19 March 2008 GST/HST Interpretation 100748 - Amount Charged on Direct Recoverable Costs

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.

Dear XXXXX:

Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on the reimbursement of expenses incurred by a GST/HST registrant.

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.

Effective January 1, 2008, the rate of the GST has been reduced from 6% to 5% and the rate of HST from 14% to 13%. The new rates apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

XXXXX

Our understanding is as follows:

1. A GST/HST registrant (the Company) provides XXXXX services to many corporations (Clients) XXXXX.

2. The Company incurs out-of-pocket expenses and includes these costs as a separate item on their invoice to their Client, classed as direct costs.

3. The Company invoices the Client. These invoices include:

(a) a charge for "fees for service"—for services provided by the Company; and

(b) a charge for "disbursements"—for out-of-pocket expenses incurred by the Company.

4. The Company attaches receipts for disbursements to the invoice.

5. The Company calculates the GST on the total value of consideration (fees for service + disbursements).

Ruling Requested

You provided the following example to demonstrate two different methods of calculating GST for service provided by the Company to a Client:

Note: To reflect current rates, we have adjusted the GST to 5% in this example.

Disbursements:

Scenario A

Invoice to Client:

Scenario B

Invoice to Client:

You would like to know if the method demonstrated in Scenario A or Scenario B is correct, or are both methods allowable.

In accordance with GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, of the GST/HST Memoranda Series, copy enclosed, a ruling can only be issued with reference to a clearly defined fact situation of a particular registrant. Rulings are issued upon request and where the taxpayer has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services or property involved, the parties involved in all transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. We are pleased to issue you an interpretation, which will elaborate on how the GST/HST applies to the questions raised in your letter.

Interpretation Given

The application of the GST to a particular transaction may vary depending on whether the Company is acting as an agent in respect of that transaction.

Company is not an agent

Where there is no agency relationship between a supplier and its client, expenses incurred by the supplier, that a customer has agreed to reimburse the supplier, are generally additional consideration payable by the customer for the supply made by the supplier. Therefore, the reimbursement for these expenses form part of the consideration for the supply.

If the Company is not an agent for the Client with respect to the transaction in the example you provided, the staples purchased by the Company would be an input into the supply of a service, or part of the supply of a service, provided by the Company to the Client. However, whether the staples are an input into a supply or part of a supply of the Company's service, a reimbursement of this nature is additional consideration for the Company's service. The GST is applicable on the amount being reimbursed even though this amount includes other taxes that were charged to the Company on the supply. Although it depends on the wording of a particular contract, the amount that the Company charges to recover an expense might not include the GST the Company paid (or is payable) because the Company can recover that tax by claiming an input tax credit (ITC). In that instance, Scenario A would be correct.

Company is an agent

Whether the Company is an agent with respect to a particular transaction is based on a determination of fact and an application of principles of law. Refer to the enclosed GST/HST Info Sheet GI-012, Agents, for additional information on this topic.

Depending on the contract between the Company and the Client, the actions of the Company might be regarded as being those of the Client. Where this happens, the Client is the recipient of the supplies and is required to pay the consideration and the applicable GST to the supplier of the property and/or services. However, as the client's agent, the Company will usually pay the consideration and applicable GST to the supplier of the property and/or services. When the Company invoices the Client for a reimbursement of the expense (i.e., the consideration and applicable GST that the Company paid to the supplier on behalf of the Client) no GST is payable on the reimbursement.

Therefore in your example, the following method would apply:

Additional Comments on Input Tax Credits

Whether a person is acting as agent on behalf of another person is important when determining who is entitled to claim an ITC for the GST paid on a purchase.

Where there is no agency relationship between the Company and the Client, the Company, as a registrant, would be able to claim an ITC to the extent possible for the GST paid or payable on the expenses incurred.

In the example you provided, the Company, if not an agent, would be entitled to claim the $10.00 GST paid or payable on the XXXXX as an ITC and not the Client.

Where the Company acts as agent in purchasing taxable property or services on behalf of a Client, it is the Client who would be entitled to claim any ITC for the GST paid on the property and services, and not the Company.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-2826. 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,

Shane Byrnes
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2008/03/13 — RITS 92312 — Consulting Services Sold in Conjunction With An Insurance Policy