A question we regularly hear from our clients is “what is the correct way to deal with expense reimbursements from a GST/HST perspective?”.
The question often stems from a disagreement with either a customer or a supplier who is unaware of the correct treatment and is not convinced when the correct treatment is explained to them.
Thankfully, CRA has recently come out with a publication GI-197 Out-of-Pocket Expenses that spells out the correct treatment and can be very useful in these situations where there is disagreement with respect to the correct treatment of the reimbursement.
CRA takes an interesting approach in dealing with expense reimbursement. According to CRA, the first consideration should be “who is the recipient of the supply?”. If the disbursement was incurred by the vendor as agent on behalf of the customer, then it is the customer who is the recipient of the supply.
Expense not incurred as Agent
Let’s first consider the treatment of disbursements not incurred as agent on behalf of the customer. In that case, if the disbursement is not incurred as agent on behalf of the customer, then it is the vendor who is deemed to be the recipient of the supply. If the vendor is the recipient of the supply, when the vendor seeks reimbursement of the disbursement, the reimbursement is seen as additional consideration for the overarching supply. Therefore, the reimbursement takes on the same tax status as the overarching supply.
Take for example an event planner Joe, who is an independent contractor and is engaged by a customer, ABC company, to help organize a company offsite event. The fee that has been negotiated is $2,000 plus expenses.
In the course of carrying out the terms of his engagement, Joe incurs some travel expenses of $100 plus HST of $13. Joe is clearly the recipient of these travel expenses. ABC did not do the travelling; Joe did the traveling. Therefore, when Joe seeks reimbursement of these travel expenses, the reimbursement is seen as additional consideration for the event planning service.
Therefore, since the event planning service is subject to HST, so will be the reimbursement of the travel expenses.
Since Joe is registered for HST, Joe will claim an input tax credit (ITC) in respect of the $13 HST incurred in respect of the travel expenses. Therefore in seeking reimbursement of the travel cost, Joe will only need to seek reimbursement of the $100 travel cost since he will already be able to recover the $13 he paid in HST by claiming an ITC.
Here’s a snapshot of what the invoice would look like.
| Event Planning Services | $2,000.00 |
| Travel costs | 100.00 |
| Amount subject to HST | 2,100.00 |
| HST | 273.00 |
| Total Invoice | $2,373.00 |
Reimbursement when the original supply was not subject to GST/HST
We are often asked the question, “what is the correct GST/HST treatment of the reimbursement if the original disbursement was not subject to GST/HST?”
To answer that question, let’s continue our example by adding the fact that Joe incurred a $10 bridge toll fee in the course of his travels while carrying out his event planning engagement. Bridge Tolls are exempt from GST/HST and therefore there was no GST/HST included in the bridge toll fee. As with the travel expense, it is clear that Joe was the recipient of the bridge toll supply. ABC Company did not cross the bridge; Joe did. Therefore, when Joe seeks reimbursement of the bridge toll fee, the reimbursement is seen as additional consideration for the event planning service. Again, since the event planning service is taxable, so will be the reimbursement of the bridge toll fee.
It may seem counter intuitive that Joe would have to charge HST in respect of a reimbursement of an expense that was originally exempt from HST.
The reason is that although the bridge toll was exempt when Joe, the recipient acquired it, Joe consumed the bridge toll by crossing the bridge. Once Joe consumed the bridge toll, it lost its characterization as an exempt bridge toll and became another input into the provision of the taxable event planning service. Since the event planning service is taxable so will be the recovery of the bridge toll expense.
So if we now have a look at the invoice after taking into account the bridge toll reimbursement the invoice will look like this:
| Event Planning Services | $2,000.00 |
| Travel costs | 100.00 |
| Bridge Toll | 10.00 |
| Amount subject to HST | 2,110.00 |
| HST | 274.30 |
| Total Invoice | $2,384.30 |
Expense incurred as agent
The final example will look at the treatment for disbursements incurred by the vendor as agent on behalf of the customer. Agency is a legal concept and whether a person is acting as agent on behalf of a person is a question of fact. In this example, ABC Company would like to hire a speaker to speak at the conference. Joe happens to know a good speaker and agrees to arrange for the speaker to speak at the event and also agrees to engage and pay the speaker as agent on behalf of ABC Company. The speaker fee is $1,500 plus 13% HST.
In this case since the payment is made by Joe as agent on behalf of ABC Company, ABC Company is deemed to be the recipient of the supply. Therefore, when Joe seeks reimbursement of the payment made to the speaker, this is not seen as additional consideration for the event planning services.
Since Joe is not the recipient of the speaking services, Joe is not entitled to an ITC for the HST applicable to the speaking fee. Therefore, Joe must recover the entire amount including the HST from ABC Company.
When Joe records the payment in his books, he will not record a speaker fee expense. Rather he will record a receivable from ABC Company.
Here’s a look at what the invoice will look like:
| Event Planning Services | $2,000.00 |
| Travel costs | 100.00 |
| Bridge Toll | 10.00 |
| Amount subject to HST | 2,110.00 |
| HST | 274.30 |
| Speaker fee paid as agent on behalf of ABC Company ($1,500 plus 13% HST) | 1,695.00 |
| Total Invoice | $4,079.30 |
Since ABC Company is the recipient of the Speaker Service, if ABC Company is registered for HST and has incurred the speaker fee in the course of its commercial activity, ABC Company would be entitled to claim an ITC is respect of the HST charged on the speaker fee in the same manner as if ABC Company had incurred that cost directly. ABC Company would want to insure it obtains a copy of the original invoice issued by the speaker and also ABC Company should insure the invoice meets the documentary requirements required by the Input Tax Credit Information (GST/HST) Regulations. For example, the invoice should contain the speaker’s HST registration number and should be made out to either the recipient (i.e., ABC Company) or the recipient’s duly authorized agent (Joe).
Worth noting is the fact that when disbursements are incurred as agent, the expense recovery maintains its original tax status. I.e., if it was originally not subject to HST, the recovery would also not be subject to HST. Say for example the speaker was a small supplier and did not charge HST, there would be no HST to recover by Joe from ABC Company.
Summary
In summary, when seeking reimbursement of expenses from a customer one must first determine who was the recipient of the supply. If the vendor was the recipient, the expense is seen as an input into the vendor’s supply and takes on the tax status of the overarching supply. If the disbursement was incurred as agent on behalf of the customer, the customer is deemed to be the recipient of the supply and the expense reimbursement maintains its tax status as if the customer had incurred the expense directly.
CRA’s document GI-197 Out-of-Pocket Expenses can be found on CRA’s website at GI-197 Out-of-Pocket Expenses – Canada.ca
