GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Road
Vanier, Ontario
XXXXX K1A 0L5
|
XXXXX
|
Case: HQR0000263
File: 11710-1
|
|
Subject:
|
GST/HST INTERPRETATION
Freight Damage Settlements - XXXXX GST Reg No. XXXXX
|
Dear Sir:
This is in response to your letter addressed to our XXXXX TIS Centre concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to transactions involving freight damage settlements. We apologize for the delay in replying.
Background
Based on the information provided, our understanding of the facts is as follows:
1. XXXXX (a trucking company) uses owners[/]operators (the "OOs") to transport goods for its customers. The OOs are paid on a per mile basis. They are independent truckers who are usually GST/HST registrants.
2. For a fee, XXXXX provides the OOs the mandatory insurance coverage to goods under shipment.
3. XXXXX is not licensed or otherwise authorized under the laws of Canada or a province to carry on an insurance business (i.e. an insurer). Also, XXXXX is not acting as an agent on behalf of such an insurer.
4. In case where freight is damaged in an accident, the OOs must pay for the damages up to the deductible amount of XXXXX (OOs can purchase optional insurance to reduce the deductible amount). The OOs pay the deductible amount to XXXXX who in turn pays the customer for the damages.
5. As part of the settlement of claim, XXXXX may, in some cases, be entitled to keep the damaged goods. In such cases, XXXXX will later sell the goods as salvage.
Interpretation Requested
Whether the following payments are subject to tax under Part IX of the Excise Tax Act (the "Act"):
1. The amount paid by the OOs to XXXXX for providing the insurance coverage.
2. The deductible amount paid by the OOs to XXXXX where goods in shipment have been damaged in an accident.
3. The amount paid by XXXXX to its customer (shipper) for the damages.
4. The payment received by XXXXX when the salvage is sold.
Interpretation Given
1. The amount paid by OOs to XXXXX for providing the insurance coverage:
Under the Act, the supply of a financial service in Canada is exempt from GST/HST. A "financial service" is defined in subsection 123(1) of the Act to include the issue of an "insurance policy". Hence, the payment of a "premium" amount for the issue of an insurance policy will not attract GST/HST. However, under the Act, a contract to provide insurance coverage will not qualify as an "insurance policy" unless the contract is issued by a person authorized by the laws of Canada or a province or under the laws of another jurisdiction to carry on an insurance business. An exception is a contract in the nature of accident and sickness or a construction bond.
Since XXXXX is not authorized to carry on an insurance business in Canada, the "insurance" coverage provided by XXXXX will not qualify as an insurance service for purposes of the Act. Hence, the amount paid by the OOs for the provision of this service is subject to GST/HST.
It should be noted that "insurance coverage" and "deductible" are terms used by XXXXX to describe its transactions with the OOs. For purposes of the ETA, the supply by XXXXX to the OOs is a supply of a service and not a supply of an insurance service. These terms are used in this letter for ease of reference only.
2. In case the freight is damaged in an accident, the OOs must pay XXXXX a deductible amount for the damages of up to XXXXX It is our view that this payment is made by the OOs to compensate XXXXX for the damages done to the goods in transit. The payment is in essence compensatory in nature and is intended to put XXXXX back to its original position only. There is no supply of any property or services by XXXXX for the receipt of this amount. Hence, the amount is not consideration for a supply, and is not subject to tax under the general provisions of the Act.
Also, subsection 182(1) of the Act will not deem the payment as consideration for a taxable supply of services since this subsection has application only where, as a consequence of the breach, modification or cancellation of an agreement for the making of a taxable supply by a registrant/supplier, an amount is paid to the registrant/supplier. In the current case, the amount is paid by the OOs to XXXXX who is the supplier of the hauling services.
3. The damage payment made by XXXXX to its customer (shipper) for the damages caused to the goods in shipment.
Again the payment is made by XXXXX to compensate its customer for the damages done to the goods in shipment. As in situation No. 2 above, the payment is in essence a compensation to the customer; it is not consideration for the supply of any property or services made by the customer to XXXXX[.] Hence, the payment will not be subject to tax under the general provisions of the Act.
Also, as in situation No. 2 above, this payment is not subject to subsection 182(1) application since the amount is paid to the customer who is not the supplier of the hauling services.
4. The amount received by XXXXX when selling the salvage to a third party.
XXXXX is making a supply of property (the salvage). The supply would be considered to be made by XXXXX in the course of its commercial activities and is subject to tax unless a specific tax relieving provision in the Act applies to the supply (e.g. the supply of basic groceries, etc.).
I trust these comments will be of assistance. Should you have any further question, please do not hesitate to contact me at (613) 954-1433.
Yours truly,
Phil Tang
Specialty Tax Unit
Financial institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate
Email this Content