Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX
XXXXX
XXXXX
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 112500
Attention: XXXXX XXXXX
July 26, 2010
Dear XXXXX:
Subject:
GST/HST INTERPRETATION
Lawyers' disbursements
Thank you for your XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to lawyers' disbursements. We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
We understand that:
Your law firm supplies legal services in XXXXX, and in the course of supplying these legal services, lawyers incur certain expenses that are billed to your clients as disbursements.
Your law firm has been accounting for GST/HST on these disbursements in accordance with GST/HST Policy Statement P-209R, Lawyers' Disbursements (P-209R). Generally, P-209R lists common expenses incurred by lawyers as disbursements, and indicates whether those expenses are viewed as incurred as agent of the client, or not incurred as agent of the client, for GST/HST purposes.
Your law firm is aware of a recent Tax Court of Canada decision (i.e., Merchant Law Group v The Queen (the Decision)) which raises questions about the application of GST/HST to lawyers' disbursements.
Ruling Requested
As a result of the Decision, you would like to know:
1. Are most expenses incurred by lawyers, except general administrative expenses, now viewed as expenses incurred as agent of the client? If such expenses are now viewed as incurred as agent of the client, are reimbursements for such expenses no longer subject to GST/HST?
2. For purposes of determining whether a disbursement billing is subject to GST/HST, does it matter whether the expense was paid out of the general funds of the law firm or out of the client's funds held in trust?
3. When a lawyer incurs an expense as agent of a client, can the lawyer claim an input tax credit (ITC) for the GST/HST incurred on the expense?
Interpretation Given
The Canada Revenue Agency (CRA) does not agree with the Decision and has appealed the matter to the Federal Court of Appeal. Pursuant to paragraph 27 of GST/HST Memoranda 1.4, Excise and GST/HST Rulings and Interpretations Service, a copy of which is enclosed, the CRA will not issue a ruling when the central issue involves a matter that is before the courts.
Since the Decision is being appealed, the CRA's policy on lawyers' disbursements continues to be that expressed in P-209R.
Question 1
For purposes of P-209R, 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 CRA's policy in determining whether an agency relationship exists is expressed in GST/HST Policy Statement P-182R, Agency (P-182R).
When an expense is incurred as agent of a client, the disbursement billing is not consideration for a supply made by the lawyer to the client, but rather a reimbursement of a cost incurred by the lawyer as agent of the client. Accordingly, if the lawyer did not incur GST/HST on the expense being billed, it would not include the GST/HST in the disbursement billing for the reimbursement. If the lawyer did incur GST/HST on the expense being billed, it would include the GST/HST in the disbursement billing for the reimbursement.
Conversely, when an expense is not incurred as agent of a client, the disbursement billing is generally consideration for a supply of the legal services made by the lawyer to the client. Accordingly, if the lawyer is making a taxable supply of legal services, the lawyer would charge and account for GST/HST on the disbursement billing.
Question 2
For purposes of P-209R, whether an expense is paid out of the general funds of the law firm or out of the client's funds held in trust is not a factor in determining whether GST/HST should be charged on a disbursement billing. The key factor in determining whether GST/HST should be charged on a disbursement billing is whether the expense was incurred by the lawyer while acting as agent of the client. As stated above, the CRA's policy in determining whether an agency relationship exists is expressed in P-182R.
Question 3
Generally, an agent is unable to claim an ITC in respect of a purchase made in its capacity as agent of a principal.
For example, when a lawyer enters into an agreement with a third party while acting as an agent of a client, under the common law of agency, the client, and not the lawyer, is the person considered to have entered into the agreement with the third party. As a result, the client is the person liable to pay the consideration for the supply made by the third party. Accordingly, the client, and not the lawyer, is the recipient of the supply. Therefore, the client is the person required to pay tax in respect of the supply, and is also the person entitled to claim an eligible ITC in respect of the supply, provided that the client meets all the requirements in the ETA for claiming ITCs.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8223. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Russell Vermette, B. Comm., C.A.
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
cc:
Enc. GST/HST Memoranda 1.4, Excise and GST/HST Rulings and Interpretations Service
UNCLASSIFIED
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