  Not surprisingly the Law Society had always been treated as tax exempt:

[53]  I was informed by the parties that the Law Society has, in the past, claimed exemption from income tax as a qualifying non-profit organization. I assume the Law Society claimed this exemption under paragraph 149(1)(l).

One would assume that if the Law Society self-insured its members the income from that activity would also be tax exempt.  There is no discussion whatever in the decision of the policy behind taxing the insurance activities of LPIC (and, one would assume, increasing annual premiums as well as the cost of legal services in Ontario).

The Supreme Court of Canada has held that the Law Society has a duty to act in the public interest:

[83]  At paragraph 18 the majority reiterated this duty to the public when they stated: “By the clear terms of s. 4.2 of the LSA, the LSUC must have regard to the principles set out in that section — including its duty to protect the public interest — in carrying out all of its ‘functions, duties and powers’ under the LSA.”

[Emphasis original]

Notwithstanding that, the decision turns on the very narrow issue of “function of government”:

[91]  In my view, a public body only performs a function of government in its specific geographical area if it performs the function as part of the governance of the public located in that specific geographical area.

[92]  It is a question of fact whether the Law Society performs a function of government in Ontario. The Court must determine what functions the Law Society performs in respect of the public in Ontario, and whether such functions constitute a function of governing in Ontario.

[93]  The majority of the Supreme Court of Canada in Trinity Western noted that the legal profession in Ontario is a self-regulating profession. The Law Society is the regulator of the legal profession in Ontario.

[94]  I do not accept the Appellant’s argument that the performance of this regulatory function constitutes the performance of a function of government in the geographical area of the Law Society’s responsibility, namely, Ontario.

[95]  While the Law Society is required to have the public interest in mind when it carries out its regulating functions, this does not mean that it is performing a function of government. The Law Society performs its functions in respect of the legal profession, not the public. It formulates and applies policies for the purpose of regulating the legal profession. As Mr. Varro stated during his testimony, the Law Society devotes all of its resources to the regulation of the legal profession. The Law Society performs its various functions in the course of regulating the legal profession, not in the course of governing people located in Ontario.

The decision does not address the significance of the fact that the Law Society has been an integral part of the legal system in Ontario for more than 200 years:

1.  The Law Society of Upper Canada (the “Society”) was founded in 1797 by an Act of the Legislative Assembly of Upper Canada.

2.  The Society was incorporated in 1822 and was continued under the Law Society Act of Ontario (the “LSA”) in 1990 as a corporation without share capital.

[Statement of Agreed Facts – Partial.  Footnote omitted]

The decision also attacks the credibility of the Law Society’s corporate secretary in a most peculiar, if not questionable, manner:

[23]  Mr. Varro provided conflicting evidence on who actually prosecutes an individual under section 26.2. During his examination in chief, he stated that it was the Law Society, not the Crown, that brought the proceedings under section 26.2.  On cross-examination, counsel for the Respondent reminded Mr. Varro that during his examination for discovery he stated that the Crown prosecuted under section 26.2. Mr. Varro then changed his testimony and stated that both the Law Society and the Crown can prosecute under section 26.2.  His testimony in this area damaged his credibility. His testimony in numerous areas left me with the impression that he was trying to provide the “right” answer for the Appellant’s case as opposed to merely stating the facts.

[Footnote omitted]

It is difficult to see what significance Mr. Varro’s comments about who carries out prosecutions has to the tax question before the Court.  Arguably this is simply unimportant arcana.

It seems obvious that the creation of LPIC by the Law Society a century or more after its own creation was not designed as some form of aggressive tax planning.  It appears that CRA does not challenge the fact that all of the activities of the Law Society are exempt from tax.  It is hard not to conclude that the provision of insurance to lawyers by LPIC is simply an extension of the Law Society’s statutory mandate to protect the public interest.

It will be very helpful to have the observations of the Federal Court of Appeal (and, possibly, the Supreme Court of Canada) on these issues.