Sandy runs a business offering an HST exempt service out of an office she rents. The service Jeremy offers is not HST-exempt. Because Jeremy offers a different but complementary service to the public, Sandy suggested that Jeremy offer his service out of Sandy’s office space. To keep the arrangement simple, Sandy suggests that Jeremy pay her 40% of his revenues, and Sandy will provide the office space, supplies, computers, etc. without any further charges. The idea is that Jeremy will just keep 60% of his revenues.
The complication comes with how to handle the HST. Jeremy must charge his clients the HST, but how should it be split between Jeremy and Sandy?
Sandy only gets 40% of Jeremy’s base rate and gives all of the collected HST money to Jeremy. Jeremy then remits the HST money to the government based on his full revenues (not just the 60% that he actually receives).
Sandy gets 40% of everything including HST money. Sandy remits her share of the HST money to the government, and Jeremy remits his share. In effect, they are treating it as though Sandy is performing 40% of Jeremy’s service, and Jeremy is performing 60% of it. This feels wrong because it is really Jeremy who is performing the service; Sandy isn’t even qualified to offer Jeremy’s service.
Sandy gets 40% of everything including HST money because she is effectively charging Jeremy HST on the goods and services she provides to Jeremy. Sandy will remit her share of the HST (less any HST input credits). Jeremy will remit the entire HST amount less the HST input credit from Sandy. This seems wrong because Sandy has charged HST on Jeremy’s rent and possibly other things that HST does not apply to. It also forces Jeremy to use the complex HST accounting instead of the quick method.
I could go on listing different ways to handle the HST in this scenario, but it’s time for others to chime in. What is the correct way to do the HST accounting in this case? Are there any experts out there? Maybe The Blunt Bean Counter?
Update: In a later blog post I explained how to handle the HST for this situation.