4 December 1998 GST/HST Interpretation 11585-1 - Damage Settlement Payments

Dear XXXXX

This concerns your letter of September 17, 1997, to XXXXX Tax Service Office, on the subject of damage settlement payments. We regret the delay in replying.

You requested an interpretation as to whether GST/HST is payable under subsection 165(1) of the Excise Tax Act (ETA) in respect of damage payments made by a law firm to its client, or whether such payments are deemed to be consideration for taxable supplies under subsection 182(1) of the ETA. You also wish to know if the results would vary, depending on whether the damage payments were made pursuant to a court ordered settlement or a voluntary settlement.

Facts

1. A Canadian law firm that is a registrant provides advice on pension matters to its client, a Canadian corporation that is also a registrant.

2. The advice relates to pension and benefits legislative requirements in the area of investments and the treatment of surplus.

3. The corporation acts on the law firm's advice, which turns out to be incorrect. The corporation therefore sues the law firm for damages for negligence, and is successful.

Interpretations Requested

1. Is it correct to state that subsection 182(1) of the Excise Tax Act (ETA) does not apply to the situation, since the damage payment is made by the supplier to the recipient?

2. Does subsection 165(1) of the ETA apply to the situation?

3. Would the answer be different if the parties settled the matter out of court, and the law firm agreed to make the damage payment pursuant to a settlement agreement, rather than as a result of a court order?

Response

1. Subsection 182(1) does not apply to the situation at issue.

2. Subsection 165(1) does not apply to the situation at issue. No GST/HST is payable with respect to the damage settlement payment.

3. If the parties had settled out of court, our response as to the tax status of the damage payments would have been the same, provided that the other facts remained the same.

Rationale

1. Although the settlement may have been made as a consequence of the breach of an agreement for the making of a taxable supply, subsection 182(1) does not apply, because the payment at issue is made to the recipient by the supplier. Subsection 182(1) applies only where, because of a breach, modification or termination of an agreement, the recipient pays an amount to the supplier in addition to the consideration.

2. Subsection 165(1) does not apply to the situation, because the damage payments are not consideration for a supply. The law firm does not receive property or a service in return for making the payments. It is merely providing compensation for the damages that the corporation has suffered. Therefore GST/HST does not apply, as explained in Policy Statement P-218, a copy of which is attached.

3. The GST/HST status of the settlement payment does not depend on whether the settlement occurs as a result of a court decision or a voluntary agreement, but on whether property or service are given in exchange for the payments.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

If you require any further information concerning this matter, please contact Mr. Pierre Bertrand at (613) 952-9219 or myself at (613) 952-9211.

Don Dawson
Specialty Tax
Financial Institutions and
Real Property
GST/HST Rulings & Interpretations

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