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Lawyer bookkeeping


#1

Looking for clarification

Lawyer - purchased legal supply for client - no markup.
E.G.
Minute book purchased - $100.00 + HST ($13.00) that exact amount lawyer charges the client in addition to legal services on invoice.

Which scenario below is the correct way for the bookkeeper to record?

A.
Income tax return
Sales $300.00
Expenses $100.00
Profit $200.00

HST Return
HST collected $39.00
HST paid $13.00
HST owed $26.00

or

B.
Income tax return
Sales $200.00
Profit $200.00

HST Return
HST collected $26.00
HST owed $26.00

Any references or links would be helpful, as well.


#2

Tax return
Sales 300.00
Office Expense 100.00

GST/HST return
Sales 300.00
HST collected 39.00
HST ITC 13.00


#3

I concur with David. The clients I have who are lawyers treat the transaction as in A when it comes down to recoverable disbursements that are not incurred as an agent.

I don’t believe the purchase of company supplies (minutes books, corporate seal etc) is on account of agency. It’s irrelevant whether the lawyer charges a markup on the company supplies they purchase for the client. It really isn’t much different than the auto mechanic who purchases oil and a filter for your car and charges you for parts and labour. I mean what about postage, telephone, and courier charges that get billed to the client’s file as recoverable disbursements? What would you be doing with the HST and the expense for the courier, Canada Post, and telephone?

At one time “most” of the agency disbursements were paid directly from the lawyer’s trust account, although nowadays around here with Ontario’s Teranet Registration system more of these agency disbursements are being paid from the lawyer’s General account, and then get transferred from trust when the account is rendered.

I have seen a couple of systems, one a little more elaborate than the other;
Basic System:
Clients Disbursements Advanced - Expense Account
HST paid on Expenses;
Clients Disbursements Recovered - Income Account
HST collected:

Advanced System (agency disbursements separated from non-agency disbursements);
Clients Disbursements Advanced - Expense account (non-agency expenses)
HST paid on Expenses
Clients Disbursements Recovered - Income Account (non-agency expenses)
HST Collected:

Agency Disbursements Advanced - Asset account

Under this method, recoverable Agency disbursements paid from lawyer’s General account get posted as a debit to this asset account and all recovered or billed Agency Disbursements get posted as a credit to this account when the client’s account is rendered. Technically speaking any debit balance in this account means are still agency disbursements advanced on behalf of a client that have not been recovered. The agency disbursements advanced and collected that go through this account do not hit the lawyer’s income or expense statement nor the HST return of the lawyer.

PCLaw and other bookkeeping type software for Canadian law offices do a decent job of tracking clients disbursements to specific client files.

Anyway… here is GST/HST Policy Statement P-209R for what it’s worth.

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p-209r/lawyers-disbursements.html


#4

I read GST/HST Policy Statement P-209R.

The policy breaks down different practice areas - business law, civil litigation, real property, etc.
To continue, it lists “common disbursements incurred as an agent” & “common disbursements not incurred as an agent”

After further research, I found: Merchant Law Group v. The Queen, 2008 TCC 337 (CanLII)

https://www.canlii.org/en/ca/tcc/doc/2008/2008tcc337/2008tcc337.html?searchUrlHash=AAAAAQAXUG9saWN5IFN0YXRlbWVudCBQLTIwOVIAAAAAAQ&resultIndex=1

Merchant argued that the policy is irrational - paragraph 22
What I got from the case is that most disbursements should be treated as purchased on behalf of the client (agency) and simply reimbursed with no additional HST being charged on top of the HST that was paid.

Therefore, these clients disbursements are not part of the lawyers revenue/expenses nor their hst collected/paid.

Merchant was successful in appealing the reassessment, which was suggesting they owed gst on disbursements.

There are the common disbursements not incurred as an agent, which seem straightforward.

  • Telephone charges
  • Photocopy charges
  • Courier costs
  • Costs for travel by the lawyer (or others working on a client’s file)
  • Postage

Wondering if you had anything to add to this research journey?


#5

I would not adjust my initial position.

