1 June 1999 GST/HST Interpretation HQR0001668 - Re: GST on Award Settlement

This is in response to your memo of February 26, 1999 concerning a telephone request from XXXXX with respect to certain "damage payments" received by XXXXX through a court settlement. You requested our opinion as to whether GST was applicable to these damage payments.

Based on the information provided in your memo and the copy of the XXXXX XXXXX our understanding of the facts is as follows:

1. In XXXXX was the successful bidder for a part of a major project undertaken by XXXXX which was designed to lessen the amount of XXXXX[.]

2. The total project was made up of a number of different contracts. The total project was designed by XXXXX and it was also responsible for the invitations to tender, the acceptance of tenders and contract supervision. XXXXX acknowledged its responsibility to XXXXX for the actions of XXXXX throughout and also for the actions of its other contractors where those actions interfered with XXXXX operations.

3. On or about May 2, 1990, the tender of XXXXX was accepted by XXXXX did not retain a general contractor. XXXXX through its agent XXXXX dealt with each of the contractors.

4. The original contract between XXXXX and XXXXX included the following terms:

•   work was to commence XXXXX and be completed no later than XXXXX - the agreement contract price was $XXXXX and

•   the contract provided certain other milestone dates when work of the other contractors was to be completed and when material and equipment were to be delivered and made available to XXXXX. This information was necessary in order for XXXXX to prepare its schedule.

5. Although the contract called for work to commence on XXXXX the acceptance of XXXXX tender did not take place until XXXXX[.] It was impractical for XXXXX to have mobilized instantly when the tender was accepted. The contract term was adjusted forward by some ten days to allow a reasonable period of time for mobilization and to commence work.

6. At the beginning of the contract, there were a number of trades on strike, including the pipe fitters and cement finishers.

7. The XXXXX itself and a number of equipment, motors, etc. were not delivered on time as anticipated, making it difficult for XXXXX to schedule the various components of its contract.

8. Many pieces of equipment and other major parts of the project arrived with defects and had to be repaired by XXXXX[.]

9. XXXXX had problems with access to various parts of the project.

10. XXXXX schedule was also interfered with from time to time by other contractors.

11. The completion date was extended to XXXXX because of the various disruptions, and XXXXX had to work two shifts and weekends to meet the scheduled completion date.

12. In fact the XXXXX instructed XXXXX to leave the project, and accepted the XXXXX contract as being complete.

13. XXXXX filed a claim with the XXXXX for a total amount owing of XXXXX[.] The claim was made up of the contract price and other additional charges for additional work, expenses, impacted costs and loss of productivity as follows:

XXXXX counter-claimed against XXXXX for the sum of XXXXX but later reduced the amount to $XXXXX[.] The matter was heard on XXXXX[.]

4. You advised us that:

•   the various amounts claimed by XXXXX were invoiced to XXXXX and booked by XXXXX as receivables prior to XXXXX - after the judgment, XXXXX received the net amount approved by the Court from XXXXX plus the related GST;

•   XXXXX called up your office to see if the amount should be subject to GST;

•   XXXXX indicated the contract had hundreds of pages, and would not be convenient to forward it to you for review. Further, whether the net amount determined by the Court should be subject to GST was really not of their concern XXXXX who already paid the related tax, should pursue the matter further for its own benefit.

Interpretation Requested:

Whether the net amount paid by XXXXX pursuant to the Court's decision is subject to GST.

Our Comments:

In this matter, the Court considered the amounts claimed by XXXXX item by item. The Court confirmed, revised or disallowed these amounts, and reduced the total claim to XXXXX[.] The net amount adjudged payable by the Court (after deducting the actual payment of XXXXX[.] The Court also noted that "this is the amount of damage under the contract plus GST and without considering interest or costs".

Assuming that this decision has not been subject to an appeal or a revision, the Court's findings in regard to the exigibility of GST on the payments in issue may be binding on the parties to this action, but are not necessarily binding on Revenue Canada.

Based on the information provided, we are of the view that the net amount in issue is consideration for a taxable supply. However, pursuant to the transitional provisions set out in subsection 341(1) of the Excise Tax Act (the "Act"), a service which was substantially or entirely performed before 1991 is not subject to GST as long as the consideration for the service was paid or "becomes due" before May 1991. Under subsection 152(1) of the Act, the consideration for a supply is generally deemed to have "become due" on the day on which the supplier first issues an invoice in respect of the supply for that consideration.

Therefore, if all of XXXXX services were in fact performed before 1991, and the consideration for these services was invoiced to XXXXX before May 1991, these services would not have been subject to tax even if they were paid after May 1991. Based on our understanding of the relevant documents however, it is not entirely clear to us whether all of the consideration for those services became due prior to May 1991 within the meaning of subsection 152(1) of the Act. In other words, we cannot determine with certainty whether the judgement was technically "correct" in regard to the exigibility of GST. In any event, it is our understanding that XXXXX as paid the GST as set out in the judgment.

Provided that XXXXX has included this amount (i.e. GST) in its calculation of net tax, and remitted this tax to the Receiver General, it is our recommendation that no further action be taken with respect to this matter unless XXXXX or XXXXX submits additional documentation which supports the position that all of the consideration for the supply became due prior to May 1991. If GST was properly exigible, XXXXX may be entitled to an input tax credit. If GST was not exigible, a rebate for tax paid in error may be available under section 261 of the Act.

We trust the above will be of assistance. Should you wish to discuss the issue further, please do not hesitate to contact the undersigned at (613) 954-1433.

Phil Tang
Specialty Tax Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate