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GST and Invoicing

I have a construction client that charges back his material expenses plus a 10 % material markup to his clients. For example, if his material costs were $100 plus markup of $10, his labor was $50 and his consumables were $20 flat rate (charged on every invoice), his invoice would look like this:
Materials $110
Labor $50
Consumables $20

Subtotal $170
GST $8.50

Total $178.50

Would this be correct? By invoicing in this manner, the contractor is charging the client GST on the markup on the material ($10), understandable but he is also charging GST on GST already included in the total material cost. ($100).

Thoughts please.

I don’t know why the client would want “thoughts” on whether he should comply with the law? :policeman: :innocent:

For a registrant, the law says that he has to report all sales and to charge GST (5%) on his sales.

So not a good idea to do it wrongly (For both GST and Income tax purposes).
So should be:
(Sale price: 110+50+20=180)
($180.00 x .05 = $9.00 thus total is $189.00)

Is this his first year of business? He might have exposure from legal problems from before to deal with from before if he has been doing this awhile. (His contracts should be carefully examined for the legal terms. The recording and reporting of tax (and his books) should follow the legal terms of the contracts).

If your client is registered for GST/HST (not sure where you are located), then they are to charge GST/HST on the invoice total of $170.00. When they file their GST/HST return, they will claim the GST/HST paid on materials and consumables as input tax credits against the GST/HST collected and remit the difference.

A different approach would be to pass the preGST cost of the materials and mark that up. The contractor will recover the GST paid on materials.

Invoice does not total $170.00 …
(He charges $110 plus GST to his customer for the material (110+50+20=180))

Doesn’t matter whether he marks it up or not, or how much the markup is. Same GST law applies.

If he bought $100 in materials, he was likely charged 5% GST which he will recover as an input tax credit. The markup is on the cost of the material only. Unless an item on an invoice is exempt, zero-rated, or provided by a non-registrant, the applicable GST/HST will apply to the total.

Your proposed invoice is correct assuming all items were subject to 5% GST (as opposed to HST).

You have misinterpreted the contractor’s markup as he is not charging GST on GST.

You are assuming $95.24 of material cost plus $4.76. Most likely, it was $100 of material plus 5% GST. Even if it was the former, as a contractor, he could charge $125 instead of $110. He could have pre-pandemic lumber with a $10 cost which he is now selling at $120. He can choose to markup his cost or sales tax inclusive cost. He can draw a number from a hat. Whatever amount he determines to be the cost, is the amount used to calculate any applicable tax.

GST is to be charged by registrants at either a 0% rate or a 5% rate based on the Excise Tax Act.

FYI There are times when a tax is paid on a tax. For example, GST/HST is charged on the Carbon Levy.

1 Like

No, the invoice does not add up to $170

(His stated sales prices: 110+50+20=180)…

Or am I reading a thread on “creative” accounting? :rofl:

Yes there is an error either within the components of the invoice or in the total. Fact remains that GST/HST is to be charged on the invoice total and GST/HST paid on materials and consumables to be claimed as ITC’s.

Yup, that is what I said.
Total invoice amount is $189.00 (Assuming in a non-participating province).

Yup, missed the MARKUP!

If he is a contractor in British Columbia he will pay $100 + $7PST +$5GST. The $7 is not rebated so his cost of materials is $107 + 10%MU = $117.70

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Still GST related, but a little off topic. I have a client living overseas and preparing past due returns from before he left Canada. Would I be right in assuming the invoice will be GST exempt?

I would not be charging him the tax.

I was told by the GST dept to charge based on where the client was so 5% in BC (GST only), 13% in Ontario (HST) and 0% (No GST) for international clients.

joe.justjoe1
Just to be clear, the client isn’t asking for ‘thoughts’ on whether or not he should comply with the law. Perhaps I should have worded my question differently. I am seeking an answer to my question so I am able to correctly advise my client as to how he should be invoicing. This is his first year of business and as he just started in March, there have not been many invoices sent out. His is a small, one man business at this time, he doesn’t write up contract but does provide estimates. He has every intention of following the letter of the law, hence, my question.

Thank you for catching my math error…how embarrassing! Of course, the total would be $189. This amount is not an actual invoice, just rounded numbers used as an example.

I do know there will be GST on his markup.

I would also like to make it clear, I do NOT practice ‘creative accounting’, again, hence my question to this forum.

tsolowczuk
This contractor is located in BC. Thank you for your explanation of how to complete the GST return. I do know how to complete a proper GST return and have been doing so for years. Although, after re-reading my post I can certainly understand why you might think otherwise. : )

neal
Your answer was more in line with what I was questioning. The contractor is treating materials as a reimbursement of costs. So if we forget about the markup and PST for a moment, say he paid $100 total bill for lumber. There would be $95.24 for lumber & $4.76 for GST. If there is GST charged on total invoice, the customer will now be paying GST on the $4.76 GST in the total material cost. This would no longer be considered a reimbursement. That was what I was trying to explain in my original post. I just didn’t do a very good job of it. :slight_smile:

helga_spence
I have not misinterpreted the contractors markup. I guess I didn’t work my original post very well. I had just included the markup in the total cost before GST was charged. Lumber receipt $100 (GST included in this total) + $10 markup on total receipt.) Thanks though. :slight_smile:

gaywise
The client is not PST registered but I will look into the requirements. Thank you.

To all that responded to my post. My client has been charging and has remitted all GST collected on the total invoices. His wish was to be reimbursed for materials used. He does not keep an inventory and is charging back materials as he purchases them. By charging GST on top of GST included, I would no longer be a reimbursment. Thank you for taking your time to reply, I know we are all busy. This forum is a wonderful tool as there is so much knowledge shared here.

However, that is NOT what he is doing.

He is PURCHASING whatever inputs he needs.
He is SELLING Goods plus labor.

He DOES have contracts, whether he likes it or not.
If he wants to ensure that his chances of courting trouble are higher by treating his business like a hobby and to not memorialize those contracts in writing, he would not be following good advice.

He HAS TO charge ALL applicable taxes on ALL his sales.
That means charging GST and PST (in those Provinces) (or HST in those Provinces) on all his sales,

If he wants to act as agent for customers, he should speak to his lawyer about what contract documentation he would need to support that position.

joe.justjoe1
I do realize he is not being reimbursed. His intentions were to be reimbursed for materials, obviously this isn’t what is happening. ALL GST collected on sales is reported. While I understand he should have a written contract, he thus far does not have them. But it isn’t very fair of you to assume he treats his business as a hobby as he most definitely does not! I will look into the PST registration requirements, thank you for your input.

I use that comparison wording as explanation, since evidentiary records are not required for a hobby, but tax legislation does have specific documentation requirements for business.

I don’t see any evidence of his intention at any time of his “actual sale” having anything to do with “reimbursement”…

He buys stuff.
He does things with it, adding labor and some more stuff.
He determines a sale price high enough to make a profit and charges the customer his sales price, plus all applicable taxes…

Various thoughts may go through his mind as he costs out a job in his mind how much profit he can make on a job before giving a quote for the sale. However, those costing thoughts are not transactions.

I agree with you on that point. If his intentions are only to be reimbursed for materials, he must change his invoicing practices. Thank you.