Most of that case dealt with litigation and I would agree that most of the disbursements listed there would be on account of agency. The law firm wasn’t purchasing minute books and company supplies for its clients. Also, the majority of the disbursements in that case were paid directly from the lawyer’s trust account… which is essentially using the clients own funds to pay for the expenses. Those expenses do not hit the income or expense records of the law firm because they were paid directly from trust.

The policy being irrational is fairly irrelevant IMO, since they are arguing litigation disbursements, none of which are terribly similar to purchasing office supplies for a client.

The long and short of it in my mind is that Dye & Durham or Carswell invoiced and charged HST to the lawyer for the purchase of the company supplies. In all likelihood the lawyer paid for the products from his General account, but even if he collected an incorporation retainer and paid for them out of his trust account, someone needs to pay and possibly be able to recover the HST input tax credit that was paid to D&D or Thomson Reuters.

If the lawyer has paid for the company supplies from General Account then he records the ITC and collects the same amount of HST from the client as a taxable disbursement. The client then recovers that HST as an ITC on his business records. If the supplies were paid from Trust then the lawyer would show the pre-tax amount paid to Dye & Durham as a taxable disbursement on his invoice to the client and add HST to that in order for the client to recover the ITC.

I must be missing something as I don’t see how it’s a big deal. The HST ultimately needs to be paid by the lawyer’s client and claimed back as an ITC if the lawyer’s client is an HST registrant. If the minute book was paid from general funds then the lawyer also has an ITC against his HST collected (to net his tax on the supply to zero). If paid from trust the lawyer has no expense or ITC, and the client can claim the ITC if registered.


#6

I realize net effect is zero – but I would like to clarify with a numerical example.

My understanding is the general account is used for client disbursements “not incurred as an agent” & trust account used for client disbursement “incurred as an agent” in an ideal world.

I understand there are instances where a lawyer may use the general account when they should have used the trust but will just transfer from the trust to the general to cover it.

Example
Client Disbursement $100.00 + HST ($13.00) = $113.00
Paid from General Account (non agency)

LAWYER BOOKKEEPING
INCOME TAX RETURN
• SALES $100.00
• EXPENESE $100.00
HST RETURN
• HST COLLECTED $13.00
• HST PAID (ITC) $13.00

CLIENT BOOKKEEPING
INCOME TAX RETURN
• EXPENSES $100.00
HST RETURN
• HST PAID (ITC) $13.00

Paid from Trust Account (Agency)

LAWYER BOOKKEEPING
• NO IMPACT
• PUT ON CLIENT INVOICE $100.00 + HST ($13.00) = $113.00

CLIENT BOOKKEEPING
INCOME TAX RETURN
• EXPENSES $100.00
HST RETURN
• HST PAID (ITC) $13.00

My confusion was coming from the fact that I was being told that when a lawyer incurs an expense for a client (non agency) there can be tax on tax.
e.g.
Lawyer pays $100.00 + HST ($13.00) = $113.00 for a client disbursement (non agency) – Witness fee

Are Lawyers supposed to charge the client $113.00 + HST ($14.69) = $127.69

Whether the client disbursement is on the account of agency or not there is no tax on tax, correct?


#7

There is no tax on tax in either scenario.

If there is no agency, any expense charges are effectively a purchase and re-sale.

So the lawyer buys a minute book for $113, claims $13 as an ITC. He is out $100.

Bills the client for $113, remits $13 to CRA and keeps the other $100 to offset the amount he is out

Client pays $113 and claims the $13 as an ITC. Buyer ends up with a $100 minute book.

This applies to ALL expenses, including mileage. Also, the billing is at the provincial rate relevant to the client, regardless of whether the lawyer paid the GST/HST at a different rate (or not at all).

Agency is not simply buying on behalf of a client, it is being legally authorised to bind the client. So the client would not be able to repudiate the purchase, even if he didn’t agree with it. I would question whether clients are actually giving their lawyer this authority, since that would mean that, for example, that if a charge is considered to be excessive, the client would not be able to question it.

In the particular case cited, it seems to be saying that there is a special relationship between lawyer and client which more or less implies agency. It also said that the client had consented to all the expenses. I don’t think this outcome can necessarily be extrapolated to all cases relating to expense billings.