29 June 1998 GST/HST Interpretation HQR0000217 - Damage Claims

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your facsimile transmission of May 28, 1996 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Background

Based on the information contained in your facsimile and your telephone discussion on September 16, 1997 with Ms Jane Mah of our office, the following is our understanding of the facts:

1. Telephone companies own underground cable that are often damaged or cut by outside individuals and companies.

2. When this occurs, the telephone company that owns the cable would perform the necessary repairs using its own resources and invoice the party or parties responsible for the damages.

3. Persons causing the damages are often construction companies in the conduct of their business activities or homeowners in the process of, for example, planting trees on their property. These activities and the resulting damages do not arise from any contractual agreements between the phone company and these persons.

Interpretation Requested

1. Should GST/HST be applied to the invoices to recover the cost of repairs from persons responsible for causing the damages?

2. How does this apply when the damages are caused by federal, provincial and municipal governments?

Interpretation Given

1. GST/HST should not be applied to the invoices to recover the cost of repairs rom persons responsible for causing the damages.

2. The above applies equally when the damages are caused by federal, provincial or municipal governments. For example, a municipal repair crew, in the process of repairing drainage pipes, accidentally damages cable owned by the telephone company. Any amounts recovered from the municipality would generally not be subject to GST/HST. As you may be aware, XXXXX (and entities considered to be part of the province), as a non-participating province, does not pay GST/HST on any supplies.

There are many situations in both commercial and non-commercial activities where one person makes a payment to another person as compensation for damages. Some of these situations are covered by section 182 of the Excise Tax Act (the Act). However, there are many situations where one or more of the conditions in section 182 of the Act are not met. These situations could include:

•   no prior agreement for a taxable supply existed between the parties;

•   the payment is being made by the supplier of the original supply;

•   the original supply was not made by a registrant; or

•   the payment is actually additional consideration for the original supply.

It is the Department's position that a damage payment, to the extent that it is not a payment for a supply of property or a service, is not consideration for a supply even if the payee agrees to release the payor from further liability. 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.

Damages may be compensatory or punitive in nature, according to whether they are awarded as the measure of actual loss suffered or a punishment for outrageous conduct and to deter future transgressions. Nominal damages are awarded for the vindication of a right where no real loss or injury can be proved. Generally, punitive or exemplary damages are awarded only if compensatory or actual damages have been sustained.

Damages may arise in tort and similar causes of action, but will also include damages arising out of contractual relationships. The payments may be made pursuant to a court award or an out-of-court settlement. In an out-of-court settlement, the payments may be in respect of damages alleged but not admitted.

There will be situations where a payment is made in the context of a claim for damages, but the payment can be linked directly to the provision of some property of service by the payee in return for the payment, and for which purpose the payment is being made. The payment is not made to compensate the payee, but rather to obtain the property or service being provided by the payee.

A distinction must also be drawn between those cases where a person compensates another by payment of money and those where the person contracts with a third party to repair the damage. If, for example, a person damages telephone cable and contracts directly with a third party to repair the cable, the third party is making a taxable supply of a service of repairing the cable to the person. As the person who is liable for the payment under the agreement with the third party, the person is the recipient of the service. The third party, if a registrant, would collect tax from the person.

In the situation you describe, the payments are not consideration for taxable supplies. They are in essence compensatory and are not made in exchange for a supply of property or services by the telephone companies. Additionally, the acceptance of the payment does not result in the payment being consideration for a supply, in that it represents compensation for the damage to the telephone companies' equipment. The payment is meant to restore, to some degree, the telephone company to the position it was in prior to the damage occurring.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. 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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST Memoranda Series. We have also enclosed a copy of Policy Statement P-218 on the issue of damage payments.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-7909.

Yours truly,

Gunar Ozols
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate