Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 117000
November 17, 2010
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Lawyers' disbursements for medical reports and clinical records
Thank you for your August 6, 2009, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to lawyers' disbursements for medical reports and clinical records. Your fax was transferred to this office from our [...] GST/HST Rulings Centre for reply. We apologize for the delay in responding to you.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that:
You supply legal services primarily to plaintiffs in personal injury cases and to former students of Indian Residential Schools.
In the course of supplying these legal services, you often request medical reports and copies of clinical records (hereinafter referred to as medical/clinical documents) from doctors and other medical professionals. Typically, the invoices to your firm from the doctors or medical professionals for these documents do not set out amounts for GST/HST.
When you invoice your client for legal services rendered, you separate the amounts for legal fees from the amounts for lawyers' disbursements, such as the costs incurred by your firm for medical/clinical documents.
At the conclusion of each case, you propose a settlement amount that the defendant should pay your client. Included with the settlement amount are costs your firm has incurred (i.e., lawyers' disbursements) for medical/clinical documents plus GST/HST on those costs.
Ruling Requested
You would like to know if your firm is required to charge and account for GST/HST on the cost (i.e., lawyers' disbursements) of the medical/clinical documents invoiced to your clients, particularly in the case where the doctors or medical professionals have not charged GST/HST on their supplies of the documents.
Interpretation Given
Pursuant to paragraph 14 of GST/HST Memoranda 1.4, Excise and GST/HST Rulings and Interpretations Service, a copy of which is enclosed, the Canada Revenue Agency (CRA) can only issue a ruling when the person requesting the ruling has provided all the relevant facts of the transactions.
To issue a ruling in your case would require that we obtain documentation like that described in paragraph 32 of the Memoranda 1.4. For example, we would need copies of the invoices you receive from various medical professionals, the invoices to your clients for legal services, and copies of the settlement agreements. At this time, though, we offer the following interpretation.
Independent Medical Examinations
Whether the supply of medical/clinical documents by a physician, an operator of a health care facility or a medical practitioner is a taxable supply for GST/HST purposes (on which tax must be charged), or an exempt supply (on which tax is not charged), is a question of fact. Additional information on whether such supplies are taxable or exempt supplies can be found in GST/HST Policy Statement P-248, The Application of the GST/HST to the Supply of an Independent Medical Examination (IME) and to Other Independent Assessments (P-248).
Lawyers' Disbursements
GST/HST Policy Statement P-209R, Lawyers' Disbursements (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.
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, [the lawyer] 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.
Determining whether a person is an agent is based on a determination of fact and an application of principles of law. According to P-182R, there are three essential qualities of an agency relationship: 1) consent of both the principal and the agent; 2) the authority of the agent to affect the principal's legal position; and 3) the principal's control of the agent's actions. Although each of the essential qualities is equally important in determining whether an agency relationship exists, various court decisions have focused on the authority of the agent to affect the principal's legal position (i.e., whether it is the agent or the principal that is liable under agreements with third-party suppliers to pay the consideration owing under those agreements) as an essential feature of agency.
As noted in P-209R, it is the CRA's view that, unless there is strong evidence to the contrary, a law firm would acquire medical/clinical documents in its own right, and not as agent of the client, for use in the course of supplying legal services to the client.
We have provided answers to your question under four possible scenarios. Generally, Scenarios I and II would apply to your firm, unless there is strong evidence that your firm acquired the medical/clinical documents as agent of the client.
Scenario I - Cost of medical/clinical documents not incurred as agent of the client and supplier charged GST/HST
In this case, your firm is the recipient of the supply and is required to pay the consideration and the applicable GST/HST to the supplier of the medical/clinical documents. The term "recipient" of a supply is defined in subsection 123(1) of the ETA, in part, as the person who is liable under an agreement to pay consideration for a supply. Generally, as a GST/HST registrant and recipient of the supply, your firm can claim an input tax credit in its net tax calculation to recover the GST/HST paid or payable on the disbursement incurred on its own account.
