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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 137942
Business Number: [...]
March 8, 2012
Dear [Client]:
Subject:
GST/HST RULING
Payment made under a termination agreement
Thank you for your letter of August 12, 2011, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a payment made under a termination agreement.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
Our understanding of the facts based on your submission and accompanying documents is as follows:
1. [...]([...][Company X]) is based in [...][City 1, Province A] and is registered for GST/HST purposes with Business Number [...].
2. On [mm/dd/yyyy], [Company X] entered into [...] (Supply Agreement) with [...]([...][Company Y]), a GST/HST registrant based in [...][City 2, Province B]. As per the Supply Agreement, [Company X] was to supply and deliver to [Company Y] [...] (the Equipment) and to provide [...] services following the delivery of the Equipment for the total contract price of $[...].
3. As per the Supply Agreement, [Company X] was to invoice (including applicable GST and PST [provincial sales tax]) [Company Y] as per the milestones and schedules agreed. Payments were to be made in instalments and by [mm/dd/yyyy], [Company Y] had paid approximately $[...] of this amount. The GST collected on the milestone payments from [Company Y] has been remitted to Canada Revenue Agency (CRA). [Company Y] provided a certificate of exemption pursuant to the [...] Act of [...][Province B] relieving the PST.
4. [Company X's] parent company [...] issued the [...] and the [...] (together the Guarantees) in favour of [Company Y], the originals of which, were provided to [Company Y].
5. On [mm/dd/yyyy], [...] in respect of [Company Y] [...].
6. On [mm/dd/yyyy], [Company X] filed a claim with [...] in the amount of $[...] plus interest at [...]% per annum for the sums owing to [Company X] as a result of [Company Y's] failure to fulfill its obligations under the Supply Agreement.
7. On [mm/dd/yyyy], [Company X] and [Company Y] entered into a termination agreement for the purpose of release from the Supply Agreement and to settle all outstanding claims. The Termination Agreement was supported by [...].
8. Notwithstanding that the Termination Agreement set out that as of [mm/dd/yyyy], title in the Equipment had not been transferred to [Company Y] and the Equipment was still in possession of [Company X], with the exception of [...] stored in [Province B], you submit that, since the equipment was paid for, the title of the Equipment vested with [Company Y] with the majority stored at a [Company X] facility in [...][Country X] (the exception consisting of [...] valued at $[...]) on behalf of [Company Y]. This was due to the delay of [Company Y] not to ship the equipment.
9. [...] while the Supply Agreement was in force, [Company X] had possession and ownership of the equipment in [Company X's] storage facilities in [Country X] on the unpaid amounts stipulated in the Agreement. Furthermore, the Supply Agreement stipulates that title on the Equipment items stored in [Country X] passed to [Company Y] as and when payments were received from [Company Y].
10. The Termination Agreement included a payment of $[...] (the Payment) from [Company X] to [Company Y] and according to the Termination Agreement, the payment was to include any and all applicable taxes, without limitation of federal and provincial sale taxes.
11. According to the Termination Agreement:
• In consideration of the Payment, [Company X] and [Company Y] are to execute the [...][(Transfer Document)] (Appendix [...]) and a [...][(Release Document)]
(Schedule [...]).
• According to the [Release Document], [Company Y], generally, is to waive, release and discharge [Company X] from all manner of rights, actions, causes of action, etc. which [Company Y] ever had, now has, or may in the future have against [Company X] for or by reason of: the Supply Agreement, the Equipment, and the Guarantees.
• According to the [Transfer Document], [Company Y], generally, agreed to assign, transfer, convey to [Company X] all of its rights, title and interests in the Equipment. [...]. The [Transfer Document] shall be governed by the laws of [...][Province A] and does not contain any mention of delivery, other than delivery of the [...][Equipment stored in Province B] as described above.
12. Finally, the Termination Agreement sets out that in consideration of the payment, [Company Y] is to remit the originals of the Guarantees to [Company X] and to deliver the [Equipment stored in Province B] to [Company X].
13. According to additional correspondence from [Company X] and its representative to CRA:
• for the period [mm/dd/yyyy] to [mm/dd/yyyy], since pursuant to the Termination Agreement, the payment of $[...] "includes any and all applicable taxes, including without limitation, the federal and provincial sale taxes", tax at [...]% was included in the payment [...][Direct quote] thus supporting the input tax credit (ITC) claimed on the payment to [Company Y] ([#] of $[...] = $[...]).
• [Company X] claimed the ITC of $[...] despite [Company Y] not issuing an invoice stipulating the amount of [...][GST/HST] charged and collected.
Ruling Requested
You would like to know if [Company X] is entitled to claim an ITC as a fraction of the [#] on the payment made to [Company Y] under the Termination Agreement.
Ruling Given
Based on the facts set out above, we rule that [Company X] is not entitled to claim an ITC on the payment made to [Company Y] under the Termination Agreement.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Generally, every recipient of a taxable supply made in Canada shall pay tax calculated at the rate of 5% on the value of the consideration for the supply (15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador and 12% in British Columbia) unless the supply is zero-rated. Pursuant to subsection 165(3), the tax rate in respect of a zero-rated supply (i.e., a supply included in Schedule VI) is 0%.
Subsection 182(1) of the ETA may apply where, as a consequence of a breach, modification or termination of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant, an amount is paid or forfeited to that registrant otherwise than as consideration for that supply. Where subsection 182(1) applies, the amount paid is deemed to be a tax included amount. Subsection 182(1) does not apply to the payment made under the Termination Agreement as the payment was not paid or forfeited to a registrant as a consequence of a breach modification or termination of an agreement for the making of a taxable supply by the registrant. Where subsection 182(1) does not apply, generally a damage or penalty payment is not consideration for a supply, as it is compensatory or punitive in nature, and not given in exchange for a supply of property or services by another party. Such a payment would not be subject to GST/HST, even if the payee agrees to release the payer from further liability.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (902) 426-6940. 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,
Nancy Jardine
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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