The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

Disbursements have been an issue under the goods and services tax (GST) and will become a more complex issue with harmonized sales tax (HST).  When I speak about disbursements, I am talking additional charges or expenses incurred by the service providers, such as parking, filing fees, photocopies, etc. that are billed to the client with the fees for services.

As a general rule, disbursements take on the same GST/HST character as the underlying supply of services.

In 2004, the Canada Revenue Agency (CRA)  reissued Policy Statement P-209R "Lawyer's Disbursements" and indicated that they took the position that there are two categories of disbursements that may be found on a lawyer's bill:

1) Expenses/disbursements incurred by the lawyer as agent for the client; and

2) Expenses/disbursements not incurred as agent for the client.

The expenses/disbursements incurred as agent may be passed on to the client without additional GST/HST (however, the service provider should not take an input tax credit and then not charge GST/HST as the GST/HST should be passed to the recipient).

The same two categories apply to other service providers.  However, depending on the nature of the services, it may be that for other service providers expenses are not normally incurred in the context of an agency.  As a result, it is important to understand the CRA's administrative position:

The phrase “incurred as agent” indicates that the disbursement described is generally incurred in a lawyer's capacity as agent for a particular client. As such, no GST/HST is exigible on the subsequent reimbursement by the client. The phrase “not incurred as agent” indicates that the disbursement described is generally incurred otherwise than in a lawyer's capacity as agent for a particular client. As such, GST/HST is exigible on the subsequent reimbursement by the client (to the extent that GST/HST is exigible on the consideration for the service provided by the lawyer to the client). The characterization of each disbursement is based on the application of the principles of agency to a typical transaction involving that disbursement.Policy statement P-182R, Agency was used as the basis for this analysis.

In 2010, there have been two important court cases that provide additional guidance on the issue of disbursements (Merchant Law Group v The President of the Canada Revenue Agency (FCA); Roberge Transport Inc. v. The Queen (TCC).  Both cases give guidance that a court will consider as relevant whether the parties had an agency agreement (or some statement concerning the expenses being incurred as agent) in place to support the arguments that the expenses where incurred in the context of an agency. The Roberge Transport case is important to review because it is written by Justice Steven D'Arcy, who was one of the leading GST lawyers in the country before joining the bench in 2009.

Service providers, therefore, should follow the existing policy statement and add what may be taken from the cases.

There are many complex situations where the HST treatment of disbursements will become relevant.

Example 1:  A service provider pays a filing fee to a municipality in circumstances where the filing fee is exempt for GST/HST purposes.   The service provider may be required to charge HST when it bills the disbursement when the service provider is not an agent for the client.

Example 2: A service provider in an HST province (e.g. Ontario) retains a service provider on a sub-contract basis in a non-HST province (e.g., Manitoba) and pays the service provider's invoice and includes the disbursement on the Ontario service provider's invoice to the client.

Example 3: A trucking company providers trucking services to a Canadian manufacturer and incurs inter-provincial fuel taxes that it invoices the client as a disbursement. If the trucking company is not acting as an agent, there may be HST on the incurred taxes depending on the facts.

The answers re whether HST must be charged in respect of a particular disbursement will depend upon the facts.  I can tell you that businesses need more clarification regarding this subject.

My best advice is to read the Policy Statement on "Agency" and "Lawyer's Disbursements" and clearly state in retainer letters and contracts which expenses and disbursements will be incurred as agent for the client.  The list will depend on the business activities and usual disbursements.  You should seek help compiling the "Incurred as Agent" listing.

In addition, it is better to be consistent in your approach to billing disbursements. A billing policy is helpful and should be provided to all sales and billing staff.  Arguments will have greater persuasive value if it can be shown that a particular type of expense is always treated in a certain manner (usually as incurred as agent in order to not charge GST/HST).

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On February 20, 1991, then Finance Minister Michael Wilson announced in Department of Finance press release 91-023 that the Federal Government of Canada and the Government of Saskatchewan had signed a Memorandum of Understanding which provides for the harmonization of the provincial sales tax with the very new goods and services tax ("HST").  I have a copy of this press release from Carswell's Canada GST Service (pages R687-694 in the "Historical" binder), but have not received permission yet to attach the photocopy.  The harmonization was to occur on January 1, 1992; but never did.

