18 November 1998 GST/HST Ruling HQR000261 - Taxable Status of Reimbursements to the Crown (DND) for Loss/Damage of Property

Dear Mrs. Bertrand:

This refers to an earlier request from XXXXX with attachments, concerning the application of the Goods and Services Tax (GST) to reimbursements made to the Crown for loss or damage of public and non-public property. We apologize for the delay in providing a written response. However, this case was outstanding pending the completion of our policy with respect to damage payments. The Departmental policy on the tax status of damage payments was recently released as policy statement P-218.

Our understanding of the facts based on our review of the documentation submitted with XXXXX letter is as follows:

•   Pursuant to XXXXX an officer XXXXX who is found to be liable under the regulations for damage, loss, deficiency, theft, destruction, deterioration or improper expenditure of public property or any property under the control of the Minister, or of any non-public property, is liable to reimburse the Crown for the financial loss incurred, or is liable to reimburse the non-public property organization concerned for the financial loss incurred.

•   Recovery for any loss or damage referred to in the XXXXX is obtained by way of deduction or set-off against any sum of money that may be payable by the Crown to such person found liable unde[r] XXXXX[.] For the most part, in the case of DND XXXXX the cost of the damageloss is recovered by way of an administrative deduction or reimbursement by way of cash, cheque or money order by the member.

•   A member of the Canadian Forces or DND may be required to reimburse the cost of damage/loss in respect of the following:

1. Living accommodations, commonly known as "Married Quarters and Single Quarters", or any other property associated with a member's occupancy.

1.1 Member found liable for repairs to quarters

Where repair, replacement or servicing of the buildings are the result of neglect, carelessness or mischief, a member found liable for such damage under QR&O is required to reimburse the Crown for costs. Any work necessary in respect of the damageloss is carried out by internal components of DND. A member found liable reimburses the Crown through an administrative deduction off his/her wages or the member may pay by cash or cheque.

1.2 Occupant Requested Repairs

In other circumstances, a member or occupant may request that certain work be carried out, i.e., repairing a broken window. Occupants have the option of calling the Construction Engineering Section of DND to perform the work or calling any other trades person. The occupant is invoiced for labour and material. In this situation the occupant is admitting responsibility for damages and is seeking repair services which he/she freely pays.

The Canadian Forces Administration Orders (CFAO) 38-1 sets out the policy and procedures when ordering an administrative deduction pursuant to QR&O, Chapter 38. It provides guidance as to the circumstances in which the ordering of an administrative deduction should be considered. In particular, paragraph 18 of the CFAO 38-1 states:

"The maintenance or servicing of MQs normally does not fall within the legal interpretation of "loss" or "damage". Consequently, such costs cannot be recovered under QR&O Chapter 38 and this order. Where, however, repair or replacement of public property is involved, liability under QR&O Chapter 38 may arise. Examples of items for which reimbursement by way of an administrative deduction does not arise are the cleaning of dirty walls, stoves and refrigerators, the unplugging of toilets or sinks, and the cutting of grass. However, where the cleaning of an MQ was necessary to restore the premises from a state of deterioration that is not attributable to reasonable wear and tear and that deterioration has been wilfully or negligently caused, permitted or contributed to or by the occupant, an administrative deduction may be processed but only if the local representative of the JAG has stated in writing that liability under QR&O Chapter 38 exists."

2. Public Property

Liability may also arise under QR&O 38.01(b) where a person "wilfully or negligently causes, permits or contributes to damage to or the loss, deficiency, theft, destruction, deterioration, or improper expenditures of public property or any property under the control of the Minister;"

Repair for damage to a military vehicle is covered under this provision. Vehicle repairs are carried out internally by DND. Where a person is found liable under QR&O 38.01(b), following appropriate investigation, declaration of liability by an authorized military authority, the individual reimburses the Crown for the damagesloss.

Ruling Requested

Determination of the taxable status of amounts reimbursed to DND for loss or damage to:

1. Residential units (Married Quarters and Single Quarters); and

2. Public property.

Ruling Given

Based on the facts set out above, we rule as follows:

1. Living accommodations, commonly known as "Married Quarters and Single Quarters", or any other property associated with a member's occupancy.

1.1 Member found liable for repairs to quarters

GST/HST is not applicable to amounts reimbursed to DND in respect of damage or loss to living quarters by a member found liable to reimburse the Crown for such costs.

1.2 Occupant Requested Repairs

(i) GST/HST is not applicable to amounts reimbursed to DND in respect of damage or loss to living quarters by a member who voluntarily accepts liability for damages by initiating the request for repairs to DND.

(ii) GST/HST is applicable where the member contracts with an outside third party to repair the damage. The third party is making a taxable supply of a service to the member. The member is the recipient of a taxable service and is liable to pay GST/HST to the third-party registrant.

2. Public Property

GST/HST is not applicable to amounts reimbursed to DND in respect of damage or loss to public property by a member found liable to reimburse the Crown for such costs.

Explanation

An amount reimbursed to DND pursuant to QR&O, Chapter 38, by an officer or man who is found liable under the regulations for damage or loss does not constitute consideration for a taxable supply. It is compensatory in nature, intended to restore the Crown to the position it was in prior to the loss or damage occurring. A damage payment is the payment of an amount of money from one person to another as compensation or indemnification for damages that the first person has caused the second person to suffer, or allegedly suffer. It is not viewed as consideration for a taxable supply, and thus no GST/HST is applicable.

However, a distinction must be made between those situations where a person compensates another by payment of money and those where the person contracts with a third party to repair the damage. For example, if an occupantmember contracts with an outside third party to repair a broken window, the third party is making a taxable supply of a serving of repairing a window to the occupantmember. As the person who is liable for the payment under the contract with the third party, the occupantmember is the recipient of the service and is liable to pay GST/HST on the supply to the third party, if a registrant.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0328.

Yours truly,

C. Antonelli
Specialty Tax Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate