CRA confirms that, under the ETA s. 182 rules, a payment by a guarantor can generate an ITC to the defaulter
Aco (a corporate registrant) agreed to make taxable supplies in Canada of tangible personal property to Bco (a registered partnership). A corporate partner of Bco (Cco) agreed to guarantee the obligations of Bco under the contract. As a result of Bco’s default on its obligations, Cco is required to pay liquidated damages to Aco.
CRA indicated that, under ETA s. 182, Aco is deemed to have collected the GST/HST as part of the liquidated damages amount, which is deemed to be consideration for a taxable supply by it, and Bco would be deemed to have paid that GST/HST (notwithstanding that Cco is the actual payer) – so that Bco (not, Cco) would be able to claim an ITC for the deemed GST/HST payment if the usual conditions in s. 169 were satisfied.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.18 under ETA s. 182.