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, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 188807
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Application of GST/HST to a settlement payment
Thank you for your facsimile dated January 8, 2018, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to a settlement payment. We apologize for the delay in our response.
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.
STATEMENT OF FACTS
We understand
1. […](The company) is a […] corporation domiciled in […][Province A] and is registered for GST/HST purposes.
2. […][The client] entered into a Contract on [mm/dd/yyyy] with […] (the broker) whereby [the client] will remain an independent contractor which provides real estate services on behalf of the broker.
3. Paragraph […] of the contract provides that “All commissions that are received by the broker in respect of a real estate transaction completed as a result of the company’s efforts shall be received “in trust” by the broker and the broker shall pay to the company 100% of such commissions (less any deductions …)”
4. Paragraph […] of the contract provides that “The company hereby nominates and appoints the broker, without obligating the broker in any way, to be his/her agent to collect all commissions earned by the company as a result of contracts or agreements entered into during the term of this contract”
5. The broker/the company and […] (the buyers) entered into an […] (the agreement) dated [mm/dd/yyyy] to find a property in the market area ([…]) for the buyers to purchase and to assist the buyers in negotiating the terms of purchase.
6. The agreement term was from [mm/dd/yyyy] to [mm/dd/yyyy]. Paragraph […] of the agreement provided that the buyers' brokerage designated agent was to be the company. Paragraph […] provided that the buyers agreed to pay a brokerage fee of $[…] (Fee) plus applicable GST and any other applicable tax. Schedule […] of the agreement stated that the buyers were to pay the commission directly to the broker.
7. According to the incoming letter, the purchase of the property at […] was completed on […] at which time the commission was due, however, the buyers refused to pay.
8. On [mm/dd/yyyy], [the client], the company, and the broker filed a civil claim against [the buyer] and […] (the owner) seeking damages of $[…], damages/compensation for the advice and services provided, damages for misrepresentation, costs and other relief that may seem just.
9. On [mm/dd/yyyy], the civil claim was dismissed without costs to any party.
10. A mutual release agreement (the MR) was signed by all parties whereby it was understood and agreed by the parties that this is a settlement of disputed claims and that the buyers are to pay the company and the broker a sum of $[…].
11. On [mm/dd/yyyy], the lawyers sent a letter to [the client] and the broker with an enclosed cheque for $[…] which sum represents the balance of the settlement monies of $[…], less the sum of $[…] for legal fees. The cheque mentioned explicitly that this was the payment made pursuant to the MR minus the legal fees.
12. On [mm/dd/yyyy], the broker issued a cheque to the company for the sum of $[…] ($[…] plus [$][…] GST less a deal fee of $[…].)
RULING REQUESTED
You would like to know
1. Whether the MR payment of $[…] was subject to GST.
RULING GIVEN
Based on the facts set out above, we rule that
1. Subsection 182(1) applied to the $[…] MR payment and it was therefore subject to the GST.
EXPLANATION
A damage payment or other amount that is paid other than as consideration for a supply that was to be made under an agreement may fall under the deeming provision in subsection 182(1), resulting in a GST/HST liability.
This subsection deems certain amounts to be consideration for a taxable supply where the following conditions are met:
- an agreement must have been breached, modified, or terminated;
- the breach, modification, or termination of the agreement must have occurred after 1990;
- the agreement must have been for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a GST/HST registrant;
- an amount must be paid or forfeited to the GST/HST registrant as a result of the breach, modification, or termination; and
- the amount paid or forfeited must not be consideration for the taxable supply that was to be made under the agreement.
Based on the facts, the conditions of subsection 182(1) have been met and the MR payment is therefore deemed under that provision to be a tax-included amount paid for the taxable supply the company and the broker agreed to make to the buyers, and they are deemed to have collected a corresponding amount of GST of 5/105ths of the MR payment.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 905-721-5217. 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,
Jill McDonald
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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