Generally, supplies of legal services are taxable supplies for GST/HST purposes. When your firm invoices the client for the supply of legal services, GST/HST is payable on the legal fees and the disbursement for the medical/clinical documents, which combined represent the value of the consideration for the supply of legal services. The client, who is the recipient of the supply of the legal services, is required to pay the consideration (i.e., the legal fees and the disbursement for the medical/clinical documents) and the applicable GST/HST to your firm. Generally, your firm would not invoice the client for the portion of the disbursement (i.e., the GST/HST on the medical/clinical documents) that it is entitled to claim as an input tax credit.
By way of example, a law firm purchases taxable medical/clinical documents, meals and photocopying services in the course of providing legal services to a client. The total value of these taxable purchases is $700 plus HST of $84. The law firm pays the suppliers $784 and claims an input tax credit of $84. An invoice for the $700 in disbursements, $10,000 in legal fees and the applicable HST would be prepared as follows:
Legal fees
$10,000
Lawyers' disbursements
700
Subtotal
$10,700
HST ($10,700 X 12%)
1,284
Total payable
$11,984
Therefore, when your firm incurs the cost of medical/clinical documents not as agent of the client and your firm paid GST/HST on the medical/clinical documents to the supplier, your firm has to charge and account for GST/HST on the amount billed to the client for the medical/clinical documents.
Scenario II - Cost of medical/clinical documents not incurred as agent of the client and supplier did not charge GST/HST
As referred to in your question and explained in P-248, there are circumstances where the supplier does not charge GST/HST on the supply of medical/clinical documents. In these situations, your firm is the recipient of the supply and is required to pay the consideration, but not tax, to the supplier of the medical/clinical documents. The expense for the medical/clinical documents is a disbursement that your firm incurs in the course of providing legal services to the client. The disbursement forms part of the value of consideration for the supply for the legal services on which the client is required to pay tax. Even though your firm was not required to pay GST/HST to the supplier of the medical/clinical documents, your firm, as a GST/HST registrant, is required to charge the client GST/HST on the disbursement since the amount forms part of the value of consideration for the supply of the legal services.
Therefore, when your firm incurs the cost of a medical/clinical documents not as agent of a client and your firm has not paid GST/HST on the medical/clinical documents to the supplier, your firm has to charge and account for GST/HST on the amount billed to the client for the medical/clinical documents.
Scenario III - Cost of medical/clinical documents incurred as agent of the client and supplier charged GST/HST
In unique circumstances, a law firm could incur the cost of obtaining medical/clinical documents as agent of the client. When this happens, the client is the recipient of the medical/clinical documents and the person required to pay the consideration and the applicable GST/HST to the supplier. However, as the client's agent, the law firm would usually pay the consideration and applicable GST/HST to the supplier, and this amount would later be reimbursed to the firm through a disbursement billing to the client.
In these situations, although your firm is a GST/HST registrant, it is not the recipient of the supply of the medical/clinical documents, and therefore, is not entitled to claim an input tax credit in its net tax calculation to recover the GST/HST paid to the supplier on the client's behalf. When your firm invoices the client for reimbursement of the expense (the reimbursement would equal the consideration plus the applicable GST/HST that the firm paid to the supplier on behalf of the client) no GST/HST is payable on the reimbursement. A reimbursement of an expense incurred by a law firm as agent of its client is not part of the consideration for the supply of legal services to the client.
Therefore, when your law firm incurs the cost of medical/clinical documents as agent of the client and the supply was subject to GST/HST, your firm does not charge and account for GST/HST on the amount reimbursed by the client for the medical/clinical documents.
Scenario IV - Cost of medical/clinical documents incurred as agent of the client and supplier did not charge GST/HST
As mentioned in your question and explained in P-248, there are circumstances where the supplier does not charge GST/HST on the supply of medical/clinical documents. In these circumstances, when your firm incurs the cost of medical/clinical documents as agent of the client, your firm does not charge and account for GST/HST on the amount reimbursed by the client for the medical/clinical documents.
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, Excise and GST/HST Rulings and Interpretations Service, 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.
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
UNCLASSIFIED
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