6 July 2004 GST/HST Interpretation 52956 - Temporary Importation of Amusement Rides

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to out-of-court settlements

Interpretation Requested

You would like an explanation of the application of GST/HST to out-of-court settlements made with individuals in a non-commercial context. The settlement is not in respect of a breach, modification or termination of an agreement, nor does it include paying consideration for a supply.

Interpretation Given

Generally, a payment made as a result of an out-of-court settlement as described above is not consideration for a supply as it is compensatory in nature and not given in exchange for a supply of property or services by another party. Accordingly, it would not be subject to GST/HST, even if the payee agrees to release the payer from further liability. This applies regardless of whether the payment is made as a result of a court judgement or as a result of a settlement that was concluded in order to avoid a court judgement. Policy Statement P-218 Tax Status of Damage Payments not within section 182 of the Excise Tax Act (copy enclosed) provides additional information on the application of the GST/HST to this type of payment.

The tax status of payments made pursuant to a settlement agreement must be distinguished from the tax status of supplies of legal services. Supplies of legal services are usually subject to GST/HST. Tax may also apply on some disbursements that lawyers make in the course of representing their clients. The client, who is liable to pay the amounts to the lawyer, is the recipient of the service and is responsible for paying the GST/HST on those amounts. From the client's perspective, the fees, disbursements and any GST/HST charged on those amounts would form part of the client's total costs.

A settlement amount may be computed by basing the payment on the costs incurred by the other party including amounts charged for legal services and disbursements made by the other party's lawyer. Although there may be GST/HST embedded in the total costs incurred by the other party, there is no GST/HST charged on the settlement amount itself, because, as noted above, the settlement amount is not subject to GST/HST.

To illustrate, assume that a lawyer charged a client $100 + $7 GST for a total of $107. The client is the recipient of the supply of the legal services. If the first party agreed to pay the client's costs under a settlement agreement, the payment would be $107. The first party would not be able to recover the $7 through an input tax credit or other mechanism since the $7 was not GST/HST that it was liable to pay under Part IX of the Excise Tax Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Alyson Trattner, Manager, at 952-8813.

Yours truly,

John Sitka
Director
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2004/07/14 — RITS 53036 — Request for Designation as a "Hospital Authority" and as a "Municipality" by XXXXX