21 March 2007 GST/HST Ruling 83621 - Application of GST/HST to XXXXX

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.

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5
XXXXX XXXXX XXXXX	Case Number: 83621
XXXXX XXXXX XXXXX	March 21, 2007

Subject:

GST/HST RULING GST on holdback amounts

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to holdbacks.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

From your incoming letter and documentation we understand that:

1. XXXXX (the Contractor) entered into an agreement (the Agreement) with XXXXX (the Developer) XXXXX, in the province XXXXX.

2. As outlined in XXXXX the Agreement, the Contractor was to supply all labour, materials, tools, plant, equipment and supervision required to complete the kitchen and vanity cabinet work in accordance with the plans and specifications (the Work).

3. In a letter XXXXX from XXXXX, the management consultants for the project, to XXXXX (the Letter), the following statement was made: XXXXX.

4. XXXXX the Letter also outlines that, XXXXX.

5. The Invoice Summary XXXXX that the Contractor submitted to the Developer along with the corresponding invoices, includes the following:

Total Contract Amount $XXXXX

Total Approved Extras

Revised Contract Amount $XXXXX

Total Work Done to Date $XXXXX

Less Previous Invoices $XXXXX

Current Invoice:   $XXXXX

Less 10% Holdback:  $XXXXX

Sub-total   $ XXXXX

Plus 7% GST on Sub-Total $XXXXX

Total Payable This Invoice: $ XXXXX

6. XXXXX the Agreement provides that:

XXXXX.

7. XXXXX the Agreement provides that:

XXXXX.

8. XXXXX the Agreement provides that the Contractor must provide the following with its invoice for release of the holdback:

(a) Statutory declaration stating all materials, work and services in connection with the Work have been paid in full and no liens exist,

(b) Notice from subcontractors that they have been paid in full,

(c) A statement from the Workers Compensation Board (WCB) stating that all WCB assessments related to the Work have been completed.

9. XXXXX the Agreement provides that:

XXXXX.

10. XXXXX (the Act) provides that:

XXXXX.

11. XXXXX the Act provides, in part, that the liens expire as follow:

XXXXX.

12. XXXXX of the Act provides that:

XXXXX.

13. The Contractor requested the holdback amount be released XXXXX days after their contract completion XXXXX.

14. The Contractor invoiced the holdback amount applying GST at 7%.

15. The Contractor included only the following two documents conditional for application of holdback release under the Agreement:

(a) A final Clearance Certificate under the Workers Compensation Act, and

(b) A XXXXX with a Notary Public Stamp or Seal.

16. The Contractor did not supply the architect certification with its invoice for holdback release.

17. The Developer refused to pay the requested holdback amount until the entire building was substantially complete and certified by the architect. The Developer obtained certification for the whole project XXXXX.

18. The Developer paid the holdback amount XXXXX.

Ruling Requested

You would like to know what rate of GST applies to the holdback amount from the Invoice Summary XXXXX.

Ruling Given

Based on the facts set out above, we rule that for purposes of the ETA, the holdback amount from the Invoice Summary became payable after June 30, 2006, was not paid before that date, and is therefore subject to GST at 6%.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is 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

Subsection 3(1) of the Budget Implementation Act, 2006 (BIA), amends subsection 165(1) of the ETA to reduce the rate of GST imposed on the value of the consideration for taxable supplies made in Canada from 7% to 6%. Pursuant to paragraph 3(2)(a) of the BIA, any supply (other than a supply deemed to have been made under section 191 of the Act) made on or after July 1, 2006 is subject to GST at the rate of 6% where the supply is made in a non-participating province.

For any supply (other than a supply by way of sale of real property) made before July 1, 2006, paragraph 3(2)(b) of the BIA provides that the 6% GST applies to the portion of the consideration that becomes payable on or after July 1, 2006, without having been paid before that day, or is paid on or after July 1, 2006, without having become payable.

The general timing of liability rule under subsection 168(1) of the ETA, provides that tax is payable by the recipient of a taxable supply on the earlier of the day the consideration for the supply is paid and the day that consideration becomes due.

However, as you are aware, subsection 168(7) of the ETA provides that:

Notwithstanding subsections (1), (2), (3), (5) and (6), where the recipient of a taxable supply retains, pursuant to

(a) an Act of Parliament or of the legislature of a province, or

(b) an agreement in writing for the construction, renovation or alteration of, or repair to any real property or any ship or other marine vessel,

a part of the consideration for the supply pending full and satisfactory performance of the supply, or any part thereof, tax under this Division, calculated on the value of that part of the consideration, is payable on the earlier of the day that part is paid and the day it becomes payable.

As noted above, the holdback can be pursuant to either an Act of Parliament or an agreement in writing. Therefore, even though the holdback period expired under the XXXXX prior to July 1, 2006, the holdback did not become payable under the Agreement until a later date. As the recipient is retaining the holdback amount pursuant to the Agreement, the timing of the liability for the tax in respect of the holdback amount is dependent on when the holdback amount was paid, or became payable, under the Agreement. Pursuant to XXXXX the Agreement, the Developer shall pay the balance owing under the Agreement to the Contractor XXXXX. As the work was neither accepted nor certified until after June 30, 2006, the holdback did not become payable under the Agreement until after that time. As the holdback amount did not become payable under the Agreement prior to July 1, 2006, and was not paid before July 1, 2006 without having become payable, the holdback amount is subject to GST at 6%.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (780) 495-6244.

Yours truly,

Darryl Waldner
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2007/04/10 — RITS 85379 — Application of Section 232