At the time of the press release in 1991, Grant Devine was the premier of Saskatchewan.  A few months later he had been voted out of office and Roy Romanow was the premier of Saskatchewan. During the election campaign, the proposed tax harmonization was a hot topic and public opposition was fierce.  Due to the public opposition to the sales tax harmonization plan, Premier Roy Romanow scrapped the sales tax harmonization plans and to this day Saskatchewan does not have an HST.  Harmonization legislation was not drafted (or should I say completed and released publicly) by the federal Department of Finance until 1997 when Nova Scotia, New Brunswick and Newfoundland/Labrador decided to implement the HST.

Former Premier Grant Devine became the Premier of Saskatchewan in the 1982 after his Progressive Conservative Party won the most seats (55 of 64 seats) in the provincial election.  His government was re-elected in 1986.  During the 1991 election, the Progressive Conservatives won only 10 of 66 seats and both the Devine PC government and the HST were history.  In 2004, Grant Devine sought to enter the federal political arena as a candidate, but was not accepted by the federal PC Party. 

In 1991, the New Democratic party won the election in Saskatchewan.  Roy Romanow became premier and held that position through two elections (1991-2001). Former Premier Lorne Calvert replaced Roy Romanow as NDP leader and premier of Saskatchewan (2001-2007).  Calvert and his government were defeated in 2007 by the Saskatchewan Party and Brad Wall became premier (2007 to present).  The Saskatchewan Party is a coalition of members of the Saskatchewan PC and Liberal parties, but is not the result of a merger.  Technically, the Saskatchewan PC party still exists, but is dormant so to speak.  It can, therefore, be said that the PC party in Saskatchewan did not recover after the failed HST attempt.

Back to the February 20, 1991 Department of Finance press release - Michael Wilson's press release and the backgrounder included statements about how the harmonized sales tax would be better for businesses.  It included statements about how single tax administration would result in economic efficiency and cost savings to businesses.  The people of Saskatchewan did not accept these statements as evidenced by the thrashing the initiators of the HST experienced (both federal and provincial PC parties) during the post announcement elections.

If one considers the Saskatchewan experience and then looks at the anti-HST movement in British Columbia, one should be able to see more clearly how the people can have a strong voice.

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On August 11, 2010, British Columbia's Chief Elections Officer announced that the anti-HST petition met the requirements of the Recall and Initiative Act. More than 700,000 B.C. voters signed the anti-HST petition.  The determination that the petition meets the signatures criteria sets the stage for a new vote on the implementation HST by the B.C. legislature or a possible referendum. This is and will continue to be a historic example of voter engagement and government accountability.

It is the first time a petition has been upheld since Canada’s only law allowing such petitions was enacted in B.C. in 1995.  While this is an important milestone, the future of the HST in British Columbia remains uncertain.  The Chief Elections Officer said that he will not do anything until a court case against the petition is dealt with in the courts. So, the HST is not dead yet.

Former Premier Bill Vander Zalm and the leader of the anti-HST movement made a very important observation:

“Every Liberal MLA is vulnerable as of today ... We will recall every MLA, every Liberal MLA if need be."

This observation (which may come across to some as a passing statement) is so important because it addresses the fundamental issue of accountability.  What Vander Zalm is saying is that each Liberal MLA who was elected in the 2009 election in the province will be held accountable before the next election.  MLAs are elected by the people and are not given a license to do whatever they please - especially impose new taxes on the people without the approval of the people.

While it is true that most government matters are left by the people to the elected MLAs, there are situations, such as the implementation of the HST, which cause the people to respond and ask for a reconsideration of a proposed action to be taken or action taken by government.  The anti-HST petition is one of those rare situations.

