Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 164742
Dear [Client]:
Subject: GST/HST INTERPRETATION
Tax status of solicitor-client costs plus GST awarded by the Court
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to solicitor-client costs plus GST/HST awarded by the Court. We apologize for the delay in responding.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand the following on the basis of the information that you have described in your letter.
1. A corporation is registered for GST/HST purposes and is engaged exclusively in commercial activities.
2. The corporation launched a lawsuit under the Copyright Act to protect its copyright and in doing so incurred expenses including legal services.
3. The corporation acquired the legal services. The Corporation contracted with the law firm, received the related invoices and paid or will pay these invoices plus applicable GST/HST. As such, the Corporation meets the definition of “recipient” under the ETA.
4. The Court ruled in favor of the Corporation and pursuant to the Copyright Act, granted to the Corporation, among other remedies, an amount of compensation as solicitor-client costs plus GST/HST.
INTERPRETATION REQUESTED
You request that the Canada Revenue Agency (CRA) confirm that
a) where the Court grants compensation plus GST or HST, there is no amount of GST or HST to be included in the net tax calculation under paragraph 225(1)(a).
b) subsection 225(3.1) does not apply to the compensation plus GST or HST awarded by the Court, and as such does not apply to prevent the recipient of legal services from claiming input tax credits (ITCs) for the GST or HST paid on such costs.
INTERPRETATION GIVEN
Based on the information provided, the CRA is of the view that:
1) where the Court awards judicial costs plus GST or HST directly to a winning party, there is no amount of GST or HST to be included in the net tax calculation under paragraph 225(1)(a).
2) subsection 225(3.1) does not apply to the solicitor-client costs awarded by the Court as this amount was not otherwise rebated, refunded or remitted to the Corporation, or otherwise recovered by the Corporation under the ETA or other Act of Parliament. As such, subsection 225(3.1) does not apply to prevent the Corporation from claiming ITCs for the GST or HST paid on the legal fees incurred. The Corporation will be entitled to claim ITCs on the legal fees incurred as long as all of the conditions for claiming an ITC under subsection 169(1) are met.
TAX STATUS OF COURT AWARDED COSTS
Amounts awarded for judicial costs are based on an established Court Tariff which does not always cover full legal costs incurred in relation to a case. However, the Court has the discretion to award costs beyond the Tariff where there are unusual circumstances to justify doing so. Solicitor-client costs, which are granted only on very rare occasions, are generally awarded only where there has been reprehensible, scandalous or outrageous conduct by one of the parties.
The general principle that guides the Court in fixing costs as between parties on a solicitor and client scale is that the solicitor and client scale is intended to provide complete indemnification for all costs (fees and disbursements) reasonably incurred in the course of prosecuting or defending the action or proceeding. The GST/HST is an unavoidable incidental cost of litigation, and to actually provide full indemnification, the court recognizes that a cost award should include reasonable disbursements and applicable taxes.
The costs awarded by the Court directly to the winning party are not subject to the general taxing provisions, as they do not constitute consideration for a taxable supply or a service and do not form part of the consideration paid for the lawyer’s services of the winning party. In order for a party to be the recipient of a taxable supply, the other party must be conferring something of value to him in exchange for the payment. Since the losing party has received nothing in exchange for the payment of judicial costs, there is no supply made and the payment falls outside the scope of the Act. As a result, generally, where judicial costs, including reasonable disbursements and applicable taxes are awarded by the Court to the winning party, there is no amount of GST or HST to be included in the net tax calculation under paragraph 225(1)(a). In other words, since the amount awarded is not consideration for a taxable supply , the amount equal to the GST/HST that is included does not represent an amount collectible or collected as or on account of tax that has to be included in the net tax calculation.
However, if the judicial costs are paid or payable directly to the lawyer of the winning party by the losing party, the amount is subject to GST/HST as they are considered to be part of the total consideration received by the lawyer for legal services provided. The lawyer would be required to include the GST/HST calculated on those costs in determining his net tax for the reporting period during which the amount is collectible or received pursuant to paragraph 225(1)(a).
“RECIPIENT” OF A TAXABLE SUPPLY
Pursuant to subsection 165(1), every recipient of a taxable supply made in Canada is required to pay the GST in respect of the supply calculated at the rate of 5% on the value of consideration for the supply.
Pursuant to subsection 165(2), every recipient of a taxable supply made in a participating province is required to pay, in addition to the tax imposed by subsection (1), tax in respect of the supply calculated at the tax rate for that province on the value of the consideration for the supply.
Paragraph (a) of the definition of “recipient” in subsection 123(1) provides that where consideration for a supply is payable under an agreement for the supply, the recipient of the supply is the person who is liable under the agreement to pay that consideration.
Generally, under section 169, where a person acquires or imports property or a service and, during a reporting period of the person in which the person is a registrant, the GST/HST in respect of the property or service becomes payable by the person or is paid by the person without having become payable, that person will be eligible to claim an ITC in respect of the tax to the extent (expressed as a percentage) the property or service is acquired or imported for consumption, use or supply in the course of the person's commercial activities.
JUDICIAL COSTS VS. LEGAL COSTS
The tax status of judicial costs must not be confused with that of legal fees. The legal fees are subject to tax as long as the supplier is required to collect the tax, and the party who has contracted for legal services is liable for the payment of the tax. By virtue of subsection 165(1), it is the recipient of the supply who is liable to pay that tax. Legal costs paid by a client to a lawyer constitute consideration for the lawyer’s services when the payment is made by a client for receipt of such services. Accordingly, the lawyer would be required to collect the GST or HST from a client on the consideration paid or payable for the taxable services provided.
Judicial costs awarded to the winning party do not constitute consideration for a taxable supply or a service. The awarding of costs by the court to the successful party does not change the recipient of the legal services, or transfer the liability to pay to the losing party. Where the person required to pay the tax on legal services is a registrant for GST/HST purposes, such person would be entitled to claim ITCs in accordance with section 169 providing the conditions of this section are met. If the taxable supply in question is not for use or consumption in the commercial activities of the registrant, such person would not be entitled to an ITC in respect of that taxable supply.
ENTITLEMENT TO INPUT TAX CREDITS (ITCs)
In the case at hand, legal fees were paid by the Corporation in the course of a lawsuit launched under the Copyright Act to protect its copyright. Therefore, the Corporation is entitled to claim an ITC in relation to the GST/HST paid or payable on the fees incurred since it was the recipient of these legal services, to the extent that they were acquired for consumption, use or supply in the course of the Corporation's commercial activities. The awarding of costs by the Court does not change the recipient of the legal services, and the restrictions to ITC entitlement under subsection 225(3.1) do not apply in this case.
The losing party is paying to the successful party the amount of judicial costs and disbursements as ordered by the Court. However, the losing party has not received anything in exchange for that payment. The losing party is not the recipient of any supply of legal services, and therefore is not entitled to claim an ITC for this payment. The losing party would be entitled to ITCs only in respect of tax on legal services paid or payable to the losing party’s own lawyer in the course of these proceedings, of which the losing party would be the recipient, and subject to the conditions of subsection 169(1).
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-9881. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Monica Ma
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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