Disbursements Entitled to GST Or HST: What Qualifies as Disbursements?
Any business or profession is subject to Goods and Service Tax/Harmonized Sales Tax (GST/HST), which they charge to their customers and render to the Canada Revenue Agency (CRA). If you are a business owner, you act as a collection agent of GST on behalf of the province. The GST rate differs from service/good and province where the service is provided. The GST also has an input tax credit (ITC) angle. If you incur an expense to perform the task and pay GST on it, you can deduct it from the GST you collect from the client under the input tax credit.
However, GST rules are not that simple. If you are charging disbursements or expenses to your clients, you have to be extra careful about how you charge GST. Wrongly charging GST/HST could lead to a costly assessment. You could unknowingly be cheating on your clients.
This article will dive deep into disbursements and whether you should charge GST on them.
GST: Disbursements vs. Inputs
There is a difference between disbursement and expenses. A disbursement happens when you pay someone on behalf of your client as an agent, such as a lawyer paying land transfer tax on behalf of the client. You cannot charge GST on disbursement nor claim ITC because disbursement is not a part of your service offering.
An expense could include travel, hotel stay, postage, telephone, courier, software subscription, and other normal business expenses that you normally incur. You are not acting as an “agent.” Such expenses are included in your services and are eligible for ITC.
This determination of disbursement and inputs is crucial when calculating and charging GST. Wrong determination could have significant consequences.
How to Treat Disbursements in GST?
For instance, a lawyer pays a $5,000 land transfer tax on behalf of the client when buying the home. In this case, the lawyer acts as an agent and passes on the cost to the client. The lawyer cannot charge GST on this $5,000.
The lawyer’s invoice would look something like this.
Legal Fees | $2,000 |
GST @ 5% | $100 |
Disbursement: (Land transfer tax) | $5,000 |
Total | $7,100 |
As you can see, the lawyer charged 5% GST only on his legal fees, not the disbursement. Had he included disbursement pre-GST (above the GST line) as part of the service, he would have charged 5% GST on $7,000, which comes to $350. Here, he would wrongly charge the client $300 GST as land transfer tax is exempt from GST.
What Qualifies as Input?
For instance, you are a food consultant travelling to a different province for a client’s work. You incur the cost of travel and stay. The hotel bill is $100 plus 5% GST. This is an input on the service you are providing. Hence, you can add this expense to your fees and claim GST. Your service in your province is subject to 13% GST, and you can also charge this amount to your hotel bill. The client paid $113 for your hotel stay.
Your invoice would look something like this.
Consultant Fees | $2,000 |
Input: (Hotel Expense) | $100 |
GST @ 13% | $273 |
Total | $2,373 |
As the client is in the restaurant industry, he can claim ITC on the $273 GST he paid you by offsetting the GST he collects from guests.
What could go wrong here? If you input hotel expenses as $105 ($100 + $5 GST), you are cheating your client by charging GST on the GST-included amount. You want to avoid double taxation.
Consequences of Wrongly Charging GST
Determining disbursement and expense is tricky and can significantly change your GST amount. Several mistakes can happen in GST calculation.
- You may charge GST on the disbursement, which is not a part of your service.
- You may charge GST on GST-included input, which is a part of your service.
If you have made mistakes in past invoices, rectifying them and adjusting any net cost through Voluntary Disclosure might be possible. The CRA welcomes voluntary rectification. If the CRA finds the mistake, you could face an assessment for up to four years of past GST/HST, plus interest, on all your disbursements.
This is just one scenario. The GST/HST laws are complex. Every business is prone to making mistakes when calculating GST. It is better to take the help of a professional tax consultant specializing in GST and get your past GST returns rectified. An assessment by the CRA could be way too expensive.
Contact Hagar Liao CPA Professional Corporation in Mississauga to Help You File Your GST/HST
Talk to a professional tax consultant to correctly charge GST and rectify past GST returns. At Hagar Liao CPA Professional Corporation, our accountants and tax consultants can provide services like GST filing. To learn more about how Hagar Liao CPA Professional Corporation can provide you with the best tax advisory, contact us online or by telephone at 289-803-1818.