24 December 1999 GST/HST Interpretation 13611/HQC0004892 - Construction Holdbacks and Invoices

Dear XXXXX

Thank you for your letter of October 19, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to construction holdbacks and invoices.

Interpretation Requested

XXXXX is involved in administrating building construction contracts between contractors and owners, and as such, you certify payments to the contractors.

XXXXX requires that XXXXX of each payment on a construction contract be held back and placed into a Trust Fund Account in the names of the owner and contractor. After the work has been completed and after a legislated waiting period, the hold back is paid out to the contractor.

You would like to know whether the GST applies to the holdback at the time it is placed into the Trust Fund. If it does, is the GST to be remitted at that time (in which case, how is the later actual payment of the holdback to be made since the GST has already been applied and remitted), or is it to be placed into the Trust Fund? To date you, and it is your understanding that everyone else in the industry, apply the GST when the holdback is paid out of the Trust Fund.

Secondly, when you invoice out clients, you often have expenses for which you send them an invoice. Most of these expenses have Provincial Sales Tax (PST) included and to which the GST does not apply when these vendors invoice you. You would like to know how to invoice your clients.

Interpretation Given

Based on the information provided, under subsection 168(7) of the Excise Tax Act (the Act), where the recipient of a taxable supply retains part of the consideration for that supply pending full and satisfactory performance of the supply, or a part thereof, in accordance with either federal or provincial laws, or as required under the terms of a written agreement for the construction, renovation or alteration of, or repair to any real property, tax is payable on the amount held back on the earlier of the day that the holdback is paid out to the supplier and the day the holdback period expires pursuant to the written agreement or applicable legislation.

However, if the supplier collects an amount as tax or on account of tax before it becomes payable, the supplier must account for that tax with the supplier's return for the reporting period in which the tax was collected.

In regard to the issue of how to invoice your clients in respect of expenses you have incurred, the treatment of additional expenses depends on the agreement between the consultant and the client.

Generally, consultants are not agents of their clients. Expenses incurred that a client has agreed to reimburse are treated as additional consideration payable by the client for the consultant's services. The reimbursement for these expenses is treated in the same manner as the base contract amount (i.e., the GST is applicable on the amount being reimbursed). As a registrant, the consultant should be able to claim input tax credits for the GST paid or payable on the expenses.

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/HST 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/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0419.

Yours truly,

Catherine Séguin
Technical Officer
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate