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).