A Lawyer provides legal services to a client. In addition, he acts as an AGENT to purchase a legal supply.
Lawyer purchases a minute book as an agent for client $100.00 + HST ($13.00) = $113.00
The lawyer provides a legal service to the client for $200.00.
The lawyer invoices the client
Legal services $200.00 + HST ($26.00) = $226,00
Minute book $100.00 + HST ($13.00) = $113.00
Total $300.00 + HST ($39.00) = $339.00
The lawyer books the following on income tax & HST return:
Sales (total for invoice) $300.00
Expense (legal supply for client) $100.00
NET INCOME $200.00
HST COLLECTED $39.00
HST PAID $13.00
HST OWED $26.00
Therefore, the lawyer’s income & HST nets out to his services.
The client is able to claim the ITC for the legal supply because it is his purchase done by his agent (lawyer).
Is this correct?
Yes.
How and why is explained in detail in a few of the new CRA Folios. Not sure which but I think that it incomes reimbursements and employee expense when the GST is included in the billed amount and not stated explicitly.
In any case, since the lawyers bill clearly states the HST, this is very straight forward.
services + supplies = $300
HST = $39
Total = $339
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Good catch Niceguy - though the bottom line remains correct. for both lawyer and client.
The lawyers client should not be affected at all, as long as his (the client’s) bookkeeper records his transactions properly from the invoice. The client will have the proper expenses and the proper HST paid. (ie from the documentation of the invoice he received, he purchased the minute book from the lawyer).
If you are correct about the AGENCY arrangement, the lawyer, however, has not done his bookkeeping correctly, since he has overstated his Sales, overstated his expenses, overstated his HST collected, and overstated his HST paid.
If this was a one-off, I wouldnt worry about it, since in his case also, the net income effects and the net HST effects end up netting to the correct figure.
If the lawyer does this routinely, somebody needs to advise his bookkeeper on how to properly record contracts, and maybe explain what a “recoverable expense receivable” account is.
If there was no AGENCY agreement, then the lawyer (hopefully) correctly recorded HIS purchase of the minute book, or at least, he correctly recorded HIS SALE of the minute book.
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How would you suggest bookkeeping/invoice be done from above example ($200 - service & $100 - minute book) moving forward?
Thanks
For lawyer, it is all ok but for client, he should claim 300 as his expense and 39 dollars as ITC. The client did not buy directly himself the minute book unless lawyer had arranged direct payment with client credit card or debit, in that scenario, lawyer would have billed 200 plus hst. Thanks.
Naval Gupta
Tax & Financial Advisor
Navkam’s Financial Group Corp.
FSCO #M08004718 Life #05089441
Phone: 905-799-1035
www.navkam.com
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Most lawyers prepare four billing documents:-
-
Services invoice.
-
Disbursements invoice with GST explicitly stated as disbursement expense + GST paid. Handle this the same as you would any employee reimbursed expense. You get to claim the ITC.
-
Current statement of account per client matter.
Retainer balance fwd - less services fees - less disbursements + services + disbursements + additional retainer request if required for this matter = Balance due.
-
Transaction summary of retainers, invoices, and payments per client matter.
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The lawyer is sole practitioner purchasing legal supplies for client - no markup.
If minute book is purchased for a for $100.00 + HST ($13.00) that is the exact amount the lawyer turns around & charges client on the invoice along with legal services.
Two scenarios - the question is for income tax / HST return purposes if it should be booked:
A.
i)
Income tax return
Sales $300.00
Expenses $100.00
Profit $200.00
ii)
HST Return
HST collected $39.00
HST paid $13.00
HST owed $26.00
or
B.
i)
Income tax return
Sales $200.00
Profit $200.00
ii)
HST Return
HST collected $26.00
HST owed $26.00
Or is it best use part of A and Part of B? [e.g. B i) & A ii)]
@joe.justjoe1 are you suggesting B?
@dominique_dabolczi do you mean the lawyer has one invoice for his legal services and a separate one for disbursement? Also, the ITC on the minute book is for the client, correct?
Thank you all very much - highly appreciated!