Disclaimer: Sales Tax in Canada is complex, especially surrounding disbursements. Our FAQ’s and instructions describe how to use CosmoLex’s accounting module to handle transactions and reports and is not intended as tax advice. For specific tax advice, consult your tax professional. Also, consult with your tax professional prior to start using CosmoLex and go over the guidelines provided here.
Note on Accounting for Taxes:
Taxes on Disbursements “incurred as agent” are posted to the balance sheet under advanced client cost account 1701: HST on Client Costs; or the comparable accounts if your jurisdiction uses two taxes. Collection of these taxes through client invoice payment automatically post to the same account used. Payment or Collection of these taxes are not included in lawyer's input tax credit.
Taxes on Disbursements “not incurred as agent” or for out of pocket/soft costs are automatically credited to the balance sheet under liability account “2201: HST Collected”; or the comparable accounts if your jurisdiction uses two taxes. Collection of these taxes are included in lawyer's input tax credit.
- Invoice components Late Fees, Finance Charge do not change tax amount. Invoice discount changes the tax amount by default. In certain situation, if use of discount should not reduce the taxes (e.g. early payment discounts), you will have an option when generating the invoice to make Discount effect non-taxable.
- See article below which seems to indicate CRA does not permit changes in taxes due to early-payment discounts, finance charges etc etc.
GST Taxes paid on office expenses are customarily posted (as these are recoverable) under contra liability account 2202: HST Paid. Payment of GST taxes are included in lawyer's input tax credit. If you also have non-recoverable GST Taxes Paid, you should create additional sub-accounts for their postings.
If your jurisdiction uses two taxes, except for Quebec, PST Taxes paid on office expenses are customarily posted (as these are non-recoverable) under expense account 6660: PST Paid on Operating Expenses. See the article below on how to post Disbursements not incurred as an agent in these jurisdictions.
If Quebec jurisdiction, QST Taxes paid on office expenses are customarily posted (as these are recoverable) under contra liability account 2212: QST Paid. Payment of QST taxes are included in lawyer's input tax credit.
To learn more about taxes on disbursements, please review following articles: