GI-197 “Out-of-Pocket Expenses” 17 December 2021

Expenses not incurred as agent

• “When a supplier, in the course of supplying a service to a client, pays an out-of-pocket expense [defined as an expense “that a supplier may incur when providing a taxable (other than zero-rated) supply of services to a client”] that is not incurred as agent and the client has agreed to reimburse either all or a portion of the expense, the amount invoiced to the client is treated as additional consideration payable for the supplier’s supply of the service.”
• Generally, as a registrant, such supplier can claim an input tax credit (ITC) for the GST/HST paid or payable by it for the supply that gave rise to the out-of-pocket expense “to the extent that the supply was acquired for consumption, use or supply in the supplier’s commercial activities.”
• “[T]he supplier may include on an invoice, as additional consideration, the amount of the unrecoverable tax or levy that was payable by the supplier in respect of the out-of-pocket expense. The GST/HST will then apply on the total amount of the consideration on the client’s invoice.”

Typical out-of-pocket expenses not generally incurred as agent that a registered supplier may charge a client include …:

• office supplies, if they are associated with the service being performed by the supplier for the client
• air travel
• local transportation, such as a taxi
• parking
• hotel or other accommodation
• per diem amounts, such as meals
• car rentals and gasoline
• an automobile allowance, where the supplier’s personal vehicle is used in the performance of the service

Expenses incurred as agent

When a supplier incurs an out-of-pocket expense as a client’s agent … the client is considered to be the recipient of the supply. The reimbursement of the supplier’s out-of-pocket expenses by the client is not treated as additional consideration for the supplier’s services. As a result, the expense identified in the supplier’s invoice to the client would not be subject to the GST/HST.”

Where the GST/HST is payable on an expense incurred as agent, the supplier is not eligible to claim an ITC in respect of the GST/HST that was paid or payable on the supply. Instead, the supplier should be reimbursed by the client for the expense, along with the GST/HST and any other taxes and levies paid by the supplier.

Generally, a client who is a registrant can claim an ITC for the GST/HST paid or payable on the out-of-pocket expenses incurred by a supplier as agent of the client, in addition to the GST/HST paid or payable in respect of the supply of the supplier’s services, to the extent that the supplier’s services and the supply acquired by the supplier are consumed, used or supplied in the course of the client’s commercial activities. However, if the reimbursement is for food, beverages or entertainment expenses incurred by the supplier as the client’s agent, the client is required to recapture 50% of the ITCs claimed for the GST/HST on these expenses.

If a supply that did not attract the GST/HST (for instance, the expense was for a zero-rated or an exempt supply) was incurred by the supplier as agent, the expense of the supply should flow through to the client for reimbursement without the GST/HST. In this case, the client could not claim an ITC in respect of the supply acquired by the supplier.

Expenses incurred by a supplier of taxable services as agent for its client are not subject to GST/HST when it is reimbursed for those amounts by the client, whereas expenses incurred by it as principal are subject to GST/HST if it is able to add those amounts (including any GST/HST on those expenses for which it is not entitled to ITCs, e.g., 50% of restaurant bills) to its invoice for its taxable services. CRA provided the following list of expenses which are generally not incurred as agent for the client:

• office supplies, if they are associated with the service being performed by the supplier for the client
• air travel
• local transportation, such as a taxi
• parking
• hotel or other accommodation
• per diem amounts, such as meals
• car rentals and gasoline
• an automobile allowance, where the supplier’s personal vehicle is used in the performance of the service

In the context of a discussion of the treatment of expenses incurred by a supplier of services to a client otherwise than as agent for the client, CRA discussed the limitation in s. 236(1):

Generally, a registrant who is liable for the GST/HST paid or payable on its food, beverage and entertainment expenses may recover the GST/HST paid or payable on those expenses as an ITC. However, the ITC claimed is subject to a 50% recapture, which effectively restricts the ITC to 50% of the GST/HST paid or payable on these expenses. This recapture applies when the registrant is subject to the limitation rules for deducting the expenses under the Income Tax Act (ITA), or would be subject to those rules if the registrant were a taxpayer under the ITA.

The limitation rules under the ITA do not apply when the expenses are reasonably reimbursed by another person, and where they are specifically identified to the person in writing as food, beverages, or entertainment expenses. However, the limitation rules then apply to that other person.

In the context of a discussion of the treatment of expenses incurred by a supplier of services to a client otherwise than as agent for the client, CRA discussed the limitation in ETA s. 236(1) (based on that in ITA s. 67.1):

The limitation rules under the ITA do not apply when the expenses are reasonably reimbursed by another person, and where they are specifically identified to the person in writing as food, beverages, or entertainment expenses. However, the limitation rules then apply to that other person.