Should all provinces have similar legislation to the Recall and Initiative Act?  Arguably, the answer is "YES".  Arguably, there needs to be mechanism for the people to hold up a big "STOP" sign and ask the government to listen to opposition.  The elected officials should not turn to the voters who elected them and say they are smarter than the voters and they know what is best for the voter and that the voter should "SHUT UP".  If the elected officials will not voluntarily listen to a large number of people, such recall legislation is a check and balance on democratic principles.

I think I hear Bill Vander Zalm saying "Can you hear us now?"

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This is so exciting (NOT) - It is August 2010 and this means that some businesses that are in a net refund position (that is, their input tax credits exceed their GST/HST collected) may be filing their GST/HST returns for the month of July 2010.  The businesses that would file their GST/HST returns early would most likely be monthly filers.  Some examples are builders of multi-unit residential complexes, persons who made a large purchase of equipment in July 2010 due to the recoverability of HST, exporters and exempt entities.

July 2010 has now ended (months seem to come and go so much more quickly).  Businesses will be working on their records and filing their GST/HST returns (many must now file electronically).

The first GST/HST return must include HST collected during the transition period - please do not forget.  All HST must be remitted to the Receiver General of Canada - do not send it to the ontario Ministry of Finance.

When calculating input tax credits, please include all GST/HST paid or payable before August 1, 2010.  If you are a large business, do not offset the recaptured ITCs against the ITCs collected number - it has its own line on the GST/HST return.

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I was at an event last night hosted by Women's Post and a woman entrepreneur in the audience who was in the events planning business in Ontario asked why harmonized sales tax (HST) was charged being charged on gratuities (she had noticed this since the implementation of HST).  She noticed that venues and caterers were quoting (1) the charge for the room and/or (2)  the food/beverages and (3) a mandatory gratuity and that HST was being charged on all charges, including the gratuity.

The answer is that the Canada Revenue Agency (CRA) considers the mandatory gratuity to be extra consideration for the supply (say, of the venue.food/beverages/etc) rather than a contribution towards the salary (non-taxable) of the employees that will be working the event. The CRA had taken this position with the goods and services tax (GST).  GST/HST is payable on the consideration for the supply and since the gratuity is considered by the CRA to be additional consideration, it goes into the calculation/formula.  As a result, the CRA takes the position that GST/HST is payable on the added consideration that is the gratuity portion.

I have seen the same analysis used by CRA when they look at gratuities paid on restaurant meals, resort vacation packages, hair salon services, spa services, etc - whenever there is a mandatory gratuity OR when the gratuity is included in credit card payment (that is the recipient pays adds a gratuity to a credit card payment).  For example, when I go to the hair salon, I pay by VISA.  Before I indicate my PIN number when I use my chip card, I am asked whether I wish to add a tip or gratuity and I usually add 15%-20% of the tax-excluded price for the services rendered.  The CRA when auditing such service providers/venues, adds the gratuity amounts to the consideration for the services and calculates the GST/HST owing.

Based on the cases I have seen, often the service provider does not charge the GST/HST on the gratuity portion and has to dip into their pockets to pay a substantial assessment.

The morale of the story is that when possible, recipients should give waitresses/waiters and service providers cash tips when they are adding an amount to the bill for the exceptions services performed by the individual to the recipient.  If the gratuities are in the invoices or in the credit card payments 13/113 of the amount in Ontario (12/112 in BC, 15/115 in NS, 113/113 in Nfld/Lab. and NB) will not go to the waitress/service provider and will be remitted to the Receiver General of Canada.  This is unfortunate because the individuals affected are making low hourly wages and rely on the gratuities as employment income (to make ends meet).

I have been involved in structuring the payments so that more money goes to the real people who work very hard for the additional employment income - it is possible if a business plans in advance of the CRA visit.

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A tax on a tax is called a "cascading tax".  Cascading taxes are common in today's world.  As a general rule, most new taxes and levies can result in cascading tax (HST charged on top of the new tax) unless the provincial government asks the federal cabinet to list the new tax in a regulation.

