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.
GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 232189
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
[Amounts charged as] […] Damages
Thank you for your letter of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to amounts charged to contractors as […] Damages under construction agreements with the […] (City).
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
1. Before it initiates a construction project, the City enters into a construction agreement with contractors who will perform the work. The City submitted a template of a construction agreement that it uses, along with its departments and agencies.
2. The City’s construction agreements contain a special clause, which requires contractors to compensate the City when work is not completed within specified timelines. This compensation is referred to in the agreement as the […] Damages.
3. […] Damages are described in […] the construction agreement, as a payment to account for financial loss suffered by the City that is “…a reasonable and genuine pre-estimate of the actual damage…” payable on a monthly basis as accrued resulting from the project’s delays. Instead of requesting a separate payment from the contractor, the City reduces its payments for amounts that are invoiced by the contractor.
4. The amount of […] Damages is determined based on the number of calendar days the delay occurred and the […] rate per calendar day as set out in the construction agreement. For example, if construction has been delayed by 5 weekdays and the pre-determined daily rate for […] Damages is $[…], the total amount for […] Damages would be $[…] (5 weekdays x $[…] per weekday).
5. The contractor is allowed the opportunity to file for adjudication if there is a disagreement with the City on the […] Damages amount. An adjudicator may instruct the City to pay all or a portion of the […] Damages amount to the contractor.
RULING REQUESTED
You would like to know if the GST/HST applies to the amounts payable as […] Damages that are used to reduce the amounts otherwise payable by the City in respect of the work performed by the contractor or, after adjudication, to any of the amounts returned by the City to the contractor.
RULING GIVEN
Based on the facts set out above, we rule that the GST/HST does not apply to amounts of […] Damages that are used to offset amounts otherwise payable by the City in respect of the work performed by the contractor or, after adjudication, any of the amounts returned by the City to the contractor.
EXPLANATION
In the fact situation described above, as outlined in the construction agreement template, the […] Damages reduce the amounts otherwise payable by the City to a contractor. In our view the amounts of […] Damages are compensatory; they represent compensation paid by a contractor for lost revenue that would be incurred as a result of a project’s delays and are meant to restore, to some degree, the City to the position it would be in if the project had not been delayed.
Subsection 182(1) therefore does not apply to the […] Damages described under the construction agreement template. One of the requirements for subsection 182(1) to apply is that an amount paid or forfeited, or a debt or other obligation reduced or extinguished without payment on account thereof, must be made to the person who is the supplier under the original agreement. However, under the construction agreement template, the […] Damages amounts are used by the City to reduce the amounts otherwise payable by the City for work performed by the contractor. In other words, they are paid by the supplier (i.e., the contractor) to the City. As a result, the […] Damages would not be subject to the GST/HST.
In addition, the GST/HST would not apply to any or all of the amounts that are returned by the City to the contractor after adjudication. As GST/HST accounted for in the invoices from the contractor is unaffected by the amounts of […] Damages deducted, amounts returned by the City after adjudication are amounts of […] Damages that were overcharged.
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 given in this letter provided that: none of the issues discussed in the ruling 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 613-324-7413. 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,
William Parker
Goods Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
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