- British Columbia - you charge 12% HST;
- Ontario, New Brunswick and Newfoundland and Labrador – you charge 13% HST;
- Nova Scotia – you charge 15% HST.
Sunday, January 30, 2011
The Ontario Harmonized Sales Tax came into effect July 1st. The 5% GST was replaced with the 13% HST, effectively eliminating the Provincial Sales Tax (PST). This resulted in an immediate 8% increase in the cost of retaining legal services for individuals.
Businesses actually benefit, as previously they could not recover the PST portion of disbursements unless they sold goods and registered for PST. Now they can claim the provincial portion as HST input tax credits. And for those that were registered for PST, now they only have to track and remit one sales tax instead of two, saving on time and labour costs.
There was some confusion during the transition period over the tax rate for fees before and after July 1st on the same invoice. I heard of a few firms billing every client as of June 30th, in order to avoid any issues. Since the transition period was quite awhile ago, I will discuss it no further.
However, I have noticed an ongoing problem with “Place of Supply”, as the rules did change as of July 1st. In most cases, the address of the client is now the determining factor for what tax rate will be charged.
If your client resides or the business address is located in one of the following “participating provinces”:
In all other “non-participating” provinces and territories, your clients are charged 5% GST.
Litigation services are determined by where the court or other tribunal that has jurisdiction over the matter is located. If the client is in Alberta but the matter will be heard in Ontario, the 13% HST is charged once the action is commenced. However, if the Alberta client retained you to investigate and determine whether a cause of action actually exists, then these services supplied prior to commencement of the action are charged at the 5% GST rate. When the action commences, you begin charging this same client 13%.
If you have clients outside of Ontario, you can use Matter Manager – Billing – Taxes – to review and make changes to the tax rates you charge clients.
Some firms purchase and pass on client disbursements as “agents”. When doing this, a $113.00 purchase appears on the client’s invoice as $113.00, rather than $100.00 plus $13.00 HST. This can make it difficult for business clients to claim their HST input tax credits. The above example seems obvious, but what about a Teranet purchase of $71.30 ($60.00, $10.00 fee, $1.30 HST). If not broken down on your invoice, the client may mistakenly claim a $63.10 purchase and a $8.20 input tax credit.
As always, I invite your comments and suggestions for future posts. Next week – Transfers from trust to general.
Sunday, January 23, 2011
This blog posting will mostly be of interest to partners in small firms, but possibly to solo-practitioners, as no one is immune to the problem.
Do you really know what is going on with your bookkeeping?
I am not talking about profit and loss, or about general bookkeeping procedures. I am referring to the grim reality that employee theft does sometimes occur.
How does it happen?
Most often, but not always, it is a person with signing authority that takes advantage of your trust in them. Another common method is presenting the signing partner with a stack of cheques on a busy day. Again, your trust in the person and the stress of the day can overcome the need to properly review each cheque.
What can you do to defend yourself?
First and foremost, only a partner should be signing cheques. If another person does have signing authority, there should be a set maximum. Even then, a series of small cheques can add up to a large amount over an extended period of time.
If you handwrite the cheques, review each invoice yourself. If staff print off cheques for your signature, be sure an invoice accompanies each cheque, so that you can verify the payment.
In a busy office, you can reduce your stress level by having staff separate the cheques into two streams. One stream being the urgently needed cheques, for closings, court filings, etc. The second stream, for regular suppliers/accounts payable, can be set aside for the next day, or on an “as soon as possible” basis. Urgent or not, take the time to review each cheque and invoice.
The second thing you can do to defend yourself is to have occasional independent reviews of your bookkeeping records. You may already have an accountant doing your taxes, but he/she usually only sees the final reports, not the individual entries.
A review is not the same thing as checking to make sure your books balance. Nor is it a full-on audit of your records. The purpose of the review is to look for unusual entries, discrepancies, or patterns in the entries, which, if found, could signal a more in-depth review is called for.
How you choose to do this is your decision. You can be forthright and open with staff, telling them that you have hired an outside consultant. Or, if you feel long term staff may take offence at the implication, you can have the consultant work afterhours, on weekends, or remotely.
As always, I invite your comments and suggestions for future posts. Next week – HST comes to Ontario.
Sunday, January 16, 2011
The final item on the LSUC’s spot audit list of common errors is “Pre-taking fees”. Essentially, all unearned client funds should be on deposit in the trust account, and if the funds are not in trust, they have been pre-taken into the general account.
