In Canada, how you record taxes on disbursements depends on the activity or situation.
There are cases where:
- Taxes paid on disbursements are not included in the firm’s Input Tax Credit (ITC)
- Disbursements are not taxable to the client
- Your firm pays the disbursement as the client’s agent and the entire disbursement amount, inclusive of taxes, passes through to the client as a cost.
The taxable disbursements setting is used when:
- Taxes paid to the vendor become part of your firm’s ITC
- Your firm taxes the disbursement amount when invoicing the client. The system refers to these disbursements as taxable.
To designate a disbursement as taxable, check the Taxable box when you enter a hard cost or AP bill posted to a matter.
Incurred as Agent
This setting covers situations where your firm incurs an expense as an agent of the client, meaning that the entire disbursement, including taxes, merely passes through the firm’s books.
In these situations, while the item is taxed, your firm does not report the taxes as part of their ITC. Instead, you invoice the client for the entire disbursement amount, inclusive of taxes. The system refers to these types of disbursements as incurred as agent.
To designate incurred as agent when you enter a hard cost or AP bill posted to a matter:
- Check the Disbursement Incurred as Agent box.
- Enter tax as you normally would.
This ensures the tax amount is not included in your firm’s ITC.
Use this setting when taxes paid to a vendor become part of your firm’s input tax credit (ITC), but you do not tax the client on the disbursement. The system refers to these disbursements as non-taxable.
To designate a disbursement as non-taxable when you enter a hard cost or AP bill posted to a matter, uncheck the Taxable box.
For additional information regarding taxes on disbursements, see: