18 November 1999 GST/HST Interpretation 13417 - GST/HST Information Concerning Compensation Payments

Dear XXXXX

In response to your recent inquiry concerning the application of the Goods and Services Tax (GST) to compensation payments payable under a court order for damages, we are providing the following general information.

On April 1, 1997, the provincial sales tax in three participating provinces, Newfoundland, Nova Scotia and New Brunswick, was harmonized with the GST to create the Harmonized Sales Tax (HST). HST applies to the same base of goods and services as the GST, at a rate of 15%. Of this, 7% represents the federal component and 8% represents the provincial component of HST.

Generally, a damage payment is not consideration for a supply, as it is compensatory or punitive in nature, and not given in exchange for a supply of property or services by another party. According, it would not be subject to GST/HST, even if the payee agrees to release the payer from liability as a result of the damage payment. This applies regardless of whether the damage payment is made as a result of a court judgement or as a result of a settlement that was concluded in order to avoid a court judgement.

However, where as a result of a breach, modification or termination of an agreement for a 7% or 15% taxable supply, the recipient is required to pay or forfeit an amount to the registrant supplier, or reduce or extinguish a debt or other obligation of the supplier, section 182 of the Excise Tax Act provides that the recipient is deemed to have paid an amount as consideration and tax, in respect of the original agreement to make a supply. The supplier is therefore required to remit 7/107 or 15/115 of the amount received from the recipient. Consequently, a supplier could be required to remit an amount as tax in respect of a court ordered payment which is awarded as a consequence of a breach, modification or termination of an agreement for a supply that is taxable at 7% or 15%.

Section 182 specifically provides that its deeming provisions do not apply to any payment of an additional charge for late payment, a penalty paid by one railway corporation to another for failure to return rolling stock within a stipulated time, or an amount paid as or on account of demurrage.

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 or service by the payee in return for the payment. The payment is not made to compensate the payee with respect to the original transaction, but rather to obtain the property or service provided by the payee. If the supply of property or service being obtained is taxable, and if the payee is a registrant, 7% or 15% tax will apply, Also, if a judgement or settlement requires a person to pay a third party to provide repairs, rather than to pay damages or consideration to the supplier, the person paying for the repairs is receiving a supply from the third party. Therefore, if that supply is taxable, and if the third party is a GST/HST registrant, tax applies.

If you have any further questions or require clarification on the above matter, please contact Ms. Dawn Weisberg at (613) 952-9219 or Mr. Don Dawson at (613) 952-9211.

Yours truly,

J. Sitka
Director
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

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