Whenever you receive money that is entirely:
- payment for completed legal services for which you have sent the client a bill;
- reimbursement for proper expenses you have made on behalf of a client;
- your or your firm’s money; or
- a general monetary retainer;
these funds may be deposited into your general account.
General retainers are extremely rare. When clients give you money, they usually expect something in return. Until you actually perform this task, the funds are “deemed trust”.
Any other funds you receive from a client are also “deemed trust”, and must be deposited into your trust account.
A cheque that is partly paying your accounts receivable and partly an additional retainer must be deposited into trust, as it does not meet the “entirely” provision set out above. Deposit the cheque into trust, and then immediately transfer the accounts receivable portion to general.
You cannot anticipate a billing to a client. You cannot transfer funds from your trust account and then issue an invoice. You may very well have completed all of the work, but you are not permitted to take your money until an invoice is actually sent to the client. Nor is it permissible to deposit funds into your general account one day and issue an invoice the following day.
According to By-law 9, s. 8. (2) 2., there are two exceptions. You can receive funds into general if:
- the entire amount is in reimbursement of the client’s disbursements; or
- you will immediately issue an invoice (i.e. the same day)
As always, I invite your comments and suggestions for future posts. Next week – Third-party review of your books.
Sunday, January 9, 2011
Number 6 on the LSUC’s spot audit list of common errors is “Earned fees in trust”.
Money that a member becomes entitled to should be billed and transferred from the trust account generally within a month of the fee having been earned – s.14(7) of Regulation 708.
PCLaw can be set to automatically post the transfers to the general account when an invoice is prepared. Just make sure to actually transfer the funds between bank accounts. This is easy if you are using PCLaw to print your cheques at the same time as you are doing the invoice. However, in a busy law practice, you may get distracted, and forget to do a hand-written trust cheque or an electronic transfer.
The LSUC also found that transfers from the trust account to the general account for fees were being made without first delivering an invoice to the client. These would be fees under the heading of work-in-progress. PCLaw can allow this to happen. To prevent this, remove the checkmark in Systems Settings - Data Entry – WIP.
Another way these transfers can occur is by failing to use the “Trust to General Transfer” in PCLaw to make a payment to your firm. While you can properly use a trust cheque to pay client disbursements, PCLaw simply cannot recognize that the payee is your firm. Therefore, PCLaw will allow you to write an ordinary trust cheque to your firm in excess of funds owed.
To prevent the improper transfer of trust funds for unbilled items, make sure you and your staff only use the “Trust to General Transfer” feature in PCLaw, for any trust entries dealing with client invoices and receivables. As long as WIP is unchecked, PCLaw will prevent you from transferring too much.
As always, I invite your comments and suggestions for future posts. Next week – the last in this spot audit series - error #7 – Pre-taking fees.
Sunday, January 2, 2011
Number 5 on the LSUC’s spot audit list of common errors is “Unreconciled items”. This mostly falls under the heading of good bookkeeping practices, except when a trust bank account is involved.
The wrong amount being keyed into PCLaw by staff or by the bank teller is the most common error. Correct the PCLaw entry or follow up with the bank to make sure their error is corrected by the time the next statement is issued.
Stale-dated cheques (confirm state-date rules with your bank) should be voided in PCLaw and a replacement cheque issued. Long before this date, you should have been confirming with the payee that the cheque was received. If it was lost in the mail, place a stop payment on the cheque, and issue a new one.
Void client NSF receipts in PCLaw and request replacement funds from the client. If the client’s NSF cheque was deposited into trust, make sure the client’s ledger does not have a negative trust balance. Perhaps you have already paid for some disbursements. If the client’s ledger is in a negative balance, you must transfer funds from general to make up for the shortfall.
Sometimes a bank will erroneously debit bank charges into your trust account. Make sure the bank immediately reverses these charges and debits your general account instead. Remind the bank of the importance of debiting only your general account for any and all trust bank charges (your letter of direction should already be on file with the bank).
Most banks require you to bring errors to their attention within 30 days of the statement date. If, upon reviewing your firm’s PCLaw general bank reconciliations for this month, you find old outstanding errors listed, please remove them. Simply post to miscellaneous income or expenses as is appropriate, and clear the old errors.
Trust account errors are an entirely different matter. If old errors are listed on your PCLaw trust bank reconciliations, you must go back and find the source of those errors and correct them properly. Since these are client funds that are involved, you cannot simply post a correcting entry without adequate documentation to satisfy the LSUC.
As always, I invite your comments and suggestions for future posts. Next week – error #6 – Earned fees in trust.