Canada has a series of sales taxes defined at both the federal and provincial jurisdictions.  It is similar in complexity to the combination of state and city sales taxes levied in the US.   Unlike in the US, it cannot be disregarded when reimbursing employees for business expenses incurred on the company’s behalf.  When an employee incurs a business expense in the US, a meal for example, when seeking reimbursement most employers don’t care about what aspect of the cost was related to sales tax.  From the company’s perspective, the entire gross amount is all an expense that needs to be repaid to the employee and classified as meals and entertainment in the general ledger.

The situation in Canada is a little different.  The Canadian equivalent of sales tax, Goods and Service Tax (GST), is designed to be cost-neutral for most businesses.  Although it must be paid at the point an expense is incurred, it can later be claimed as a credit when filing taxes.  Further complicating the issue is that certain provinces also impose their own version of a GST, namely Provincial Sales Tax (PST).  Other provinces have opted to combine the two into a single Harmonized Sales Tax (HST).

Although there are specific rules on the calculation and application of this credit, it puts an imperative on the employer to collect the amount of an expense that is related to GST, PST and HST when an employee completes an expense report.  Aside from the data collection during the creation of an expense report, the tax amounts must also be recorded to the specific GL accounts.  Unlike the US, only the net amount is recognized as an expense while the amount associated to tax is placed in an asset account that is later reconciled during tax filing.  In our example of a meal that was incurred for 100 dollars, where 10 dollars was related to tax, the resulting GL entries look like this:

Canadian Tax Graphic OL

Of course in addition to recording the entries to the appropriate GL accounts, the employee must be reimbursed for the amount paid out of pocket.  In Dynamics GP and NAV, this is best accomplished through the creation of an invoice in the payables module where the employee is represented by a vendor record.  When the employee is paid the employee payable account is offset by the cash account.

Prior to the creation of the invoice in Dynamics, there is typically the review and approval of the expense report by managers, accounting, etc.  This will include validating the expenses are justified as well as substantiating the expense with any receipts or supporting documentation.

DynamicPoint has automated this entire process within our Expense Management SharePoint application.  If you have any questions regarding this or any of our products, please feel free to contact us.

Mike Marcin, DynamicPoint – SharePoint Expense & Requisition Management applications built exclusively for the Microsoft Dynamics community.