Application of PST to Disbursements
The question, when it comes to disbursements, is whether the disbursement becomes part of the purchase price of legal services. If it is, then there is PST charged, if it isn’t, no PST is charged.
A disbursement can be a request for reimbursement of an out-of-pocket expense that was paid by the lawyer, on behalf of a client, as a result of billing from a third party. In these cases, they are not part of the purchase price and PST is not charged. PST has already been charged by the third party, and if you as the lawyer charge PST on the total fee, there would be double taxation. The Provincial PST Bulletin 106 says it this way:
Out of pocket expenses (e.g. airfare and hotel costs) incurred on behalf of a particular client and billed to that client for the precise recovery of the actual cost of the expenses do not form the purchase price of legal service.
Ex. If clinical records cost $100, and you’re charged $107 from a third party, the cost you would pass onto your client is $107, rather than $114.49.
Now conversely, if the disbursement is NOT a recovery of an out of pocket expense incurred as a result of billing from a third party, then it DOES become part of the purchase price of legal services, and is subject to PST. Some examples are paralegal time, travel time, in-house photocopying, faxes and telephone calls.
When it comes to faxing, printing and copying of documents, there is an exception. If the fees charged for these services reasonably reflect the cost of these services, then they are PST exempt. If there is a “mark-up”, they cease to be reasonable costs, and PST is then chargeable.
The following illustrates one acceptable example of how to show PST and GST on an account for fees and disbursements. Note that PST is not charged on GST, and vice versa.
To our fee for services rendered in connection with... (including in-house staff time) $5,000 Goods and Services Tax 5% $250 Provincial Sales Tax 7% $350 GST Taxable Disbursements Mileage $20 Photocopies (deemed reasonable; no markup) $50 Hotel (one night stay)1 $141.90 Courier charges $50 $261.90 Goods and Services Tax of 5% $13.10 Provincial Sales Tax of 7% $1.40 GST Exempt Disbursements Court Registry Fees $100 Total $5,976.40 GST Registration # 123456789 RT 0001
Of the 4 items listed under taxable disbursements, the only one that has PST charged to it by the lawyer is the Mileage. The courier and hotel charges are a recuperation of out of pocket expenses, so there is no PST attracted by it (although PST did apply to the hotel charge in the first instance, that is, when the lawyer paid the hotel for a room). The photocopies, as noted, are deemed reasonable with no markup, so there is no PST charged on them either. The mileage isn't a recuperation of out of pocket expenses, so it constitutes part of the purchase price of legal services, so PST is charged by the lawyer. The lawyer would have paid $2.50 in GST on the courier charges (PST is not charged on courier fees). You do not show the courier charge as $52.50, including the GST. Rather, you show the courier charge as $50.00, net of GST allowing the lawyer to claim the $2.50 as a GST input tax credit. The lawyer collects the $2.50 from the client by showing the courier charge as disbursement subject to GST and charging 5% on that disbursement.
1This is another 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, $10.32 in PST, and $2.58 in municipal room tax, for a total of $148.35. You do not show the $6.45 in GST as part of the disbursement itself. Rather you show the hotel charges net of GST ($148.35 minus $6.45 equals $141.90), allowing you to claim the $6.45 input tax credit. The PST and municipal room tax are included in the $141.90 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 municipal taxes. You then collect $7.10 from your client in GST, by including the $141.90 (inclusive of PST and municipal 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 municipal tax embedded in the hotel charges. The lawyer paid only $6.45 in GST to the hotel, but the lawyer is charging the client $7.10 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.