Updated: Dec 4, 2021
Wondering how #clientdeposits should be treated in your Interior Design or boutique Architecture
Firm? Should I charge Sales Tax onto this clients' deposits/retainers? Is this cash influx income in my business financial statements? Read along for the answers.
Retainers or Client Deposits are not considered Income. These monies represent your business obligation to provide services to a client in regards to the completion of a stage in the project or fulfilling the work as a whole. From a business perspective, Retainers/Client Deposits secure a project/client engagement or commitment to work with your Interior Designer or Architecture Firm. The purpose of using Retainers/Client Deposits as a business practice is to ensure that your business does not carry the financial burden of starting a lengthy project -hiring contractors and sourcing billable goods. Retainers/Client Deposits definitely help improve your businesses' cash flow!
Having said all this, often #designers and #architects do not understand how these should be handled in their business financials. For one, Retainers/Client Deposits do not carry GST/HST - sales tax applicable in Ontario for services/goods delivered to Ontario clients. As mentioned earlier, Retainers/Client Deposits represent an obligation to provide services - services which you haven't been able to fulfill yet because the said project will take 3-12 months to complete. Given the nature of the Retainers/Client Deposits sales tax as such is not applicable.
We have established that Retainers/Client Deposits are not synonym of services/goods deliver then it follows that these monies do not belong in the Profit and Loss report under the Sales/Income category. Instead, your Accountant should be placing all the Retainers/Client Deposits under the Liabilities Section of your business Balance Sheet. At the end of your business fiscal year, the Retainers/Client Deposits category should add up to all the deposits from projects that have not been completed by that date. In this way, reporting the obligation "amount" your business has to complete those projects.
Once your business has fulfilled a stage in the project or has culminated the project, the retainer is applied against the total invoice amount- only then triggering the GST/HST (Ontario sales tax) on the full amount invoiced. It is at this point only when the income is recognized in the books.
Key takeaways: Retainers/Client Deposits are not Sales rendered. These help to improve your business cash flow and secure commitment from your client. Not being mandated to charge GST/HST (Ontario Sales tax) can ease the pain of remitting sales tax before the services have been rendered.