So you've got a client who's agreed to reimburse you for certain expenses. Great, but now comes the confusing part: Do you charge HST on those rebillable expenses or not? If you're like many people dealing with client transactions, this question probably leaves you scratching your head. It's a complex area, affected by things like the type of expense, your relationship with the client, and the fine print of your service agreement. In this article, we're going to break it down for you, making it easier to navigate this tricky terrain.
In layman's terms, disbursements are amounts that you pay on behalf of your client. For example, if you're a lawyer and you pay a court filing fee for your client, this is a disbursement. In such cases, if you're merely acting as an intermediary, you would not charge HST on the court fee when billing your client.
Expenses, on the other hand, are costs incurred by you to provide a service. Suppose you're a consultant who travels to a different city to consult for a client. The airfare, lodging, and meals in this scenario are considered expenses, and when billed to the client, are generally subject to HST.
The tax treatment of rebillable expenses can also differ depending on whether you're acting as an agent or a principal in the service provided.
If you're basically a middleman between your client and another service or product, you're what's called an "agent." In this role, when you pay for something on your client's behalf—like a permit or license—those costs are generally passed straight through to your client without adding any HST. Just make sure this is spelled out in your contract or agreement with the client to avoid any surprises.
On the flip side, if you're more than just a go-between and are actually responsible for delivering a finished product or service, you're acting as a "principal." This means that any expenses you incur to make that happen—like subcontracting someone to help you out—are part and parcel of what you're offering. In that case, you'd usually need to add HST to those expenses when you bill your client.
If you mark up an expense before passing it on to the client, it's generally considered a supply and would be subject to HST.
When you bring in someone else to provide a service straight to your client, how HST works can get a bit fuzzy. If you're just the middleman—linking your client to another service but not really part of the deal—then you typically won't add HST to what you charge your client for that service. However, if your agreement with the client says that it's your job to deliver this service, then you're considered the main supplier. In that situation, you'll usually need to tack on HST when you send your client the bill.
Given the complexities involved, maintaining proper documentation such as contracts, emails, and invoices is crucial. This evidence can be vital in case of an audit or any disputes over the tax status of a reimbursed expense.
While this article offers some general guidelines, the tax treatment of rebillable or reimbursable expenses can be nuanced and situation-specific. As the incorrect handling of HST can result in penalties and interest, it's probably a smart move to consult a tax advisor who can guide you based on your specific circumstances.
So, is there HST on rebillable or reimbursable expenses in Canada? The answer, as with many things in the world of taxation, is "it depends." Understanding the nuances can help you navigate this intricate topic more effectively.
Understanding the application of HST on rebillable and reimbursable expenses can be complex. To offer further clarity, this appendix provides real-world examples from uniquely Canadian businesses for each section discussed in the main article.
Local Landscaping Company: Imagine you run a small landscaping company and a client asks you to install a specific type of rare plant in their garden. You agree to source the plant, and the client insists on covering the cost of the plant separately from your service fees. You go to a specialized nursery, purchase the plant using your company's funds, and the client agrees to reimburse you later. In this case, since you're just fronting the cost and will get reimbursed without a markup, this is considered a disbursement. You would bill the client for the exact cost of the plant without adding HST.
Canadian Wildlife Tour Operator: If you run a wildlife tour company in British Columbia and pay national park entry fees for your customers, those fees would be considered disbursements. You would bill your customers for the exact amount of the entry fee without adding HST.
Molson Coors Beverage Company: Assume you are a marketing manager for Molson Coors and you organize a promotional event for one of your brands. As part of this event, you rent a venue. While the venue rental would generally be a cost you incur to provide a service (your marketing event), you have a special agreement with the venue owner to bill Molson Coors directly for the rental cost. Because Molson Coors will be billed directly and you're not marking up the cost, the venue rental becomes a disbursement and you would not add HST when billing Molson Coors for this particular expense.
Rogers Communications: Let's say you’re a manager at Rogers Communications. You travel from Toronto to Vancouver to negotiate a new business partnership. Your travel, accommodation, and meals would be considered expenses and subject to HST when billed back to Rogers.
Moosehead Breweries: You're an independent sales agent for Moosehead Breweries in New Brunswick. You secure a bar as a new client and pay for the initial supply of kegs. You're merely acting as an agent for Moosehead; hence, you would bill the bar for the kegs without adding HST.
TELUS: If you act as an agent for TELUS and collect old smartphones from customers for recycling, you're acting as an agent. When TELUS reimburses you for the shipping fees, you would not add HST to the shipping costs when billing TELUS.
Bombardier Aerospace: Let's say you're a project manager at Bombardier Aerospace in Quebec, and you've subcontracted an engineering firm to create custom software for one of your aviation projects. Since you are contractually obligated to deliver the final aviation system to your client, you're acting as the principal. When you invoice the client for the project, you would include HST on the entire amount, which includes the software development costs incurred by the subcontracted engineering firm.
MapleLeaf Digital Solutions: Imagine you run a small digital marketing agency called MapleLeaf Digital Solutions in Vancouver. You have a client who needs a high-quality promotional video. To meet this need, you hire a freelance videographer to shoot and edit the video. Since you are taking the responsibility of delivering the final video to the client, you are acting as the principal. When you bill the client for the entire project, you would include HST on the total invoice, which would include the freelance videographer's costs.
Rooster Coffee House: Imagine you run Rooster Coffee House in Toronto and decide to sell a selection of locally-crafted ceramic mugs. You purchase these mugs from local artisans and mark up the price before offering them to your customers. In this case, you would add HST to the marked-up price when you sell the mugs.
Northern Lights Yoga Studio: Suppose you run a yoga studio in Ottawa called Northern Lights Yoga Studio, and you offer yoga mats for your clients to use during classes. A client loves one of the mats so much that they want to buy it directly from you at cost, with no markup. Since you're not making any profit on the mat and it's being sold at the exact cost you paid, you wouldn't add HST to the price when you sell it to the client.
Avison Young: Let's say you're part of Avison Young, a commercial real estate services firm, and you have a client who's looking for specialized environmental assessment services for a property they're considering purchasing. You refer them to an expert third-party environmental assessment company, and this company invoices the client directly for their work.
Here, your role is more of a matchmaker between your client and the third-party environmental assessment company. You're not adding any markup to the environmental assessment company's fees, nor are you billing for those services yourself. You're simply making a trusted recommendation. Because of this, there's no 'supply' being provided by you that would be subject to HST. Should you charge a fee for your time making the referral or coordinating the service, that specific fee would not have HST applied to it.
Canfor, a Forestry Company: Imagine you're a project manager at Canfor and you subcontract a local logging company to provide some of the lumber needed for a big contract. Since you're the one responsible for fulfilling the contract, and the subcontracted lumber is a part of that, you would charge HST on the entire amount, including the subcontracted services, when billing your client.
These examples are designed to illustrate the complexities involved in determining whether to charge HST on rebillable or reimbursable expenses. Just when you thought you had it all figured out, tax rules come along and ruin everything.