The Goods and Services Tax (GST) and Harmonized Sales Tax (HST) can pose various challenges for those filing taxes in Canada, especially when it comes to out of pocket expenses. The Canadian Revenue Agency and Provincial tax authorities have many rules when it comes to calculating these expenses, and it is important to gain a complete understanding of these concepts in order to minimize tax liability. Tax obligations vary depending on the specific circumstances of each business transaction in Canada, including the province in which the expense has been incurred and who is the actual recipient of the supply (which is sometimes, but not always, the customer). For personalized advice, consider discussing tax matters with an experienced Canadian tax attorney at Jeremy Scott Law. Call (902) 403-7201 to get started today.
In addition to the Goods and Services Tax and Provincial Sales Tax, there are also two other sales taxes to consider: Harmonized Sales Tax and Quebec Sales Tax. As the name implies, Quebec Sales Tax is simply a provincial sales tax that applies only to Quebec transactions. Harmonized Sales Tax is essentially a combination of a province’s sales tax and Goods and Services Tax. Some provinces have chosen to use HST instead of both GST and PST for the sake of convenience. Specific tax obligations depend on the location of supply – including obligations related to out of pocket expenses. While GST is always 5%, the rate at which HST and PST apply vary by province. Some provinces (and territories) have no Provincial Sales Tax whatsoever. Here is a summary of current sales tax rates for each province, according to the Retail Council of Canada:
- Alberta: 5% GST + 0% PST
- British Columbia: 5% GST + 7% PST
- Manitoba: 5% GST +7% PST
- New Brunswick: 15% HST
- Newfoundland: 15% HST
- Northwest Territories: 5% GST + 0% PST
- Nova Scotia: 15% HST
- Nunavut: 5% GST + 0% PST
- Ontario: 13% HST
- Prince Edward Island: 15% HST
- Quebec: 5% GST + 9.975% QST
- Saskatchewan: 5% GST + 6% PST
- Yukon: 5% GST + 0% PST
What Are Out of Pocket Expenses?
According to the Canada Revenue Agency, out of pocket expenses are expenses that a “supplier may incur when providing a taxable supply of services to a client.” In some cases, the client may agree to reimburse the provider for these out of pocket expenses. The CRA makes it clear that the respective parties are responsible for creating their own agreements regarding reimbursement. Some suppliers may agree to take on this financial responsibility without asking for reimbursement, while others may charge their clients for the out of pocket expenses they incur. Still others may charge their clients for a certain percentage of the expenses, or for only specific expenses and not others.
While the precise terms of such reimbursements are left up to the parties involved in the transaction, GST/PST obligations are mandatory once a reimbursement takes place. When a client pays for these out of pocket expenses, the GST, HST, PST, or QST may apply. Essentially, the CRA considers reimbursed expenses to be income. While one party (the supplier) typically paid tax on the initial transaction, it is entirely possible that tax must also be charged on the reimbursement made by the second party (the customer). Companies, clients, contractors, and individuals in Canada can determine their sales tax obligations by getting in touch with a Canada tax attorney at Jeremy Scott Law.
- Office supplies
- Hotel rooms
- Auto rentals
- Fuel costs
Typically in Canada, the GST/HST/PST or QST obligations depend on two factors: The place of supply and the recipient of supply. An additional factor to consider is whether or not a reimbursement agreement even exists between the supplier and purchaser.
The place of supply is the location of the recipient. GST and PST obligations may be determined by the place of supply. Typically this means that if a business is located in Quebec but supplies services to a recipient in British Columbia, the federal GST at 5% and 7% British Columbia PST would apply. If that same business supplied services to a customer in Alberta, only the federal 5% GST would apply as there is no provincial sales tax in Alberta. This same system also generally applies to out of pocket expenses charged to a recipient of supply, since the CRA views out of pocket expense reimbursement in the same way as sales income.
While the place of supply is important when making these calculations, the first step should be to determine the recipient of supply. This is because the place of supply is only clear after respective parties determine the identity (and location) of the recipient of supply.
The recipient of supply can be difficult to define. There are two possibilities: Either the supplier is incurring expenses on their own account, or the vendor may be incurring expenses as agent of their customer. Where a vendor is incurring expenses on its own account, and subsequently re-bills those expenses to a client, there are effectively 2 transactions, and tax may apply to each.
If a vendor acts as an agent of the customer, then the customer is the recipient of supply. For example, Company A may hire Individual B to find, pay, and schedule a speaker for an upcoming conference. In this case, if Individual B if is acting as agent when hiring the speaker, it is actually Company A (the customer) is the recipient of supply made by the speaker. Individual B is only acting in its capacity as an agent. When the vendor acts as an agent on behalf of the purchaser, they can request that the purchaser pay GST/PST when billing for out of pocket expense reimbursement.
Where a vendor is the recipient of taxable supply and the client agrees to pay the supplier for their out of pocket expenses, typically the vendor would first claim an input tax credit (ITC) to recover any applicable GST/HST, and claim and available PST exemptions. The supplier would then charge the applicable GST, HST, PST, or QST when billing the client for their out of pocket expenses.
Although sales tax obligations may seem complex at first, navigating this issue can be more straightforward with guidance from a Canada tax attorney. Suppliers and purchasers may can choose to contact Jeremy Scott Law to discuss this subject in more detail. We would be happy to help you understand how sales tax apply based on the recipient of supply, place of supply, and other relevant factors that may pertain to your specific business activity. Call us at (902)403.7201.