Charging Client HST on Expenses

by Abby
(Ontario)

When invoicing the client, do we add HST to both of those expenses?

When invoicing the client, do we add HST to both of those expenses?

I really hope you can help clarify something for me. I have a question regarding charging our clients HST on some expenses (or reimbursements).


We own an investigation business (incorporated) in Ontario (we provide services only). Most expenses incurred for a client are charged back to them at cost, i.e. some meals, parking & record searches. Some of these expenses (to us) include HST & some do not.

Example 1: we incur a charge for parking for $16.00. It's from a municipal parking lot, there is no HST # on the receipt & no HST charge identified. Parking is one of the items stipulated in our contract that the client pays for.

Example 2: we incur a charge of $24 for 2 (Provincial) record searches we obtained as part of an investigation. The receipt identifies that no HST was charged to us. The client is not privy to the original document & never gets a copy. (Also, sometimes the record searches are stand-alone requests and sometimes they are part of a flat-rate package. Either way, is always charged to the client outside of any other expenses.)

When invoicing the client, do we add HST to both of those expenses? And, based on another post on this site, are these 2 expenses actually reimbursements that we record as Income?

I did contact CRA & they quoted Section 133 of the Excise Tax Act as an answer to my question but reading it didn't clarify anything for me. Help!



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Hey Abby,

I'll start by answering your last question first.

It is my understanding (and how I record it when I post items) that reimbursable expenses are indeed booked as income. I usually set up a separate revenue account for this such as "Reimbursed Expense Income" or "Billable Expense Income".

When you incurred expenses on your client's behalf, you get to claim your ITCs. When you bill your client, they also should be able to claim their ITCs. Think about when a lawyer sends you a bill. It is usually something like this:

Professional Services @ $XX/hour
GST/HST on Fees $XX

Taxable Disbursements $XX
GS/HST on Disbursements $XX

Non-Taxable Disbursements $XX

Total Account $XX

The law firm clearly identifies taxable vs non-taxable items and the type of tax whether it is GST, HST or PST. This allows the client to claim ITCs if applicable to their situation. It also meets your obligations to charge the appropriate sales tax on all income including billable expense income.

In your second example, if you use QuickBooks Desktop or Quickbooks Online, the record searches would have a sales tax of zero or exempt as your invoice states no HST was applicable. I'm guessing it is exempt but you would have to research this a bit.

In your parking example, check to see if there is a HST/HST registration number on the ticket stub. If yes, then you know the amount includes sales tax. But it is my understanding the rules changed slightly in 2013 (see my chat here http://www.bookkeeping-essentials.com/sales-tax-on-paid-parking-tickets.html).

Here in BC, parking does not attract PST but it did attract HST and does attract GST now that we have returned to PST + GST. You need to research if this is also true in Ontario. If you use the municipal lot often, I would just call the number on the parking stub and ask them whether their rates include HST or not. If they say yes, and the GST/HST# is not on the stub, request the number for your records.

When charging back your meals, be careful to ensure the tip portion of the expense does not attract sales tax.

Hope this helps Abby. If it is clear as mud, post your query to the comments (See link below) and I'll try and clarify.

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Dec 01, 2016
Great Response (but one more question!)
by: Abby

Thank you for responding so quickly (and thoroughly!). Your info helped tremendously.

I did have an additional question (which came up after I submitted my original question).

We typically act as Agents on behalf of our clients but from what I've read, we're only "Agents" if we're obtaining something on behalf of the client that they could essentially get on their own (I've seen the expression "the expenses are a 'pass through' from us to them").

Some of the record searches we obtain can be purchased by anyone (a "pass through" expense) but we also obtain other records that are privileged that the client would not have access to. Can we assume that Record #1 is an expense incurred as Agent (the cost to us is passed directly onto the client and there is no ITC for us) and Record #2 is just an expense that we claim ITC for (if applic.) & the client pays HST regardless?

Thank you again!

Dec 06, 2016
Abby
by: Lake

It is my understanding that even if you are acting only as an "Agent", you still claim your ITCs and bill your client with the appropriate sales tax detailed so they can claim their ITCs.

GST/HST is a neutral tax to registered businesses. This means the sales tax is only paid by the end consumer. For clarity, it is a consumption tax.

It means you as well as your client get to claim all applicable ITCs when filing a return. That is my understanding but you may want to ask CRA for an interpretation ruling specific to your circumstances.

http://www.cra-arc.gc.ca/tx/txprfssnls/srvcs/prcnsltns/pltprjctprcnsltnts-eng.html

However, having said that, here is a blog by the Canadian Tax Foundation that discusses Agency:

http://www.ctf.ca/ctfweb/EN/Newsletters/Canadian_Tax_Focus/2011/1/110504.aspx

As I said, you may want to get a pre-ruling ... or you may decide it is prudent to book an appointment with your accountant to discuss the issue. Remember this site provides information only, not advice.

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