Introduction

Law firm HST compliance looks simple on the surface — legal services are taxable, HST is charged at 13% in Ontario, and the net is remitted to the CRA. In practice, the treatment of disbursements, trust account flows, and certain billing structures creates enough complexity that HST errors in law firms are among the more common findings in HST audits of professional service businesses.

Mistake 1: Charging HST on Disbursements That Were Never HST-Bearing

Many law firms add 13% HST to all disbursements on their client invoices — court filing fees, expert witness fees, government search fees — regardless of whether HST was originally charged on those disbursements.

Government fees — court filing fees, land registry fees, municipal search fees — are not subject to HST. They are fees paid to a government body for a government service, which is generally exempt. When a law firm pays a $500 court filing fee and then bills the client $500 for the disbursement plus $65 HST, the firm has charged HST on an amount that was not itself subject to HST. The firm has collected $65 from the client that it is now required to remit to the CRA — but the client is paying HST on a zero-HST disbursement.

The correct treatment: Government fees are passed through at cost without HST. Third-party fees that include HST (private process servers, expert witnesses, reporters) are billed at the amount paid — if the firm already claimed an ITC on the original HST paid, it should not add HST again on the full recovery.

Mistake 2: Treating Trust Receipts as Revenue

As discussed in Article 11 of Pack 1, trust accounts are one of the most important compliance areas for law firms. A related HST error: recording trust receipts — retainers and client advances held in trust — as revenue when received, and charging HST on them at that point.

A retainer held in a trust account is not earned income until services are performed and a bill is rendered. HST obligations arise on billing, not on the receipt of the retainer. A firm that charges HST on the receipt of a large retainer and remits that HST to the CRA — before any work is done and any bill is issued — has remitted HST prematurely.

More seriously, the trust account rules mean that the HST is drawn from trust funds, which are the client's property until the bill is rendered and the funds are properly applied. Drawing trust funds to remit unearned HST is a trust account compliance issue with LSO implications beyond the CRA.

Mistake 3: Not Registering the Partnership or Corporation Separately

Many law firms operate as partnerships but have a professional corporation for one or more partners. The partnership is a separate entity from the professional corporation and must register for HST independently. Where a partner's professional corporation provides services to the partnership and invoices the partnership, both the partnership and the professional corporation may be separate HST registrants with separate filing obligations.

The error occurs when firms treat the partnership and the individual partner's corporation as a single HST entity — pooling the ITCs and collected HST without separate tracking. In an HST audit, this commingling creates an irreconcilable reporting discrepancy.

When to Speak With a CPA

A law firm that has been billing disbursements with HST added indiscriminately, treating trust receipts as revenue, or operating with unclear HST boundaries between the partnership and individual professional corporations should schedule an HST reconciliation before the CRA requests one.

Rotaru CPA works with law firms and incorporated lawyers on HST compliance, disbursement treatment, and annual reporting. Book a consultation to review your firm's HST position.