Introduction – Paying GST/HST on Disbursements for Clients
In the course of operations, a business may make disbursements to complete work on behalf of a client. The field of law, for example, is rife of costs paid by lawyers on behalf of clients for legal work. Court fees will need to be paid by a Canadian lawyer when filing documents to begin a civil proceeding against another person on behalf of a client. A Canadian real estate lawyer may pay a fee to a Land Titles or a Land Registry office in order to have a mortgage on a property registered for a client. A Canadian tax and estate lawyer will have to pay a fee when applying for probate of a will, and the cost of that fee will depend on the combined value of the deceased's estate assets. Under the Excise Tax Act, a "supply" includes any sort of service, sale, transfer, barter, exchange, license, rental, lease, gift or disposition of property. In general, a supply made in the course of commercial activity will be taxable and that purchaser will be required to pay GST/HST on the cost of that supply. In most cases Canadian lawyers, like any other business acting on behalf of clients, will be obligated to pay GST/HST on these fees as a taxable supply and a client in turn will be required to reimburse that lawyer or business for those costs.
Determining the GST/HST payable for the disbursement itself can be simple, but the GST/HST obligations for a client reimbursing a business will invite many additional questions including the nature of the disbursement and the relationship between the business and the client. Whether the cost of that expense will pass through to a client, or whether that expense will become a taxable supply (that is, a purchase that the client will be required to pay additional GST/HST on) can become a very complicated tax analysis. This article will discuss the general GST/HST tax rules for pass-through transactions between businesses and clients, and the role that agency plays in determining what tax obligations the business and client face for an expense on behalf of a client. If your business often incurs expenses on behalf of clients and receives reimbursements for those expenses, and especially so if you incur costs in multiple jurisdictions, then it is imperative you speak with an expert Canadian tax lawyer to ensure that you collect and remit GST/HST appropriately on your expenses and avoid exposure to possible tax penalties.
The Common Law Rule for Agent Disbursements
In general, Subsection 165(1) of the Excise Tax Act imposes an obligation on recipients of "a taxable supply made in Canada" to pay GST/HST on the value of that supply (in common terms a purchase). An exception to this rule is provided concerning disbursements made while acting as agent for another individual. This rule was previously enumerated under Section 178 (Expenses incurred in supply of service) of the Excise Act. Although repealed in 1997, Section 178 still applies under general legal principles and under the common law. Section 178 previously read that
"[in] making a supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as an agent of the recipient."
Under this rule, if an individual is acting as an agent for another when incurring a particular expense, then that agent may be reimbursed without triggering additional GST/HST costs. When an agent incurs an expense for a principal, it is not treated strictly as a taxable supply as it would be in a normal supplier-purchaser relationship under the Excise Tax Act. This can significantly impact the sales tax burden faced by both the agent and principal, and their respective rights under the Excise Tax Act concerning input tax credits.
Where a disbursement is not incurred as agent for a client, then the taxable supply was acquired for use in the course of providing the client services. The purchaser, and not the client ultimately benefitting from the purchase, is the recipient of the supply for GST/HST purposes. If the purchaser is a registrant for GST/HST purposes, then the purchaser may claim an input tax credit in respect of the GST/HST paid on that disbursement. However, where a disbursement is incurred as agent for a client, then the agent is not the recipient of the supply for the purposes of Subsection 123(1) of the Excise Tax Act (that is, the agent is not ultimately responsible for paying the consideration owing under the agreement for the supply). In this case, the agent does not actually provide the supply because the agent has simply paid the account on the client's behalf. As a consequence, the client as principal would be entitled to claim the input tax credit if that purchase was made in the course of providing services or supplies to another.
Determining When an Agency Relationship Exists Under the Law
Whether an agency relationship exists for purposes of this rule is not always a straight-forward question. An agency relationship will not exist simply because two parties declare their relationship as one of agent and principal. It is also a mistake to assume that in particular professions, such as that of a lawyer and client, there will always be an agency relationship. Agency holds a very particular legal meaning and specific factors must exist before an agency relationship is recognized under the law. In general, there are three 'essential' components to an agency relationship under the law:
- The consent of the principal and agent;
- The authority of the agent to affect the principal's legal position; and
- The principal's control of the agent's actions.