Goods and services tax (GST) and harmonized sales tax (if applicable) (HST) is calculated on the consideration payable for a supply of property or services.  Subsection 154(2) of the Excise Tax Act (Canada) provides that "the consideration for a supply of property or a service includes:

(a) any tax, duty or fee imposed under an Act of Parliament [that means federal laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property or service [other than GST/HST];

(b) any provincial levy [intended to cover provincial laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the consumption or use of the property or service, other than a prescribed provincial levy that is payable by the recipient [that means it is in a regulation]; and

(c) any other amount that is collectible by the supplier under an Act of the legislature of any province and that is equal to, or is collectible on account of or in lieu of, a provincial levy, except where the amount is payable by the recipient and the provincial levy is a prescribed levy."

The term "provincial levy" is defined to mean "a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of the property  or a service."  What is most significant about this definition is that unless the levy is imposed pursuant to an Act of the legislature of the province, GST/HST would not be payable on the tax-included price. It is always necessary to go to the source of the taxation/fee/levy.

The Taxes, Duties and Fees (GST/HST) Regulations contain a negative list of provincial levies that are excluded from the GST/HST calculation.  If the provincial law is not in the list, then the provincial levy is included in the price for the purposes of calculating GST/HST.

Ontario has a very short list including the following:

• the Land Transfer Tax Act, R.S.O. 1990, c. L.6,
• Chapter 760 of the City of Toronto Municipal Code, made under Part X of the City of Toronto Act, 2006, S.O. 2006, c. 11, Sched. A, if the tax, duty or fee would have applied to that transfer under that chapter as it read on February 1, 2008

The Taxes, Duties and Fees (GST/HST) Regulations also prescribe in the list "a tax imposed by the legislature of a province, under an Act referred to in the definition of "general sales tax rate", which includes subsection 2(1) of the Retail Sales Tax Act (Ontario). This exclusion is more complicated, but has been generally applied to exclude Ontario retail sales tax from the calculation of GST.

Now that Ontario has harmonized and is not using the Retail Sales Tax Act to impose taxes representing significant revenue, any new provincial levy may be included in the GST/HST calculation as it would not be listed by the Taxes, Duties and Fees (GST/HST) Regulations.  I say "may" because the other requirements in section 154 of the Excise Tax Act would have to be met. To be excluded from the GST/HST calculation, new taxes must fall within a listed Act in the manner it is identified or the provincial government must ask the Government of Canada (specifically federal cabinet) to change the regulation.

It seems as if in most situations, suppliers assume (and act as if) the tax/fee is included in the calculation of GST/HST because it is the safe thing to do.  However, questions are not asked if this is correct.   For every provincial levy or charge that we might be inclined to include for the purposes of calculating GST/HST, we must ask questions before including the fee in the calculation:

• Is the tax/fee imposed pursuant to a law of Canada?
• Is the tax/fee imposed pursuant to an Act of the legislature of a province?
• Is the tax/fee imposed by a regulation or a rule and there isn't a charging provision in an Act of the legislature (I an thinking carefully about the ecotaxes)?
• Is the tax/fee imposed under a municipal by-law?
• On what is the tax/fee imposed?
• Is a recipient of a supply responsible for paying the tax/fee under the law imposing the tax/fee?
• Is the supplier of the supply required to collect the tax/fee?

I have serious questions whether the Toronto plastic bag fee is subject to HST.  I have serious questions whether GST/HST should have been charged on top of the ecotaxes.  I have questions whether certain destination marketing fees are subject to GST/HST.  I think that consumers are paying GST/HST on top of many taxes and fees when the GST/HST laws do not require GST/HST to be charged.

The unfortunate reality is that the implementation of HST has incentivized Ontario and British Columbia to cause prices to increase so that they get more HST revenues.  It is in the interest of the government for retailers and suppliers to make mistakes and overcharge consumers.  It is no longer in the interest of Ontario and British Columbia to list new provincial levies in the Taxes, Duties and Fees (GST/HST) Regulations.  It is no longer in the interests of the leaders to keep prices down for consumers.

For this reason, it is more important than ever for businesses and retailers to understand the law and force the governments to follow the law.  It is more important than ever before that provincial levies are imposed in a transparent manner.  It is more important than ever for the people to make it known that there is a cascading tax and the government is accountable to them and needs to request the new tax to be listed.

