Tax Traps & Tips: GST and Cost-Sharing Arrangements
Beyond Numbers · April 2001
by Ron Osborne, CA
Many businesses, organizations, and professionals get involved in cost-sharing arrangements.
Unless these relationships are properly understood and documented, participants could find themselves facing unexpected GST liabilities.
The views of the Canada Customs & Revenue Agency (CCRA) on this topic are expressed in the recently released GST Policy Statement P-238 Application of the GST/HST to Payments Made Between Parties Within a Medical Practice Organization. While focussed on health care, the principles discussed in the Policy Statement apply equally to other industries.
As a general rule, where one person incurs an expenditure and seeks reimbursement
of all or a portion of the expenditure from another, the reimbursement is treated as consideration for a taxable supply and is subject to GST. The main exception to this rule is where the first person incurs the expenditure as agent for the other1.
If an agency relationship does not exist, the entire amount of the reimbursement
is subject to GST, even though some components of the original expenditure (such as salaries, insurance, property taxes, or the provincial tax component) may not have been subject to tax initially. If both parties are GST registrants engaged exclusively in the course of commercial activities (i.e. entitled to full input tax credits), then this issue does not result in a GST burden, although the first person (“supplier”) may be at risk for interest and penalties if he/she failed to collect and report GST on the entire reimbursement. However, where the second person (“recipient”) is engaged in making exempt supplies or is not registered, a tax cost will arise because the recipient will not be able to recover the GST through the input tax credit mechanism.
Where the reimbursement is consideration for a taxable supply, the reimbursement must be taken into account when determining whether the supplier is still eligible for the “small supplier” exemption2. If the reimbursement results in loss of the small supplier status, then suppliers are required to register and account for GST on all their taxable activities, not just the reimbursements3.
Even when an agency relationship exists between the parties, care must be taken
to distinguish between reimbursements
of expenditures made as agent, and
payments made for services provided by
the agent. For example, assume a management company is engaged by a group of practitioners to act as their agent for the acquisition of specific goods and services (such as equipment and facilities) and to handle their invoicing. The management company provides each practitioner with a statement
for his/her share of disbursements plus a 15% administration fee. While the disbursement portion
is not considered a taxable supply, the administration fee is subject to 7% GST.
Moreover, if the management company employs its own staff and incurs costs to provide the services, a portion of which is charged to the practitioners in addition to the administration fee, this recovery is also subject to GST. Special care must be taken when the management company pays the wages and salaries of the staff working for the practitioners (as opposed to paying an outside payroll service). Unless it is properly documented that the management company is acting as the agent for the practitioners and that the practitioners are the employers, CCRA may take the position that the recovery of the wages and salaries is for a taxable administrative service, therefore subject to GST.
It’s important to recognize that when individuals act as agents for others, they
may not claim input tax credits on the expenditures thereby incurred. Only the principals are entitled to claim the input
tax credit (subject to normal eligibility rules).
Another arrangement discussed in Policy Statement P-238 is that of fee-sharing. In a fee-sharing arrangement, a principal engages the services of a locum or independent associate who works from facilities provided by the principal. In return, the locum/associate agrees to pay the principal a percentage of the locum/associate’s revenues. As
long as their arrangement is documented as a fee-sharing one only, then-using the example of the medical practitioner-the payment is considered to be in respect of an exempt health care service. However, if the agreement between the principal and the locum/associate makes reference to the payment being in part for the use of the principal’s medical facilities, then the entire payment is treated as a taxable supply
of administrative services.
The tax treatment of
any cost-sharing or recovery arrangement is heavily influenced by the supporting documentation and the actions and intentions of
the parties. Parties to such arrangements should seek professional advice to avoid unexpected
and costly tax consequences.
- The views of the Canada Customs & Revenue Agency (CCRA) on the subject of agency are summarized in GST/HST Draft Policy Statement P-182.
- Effectively, if the taxable supplies of an individual (and all entities associated with said individual) are less than $30,000 per year, the individual is considered to be a small supplier and is not required to register or account for GST on his/her supplies. The individual may, however, voluntarily register. It is also important to remember that the $30,000 threshold is based on world-wide supplies and includes zero-rated supplies.
- For example, a doctor may invest in
a resort-hotel unit and register to avoid paying GST on the purchase price. As a consequence, the doctor must also account for GST on all other taxable supplies made through his/her medical practice, even though the annual total of all the supplies may be less than $30,000.
GST Policy Statement P-238
is available online at: