The application of GST to disbursements is a bit more complicated. Part of the complication comes from the fact that some lawyers include within disbursements items that are really ‘allocated overhead costs.’
Some items, such as paralegal services, legal assistant services, and other in-house staff services, should not be allocated as disbursements at all, but rather should be part of the fee (which, of course, attracts GST). Other examples of disbursements, which are really allocated overhead costs, are items such as fax and photocopying charges. Generally, allocated overhead costs attract GST.
There are also a number of items for which lawyers often pay, that are exempt from GST. The exempt category consists primarily of fees paid to public sector bodies.
Your account to your client must distinguish tax-exempt disbursements from the disbursements on which tax is charged. Some typical disbursements and their tax treatment follow:
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See GST/HST Policy Statement P-209R ‘Lawyer’s Disbursements’ for a more complete discussion of the disbursements on which GST is charged and those which are exempt. The Policy Statement is particularly useful in that it breaks down the discussion into disbursements incurred in different practice areas.
When you pay the out-of-pocket expenses, you will pay GST on them. However, when you bill your client for these expenses, they will be shown on the account as net of GST. You will then charge GST on the total of fees and disbursements. This method allows you to claim an input tax credit for the tax portion of the out-of-pocket expenses.
The following is one acceptable example of how to show GST on an account for fees and disbursements:
¹The hotel room is an example of how you would treat an out-of-pocket expense. In this example, the room charge was $129. In addition, the lawyer paid to the hotel: $6.45 in GST, $7.74 in PST, and $2.58 in hospitality tax, for a total of $145.77. You do not show the $6.45 in GST as part of the disbursement itself. Rather you show the hotel charges net of GST ($145.77 minus $6.45 equals $139.32), allowing you to claim the $6.45 input tax credit. The PST and hospitality tax are included in the $139.32 claimed for reimbursement, because the lawyer wishes to receive reimbursement from the client for these two sales taxes; unlike for GST, tax credits are not available for PST or hospitality taxes. You then collect $6.97 from your client in GST, by including the $141.90 (inclusive of PST and hospitality tax) in the total disbursements subject to GST. This seems like an odd tax result, because in effect, the lawyer is charging GST on PST and hospitality tax embedded in the hotel charges. The lawyer paid only $6.45 in GST to the hotel, but the lawyer is charging the client $6.97 on essentially the same transaction. However, as of January 2014, CRA takes the position that these two sales taxes lose their personality as sales taxes when they form part of a lawyer’s charges for legal services, and hence GST is calculated as described here.
²The courier charge is another example of how you would treat an out-of-pocket expense for an external courier. You will have paid $2.50 in GST for this $50 courier charge, but you do not show the $2.50 GST as part of the disbursement itself. Rather you show the courier charge net of GST, allowing you to claim the $2.50 input tax credit. You then collect the $2.50 from your client by including the $2.50 in the total $259.32 charged for GST. Note that the courier charge was PST exempt, in the first instance; the lawyer did not pay the courier company any PST.