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On July 23, 2010 - TOMORROW - Is the day the last regular Ontario retail sales tax (RST) returns are due.  Are you a vendor?  Have you added up all the RST you collected in the period before July 1, 2010?  Is your RST return ready to be filed?  Have you written that last RST cheque?  How are you going to celebrate?

Vendors must file their final RST return for reporting periods ending on or after June 30, 2010.  The final RST return should be filed with the Ministry of Revenue on or before July 23, 2010.  Some vendors may be required to file a supplemental RST return on or before the 23rd day of the following month. The final supplemental RST returns are to be filed by November 23, 2010.

Harmonized Sales Tax - Tax Tip 13 (June 2010) "Prepare for Ontario's HST: Final, Supplemental and Amended Retail Sales Tax Returns" provides more information on what you should do.

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I am a big fan of anticipating a problem during a Canada Revenue Agency audit and solving the problem before it happens.  File opening forms may provide useful information to a CRA auditor.  The first thing they do is they inform the CRA auditor that you are diligent.  You took your GST/HST compliance responsibilities seriously.  You tried to ask the right questions in order to bill correctly.

A file opening form can be useful in recording the information that will allow you to determine whether the harmonized sales tax (HST) place of supply rules apply and at what rate you should be charging HST.

There isn't a single form that will work for all businesses - in other words, you would be wise to work with an HST lawyer or expert to develop the form and learn how to analyze the information on the form in a diligent manner.  If you have a billing policy, then you are more likely to get the answer right.

Some of the information that may be included on a file opening form (and I want to make it clear that this is not an all inclusive list) is:

1. Date
2. The correct legal name of the client/customer
3. If the client is incorporated, the jurisdiction of the corporation and the incorporation number
4. If the client is a partnership, the jurisdiction of the partnership and the partnership registration number
5. The head office address or the address at which the individuals are located who provide instructions to you
6. Name of the prime contact who will be giving instructions
7. The normal location of that person
8. Telephone number of the prime contact
9. Fax number of the prime contact
10. Email address of the prime contact
11. If different than 6, the name of the person who hired you
12. If different than 7, the normal location of the person who hired you
13. If different than 8, the telephone number of the person who hired you
14. Will you be providing (a) goods, (b) services, (c) real property, (4) intangible property, or (e) other
15. A short statement of the proposed work
16. If you are selling goods, the address to which goods will be shipped
17. If you are providing services in respect of real property, the address at which you will be providing the services or the location of real property at issue
18. Your client's/customer's GST/HST registration number

We would be willing to create a special file opening form for your business (for a fee to be determined based on the work involved - e.g., simple business would be $250 plus all applicable taxes).  We will ask more detailed questions about your business and add prompts for information that you will need to apply the HST place of supply rules (and ward away assessments).  We will teach you how to read the information so that you can charge the right amount of HST given your unique circumstances.  To prepare upfront, at the time of file opening, will in all likelihood be less expensive than a CRA assessment.

Contact me at cyndee@langmichener.ca

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Many businesses are conducting tests to determine whether they are recording their input tax credits properly.  In particular, they are verifying that when they pay harmonized sales tax (HST), the HST is recorded properly in their computerize records so that when they file their first GST/HST return for the reporting period that includes July 1, 2010, they include the HST paid on purchased supplies.

When a business files a GST/HST return, they should include in the input tax credit line all GST and HST paid or payable.  Even though some input tax credits of large businesses are subject to recaptured ITC rules (which will not be addressed in this post), they must claim the full amount in the ITC line and NOT undertake an offset calculation.  For the purposes of the example below, I am assuming the business is located in Ontario:

While there would be many other entries in a typical business, in the above example, the ITC to be claimed is $11,895.  As previously mentioned, if the business is subject to the recaptured ITC rules, that calculation does not affect the ITCs claim line and is addressed/calculated elsewhere.

A GST/HST registrant has a prescribed period of time (often 4 years) in which to claim input tax credits.

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