The unjust tax

Pam Frampton pframpton@thetelegram.com
Published on November 26, 2011

Most of us complain about the "airport improvement" fee that's tacked on to the price of our plane tickets.

In St. John's, that's $20 every time we depart.

What's it for? Things like more sophisticated de-icing systems, covered walkways, bigger parking lots. Things that benefit travellers.

When you think about it, it's kind of a necessary evil.

But there's another fee we've been paying since 2005, if you've ever been involved in a real estate transaction or a civil suit. And its benefits are far less direct.

The transaction levy was an idea floated by the Law Society of Newfoundland and Labrador back in 2003, when it was grappling with high insurance premiums.

The situation was compounded a year later when property developer Myles Leger went belly up, which led to $5 million in insurance claims involving the legal practices of William Parsons and Glen Bursey.

At the time, lawyers in the province were worried their insurance premiums would skyrocket.

"After the Parsons custodianship mid-year it was quickly evident ... that Parsons and other claims during 2004 would be extraordinary ...," states a law society report from April 2005.

"Premiums requirements as high as $15,000 per member were openly mentioned as a possibility."

So, the law society's insurance committee looked to Ontario for inspiration, where a transaction levy of $50 plus tax had been introduced in 1995. The fee was to be incurred by private-practice lawyers for every real estate and civil litigation, but they had the option of passing the cost on to clients, which many did, and do.

The Newfoundland law society's insurance committee reported in April 2005 that the situation was urgent, and suggested a levy could provide financial relief in the short term:

"Our existing insurance fund is currently insufficient to stabilize our risk. ... Adding funds to these resources over a short period of time is, in the insurance committee's view, an important step. ... The transaction levy is one proven tool that can achieve this objective."

The transaction levy was meant to be a short-term measure, but the law society would later distance itself from that notion.

Questions raised

But not everyone was convinced a levy was the best way to go.

A May 17, 2005 report from the provincial branch of the Canadian Bar Association, submitted to the law society's insurance committee, suggested there should never have been a need for the levy.

"Many members expressed the view that the society could have done more to discover the impugned conduct of Mr. Parsons and Mr. Bursey earlier," it said.

The report also questions whether or not lawyers were permitted to pass the charge on to their clients, and acknowledges it will be a tough sell.

"The relevant legislation confers no specific authority on the society to impose a levy on members of the general public. ... A direct disbursement payable by clients is difficult to justify.

"As one student member in attendance said, a lawyer asked to describe the transaction levy to a client would essentially have to disclose that it is a charge to ensure that we can pay a claim you might make against us if we screw up on this transaction."

Still, the levy was rolled out and took effect May 1, 2005.

Not warmly welcomed

It got a chilly reception in many circles, including from property developers and members of the public.

"The levy adds $100 to every property related transaction ($50 each side)," said Gary Reardon, the president/director of St. John's-based Reardon Construction and Development Ltd.

"Many of our buyers are really tight on their budgets and this fee very often comes as an unexpected cost. ... It should never have been paid by consumers. If the law society was lax in its diligence in monitoring their members, it should have been their issue. They have simply passed the cost on to innocent consumers."

And they're still passing it on, and there's no end in sight.

Underwhelming revenues

By December 2006, the transaction levy was no longer being touted as a short-term solution. In fact, the law society's insurance committee was lamenting the fact that it was not bringing in enough revenue.

"(Discussing) the transaction levy's first year of operation, (insurance committee chair John F. Roil) stated that the levy generated $1.34 million, a sum less than originally projected. 'If we are to have a properly funded and sustainable insurance programme that protects the public interest, then we must maintain the levy for the foreseeable future,' said Roil, QC."

But soon, the golden goose would kick into high-production mode. And by 2008, the law society's insurance committee was pleased with how it was swelling the coffers.

"In overview, the financial statements show an insurance program that is stable and appropriately funded to secure members' protection," the committee reported in 2008-09.

"The transaction levy is key to that stable funding. ... Revenues have accumulated at this writing in the amount of $3.9 (million), these monies held in cash accounts and earning 4.5 (per cent) interest."

By now, in a dramatic shift, the transaction levy is no longer being sold as a necessary antidote in the short-term, necessitated in part by the Parsons/Bursey fiasco.

Instead, it is being sold as a permanent and necessary method of propping up the insurance program and further decreasing lawyers' premiums.

"It is worth repeating the common misconception, if only to refute it, that the transaction levy was prompted by the excessive claims of the Parsons-Bursey custodianship year," Roil writes.

"The levy was approved ... in December 2003; the Parsons-Bursey custodianship did not occur until late May 2004. The transaction levy was, and remains, necessary, because of changes in the international insurance market that make it increasingly difficult to obtain professional liability insurance."

The levy may have been discussed internally in December 2003, but it was not implemented until 2005, and there's no question that the financial pressures of the Parsons-Bursey affair put the law society's feet to the fire.

Cha-ching!

The law society's annual reports are not available online beyond 2008-09 - and The Telegram's request for those documents and for comment was not met by deadline - but the rosy financial forecasts have no doubt continued.

Anyone who's witnessed the number of new houses built and the existing ones that have changed hands in the metro area alone since the levy was introduced can just imagine how many millions it's brought in for the law society.

Meanwhile, the public continues to subsidize private-practice lawyers' insurance premiums with the only possible benefit to us being that we might be compensated adequately if we ever had to sue for malpractice.

Wow, that's a relief.

We pay, they save

The law society's outlook was downright cheery in its 2008-09 report.

"In recent years, premium costs have fallen steadily, from $6,000 in 2005, $5,200 in 2006, $4,800 in 2007, and $4,650 in 2008. Members can reasonably anticipate another premium decline ...," Roil wrote.

"... cash assets generated from the regular insurance premium plus the transaction levy can, over time, significantly lower premium costs for members."

How wonderful. When was the last time your insurance premium decreased?

In essence, what started out as a temporary measure has morphed into a cash-grab targeting people for whom legal fees are cost-prohibitive at the best of times.

In Ontario, they've hiked the cost of the transaction levy from $50 to $65. Don't be surprised if that happens here.

The higher levy was necessary in Ontario, the logic goes, because there's been an increase in the number of real estate claims in that province.

Why were there more real estate claims? Ah yes, that's the interesting part.

According to LawPRO, which provides insurance services to Ontario lawyers, two-thirds of those claims stemmed from lawyer error.

As the organization's website notes: "In other words, more than 65 per cent of real estate claims over the past decade related to soft skills/decision-making/judgment in the handling of clients and the strategy concerning the file."

They screwed up.

It's fine for lawyers to build up a pot of money to cover their collective behinds, but stay the heck out of our wallets.

It's time to axe this tax.

Pam Frampton is The Telegram's story editor. She can be reached by email at pframpton@thetelegram.com. Twitter: pam_frampton