Charging GST/HST on disbursements and/or expenses you charge back to your client is a tricky area that can easily be done incorrectly. Understanding how to treat GST/HST in this area is critical to avoid costly assessments. Determining whether these disbursements were incurred as agent is vital to determining if GST/HST should be charged on these transactions.
Consider the following situation:
You charge $1,000 for your services;
Your services are taxable for GST/HST purposes at a rate of 5% GST only; and
You have disbursements of $100 that are billed back to your client.
Generally, an expense incurred as an agent is an expense that is a client’s own expense (e.g. a lawyer paying land transfer tax on behalf of a client that is purchasing real property). The GST/HST status of these transactions remains with the expense and passed through to the client. For instance, if in the above situation GST was paid on the disbursement, the total disbursement would be $105. This would be billed to your client as $105 with no GST/HST being charged on this amount. Furthermore, no input tax credit (ITC) should be claimed on these disbursements as they are not your expenses.
If these disbursements were not incurred as agent, but rather as an input to the services being provided, they are taxable and GST/HST should be charged on the net amount. The GST/HST status of these expenses is irrelevant since the status of your fees is the determining factor as to whether GST/HST should be charged. This may result in situations where disbursements which had no GST/HST charged on them originally (such as a meal or hotel outside of Canada) are now taxable. In the example above, if GST/HST was incurred on the $100 disbursement, an input tax credit should be claimed. Furthermore, regardless of whether GST/HST was incurred on the disbursement, it would be billed to the client as $100 with $5 of GST charged separately.
On the surface it may seem like the net result is the same between billing disbursements when incurred not as an agent vs being incurred as an agent, however, charging a client $105 without charging HST on the disbursement could result in a CRA assessment for the GST/HST and potentially losing out on an eligible input tax credit.
For more information, please contact email@example.com or 1 844-GYTD-CPA