Under the first branch, the scope of authority granted by the principal to the agent in order to act on the principal's behalf must be made clear to both parties. Under the second branch, the agent must be able to affect the principal's legal position in some manner. The most common example would be the agent's ability to bind the principal to a contract, but an agency relationship can include circumstances where the agent is discharging a principal's obligations, such as the earlier example of a Canadian lawyer registering a mortgage with a Land Titles or a Land Registry on behalf of a client. Under the third branch, the principal must still retain control over the agent and have some ability to dictate the agent's actions, which may include an agent's requirement to obtain approval for certain expenses or an agent's responsibility to report periodically to the principal.
The existence of an agency relationship is therefore a factual analysis and is not as simple as declaring an individual an "agent." The courts have also identified additional indicators of an agency relationship, including the principal's actual liability under a contract, the ownership of property acquired by an agent on behalf of a principal, and whether the principal faces risk brought on by the agent's actions. There is no requirement that an agency relationship be formalized by a written contract; an agency relationship can be presumed as well, where the facts support that assumption. It is only when an agency relationship exists with respect to a particular expense that the agent disbursement rule will apply.
The Agent Disbursement Rule as Applied by the Courts: SLM Direct Marketing Ltd. V R
SLM Direct Marketing Ltd. [Handyman Connection] v R,  GSTC 189 (TCC) provides a contemporary example of how the agent disbursement rules are applied by courts. In SLM Direct Marketing Ltd., the taxpayer was a corporation that provided bulk mail processing services for clients. The taxpayer would charge GST to clients for mailing services within Canada. The taxpayer would invoice clients and charge GST for the cost of postage to mail letters in bulk as a service provided to clients. The taxpayer would not charge GST on postage that was paid to other remailers like Canada Post or USPS, because it argued that it was acting as an agent for its clients when doing so. When the taxpayer paid Canada Post or USPS, it would only seek reimbursement by invoicing for the precise amount paid for those remailer services. The CRA re-assessed the taxpayer for unremitted GST. The CRA viewed the payments by the taxpayer to remailers as taxable supplies, rather than as a disbursement by an agent that would not create additional taxable consequences for the taxpayer's client.
The court accepted the taxpayer's position and concluded that the taxpayer was indeed an agent of its clients. In the view of the court, the three 'essential' elements of an agency relationship had been satisfied. The taxpayer and its clients clearly consented to an agency relationship when they contracted for mailing services. The taxpayer was given the authority by clients to enter into contracts on their behalf for re-mailing services with Canada Post and USPS. As well, the principal did have some power over the agent's actions; the client was free to revoke the taxpayer's authority to seek re-mailing services, if the client wanted to mail items itself. An element of risk between the taxpayer and its clients also supported the existence of an agency relationship. The taxpayer could always prove negligent in its duties re-mailing material, or the principal could always be late to reimburse the taxpayer's costs. In finding an agency relationship, the court concluded that the taxpayer had acted appropriately in seeking reimbursement and not charging additional GST on services rendered.
Although the case above concerns disbursements made by a bulk mail processing business, the core principles as interpreted by the court are just as applicable to any other industry. It does not matter if the business deals with mailing services, or if it provides legal services, or some other service to its clients. A disbursement incurred by that business as an agent for a client will not create additional GST/HST obligations for a client, as they were not rendered as a taxable supply for that client.
Pro Tax Tip – Agent Disbursements and Provincial Sales Tax Rates
The agent disbursement rule is a particularly relevant consideration for disbursements made by a business in different provincial jurisdictions with different applicable GST/HST rates. For example, a Canadian lawyer in Ontario could incur an expense for a client by purchasing a taxable supply in Alberta. Depending on the circumstances, that Canadian lawyer may be charged Alberta's 5% GST rate on that purchase rather than Ontario's 13% HST rate. Where the Canadian lawyer was acting as agent for that client, the Canadian lawyer will collect a reimbursement including only the value of GST paid. If the lawyer was not acting as an agent of the client when making the disbursement, then the lawyer would charge HST and claim an input tax credit on GST paid for the supply. Where the agency relationship exists, such as the case above, the cost of the disbursement will be passed on to the client including the applicable GST rate, even though the client was not actually the one to purchase the supply. If you are looking to learn more about agency disbursement tax rules or are facing difficulties determining how your legal relationships with clients affect your sales tax obligations, then you should consult with one of our expert Canadian tax lawyers.
FAQ's: GST/HST & Agent Disbursements
1. What GST/HST rules apply to disbursements made by the agent for an individual?
2. When does an agency relationship exist under the law?
3. How to input tax credits (ITCs) work with expenses and reimbursements related to an agent?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.