4 December 1998 GST/HST Interpretation HQR01011 - Tax Status of a Court Determined Settlement with Respect to an Antitrust Litigation Suit

Dear Mr. XXXXX

This refers to your earlier letter to XXXXX, concerning the tax status of a court determined settlement with respect to an antitrust litigation suit. You were advised by Ms. A. Trattner on January 6, 1998, that the GST/HST Rulings and Interpretations Directorate would provide a reply. We apologize for the delay in responding.

Facts

1. A Canadian controlled private corporation purchases amino acid lysine, an additive for animal feed. The amino acid lysine was purchased from XXXXX corporations, through Canadian border brokers.

2. Although you could not confirm whether the XXXXX corporations supplied the amino acid lysine to the Canadian corporation on a tax paid basis, or whether the Canadian corporation brought the amino acid lysine into Canada and paid tax on it at the border, you did confirm that the Canadian corporation paid tax on the product.

3. A number of XXXXX firms were found guilty by an American federal court of conspiring to fix prices and allocate sales in the lysine market on a global basis.

4. The American federal XXXXX ordered the defendants in the suit to pay damages to the injured customers, wherever they might be located. The defendant companies would not receive any property or service in exchange for making the damage payments. They were to use the services of a settlement administrator, XXXXX[.]

5. The American corporations that were supplying the amino acid lysine to the Canadian corporation were defendants in the anti-trust suit, and the settlement administrator paid the Canadian corporation an amount as settlement.

Interpretation Requested

You requested an interpretation as to

(a) whether the moneys paid in settlement is taxable or non-taxable income for income tax purposes; and

(b) whether or not the moneys paid in settlement would be subject to GST/HST under the Excise Tax Act (ETA)[.]

Comments With Respect to the ITA Issue

In order to determine the tax consequences of compensation awarded to a purchasing agent or its clients, or to a purchaser, as a result of an anti-trust litigation suit, it would be necessary to review all the relevant facts and documentation, including the exact nature of the relationship between the purchasing agent and its members. However, we are providing the following general comments.

It is the Department's general position that, where compensation has been received as a result of contract, statute law, etc. and the compensation relates to purchases that have been deducted for income tax purposes, the compensation would be taxable. These comments are consistent with paragraph 4 of Interpretation Bulletin IT-182, which has been enclosed for your convenience.

Comments Regarding the GST/HST Issue

With respect to the GST/HST issue, because you were unable to provide us with information as to who paid tax at the time of importation, we regret that we cannot provide an interpretation at this time. If you wish to resubmit your question with a complete set of facts, we will then be in a position to provide a more detailed answer. However, we can provide the following comments at the present time, for your information.

Even though a damage settlement payment may have been made as a consequence of the breach or modification of an agreement for the making of a taxable supply, the settlement payment would not fall under subsection 182(1) of the ETA if it is an amount paid or forfeited to the recipient by the supplier. In order for subsection 182(1) to apply, the damage settlement payment must be an amount paid to the supplier by the recipient.

Our Policy Statement #P[-]218 states that, where a damage settlement payment does not fit under subsection 182(1) of the ETA, it is not consideration for a supply unless the person making the payment receives property or a service in exchange. A promise by the recipient of the money to release the other person from further liability is not seen as a supply. Nor would a damage payment likely be seen as a reduction in consideration that could fall under subsection 232(2) of the ETA, since the property at issue appears to be imported, and subsection 232(2) only applies to tax under Division II.

The payments made by the American corporations to the Canadian corporation are merely payments for damages that the Canadian corporation had already sustained, and are not subject to GST.

If you require any further information concerning the GST/HST issues concerning this matter, please contact the undersigned at (613) 952-9211.

Yours sincerely,

Don Dawson
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch
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