8 February 2000 GST/HST Interpretation 25508 - Construction Contracts and Holdbacks

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 your operations.

On November 1, 1999 Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Our understanding of the two situations you describe is as follows:

1. Your business is involved in the administration of building construction contracts between contractors and owners. You certify payments to the contractors. In XXXXX[.]

2. When you invoice your clients you often have expenses which you invoice them for. Most of these expenses have PST on them on which the GST does not apply when the vendors invoice you.

Interpretation Requested

1. Does the GST apply to the holdback at the time it is placed into the XXXXX XXXXX?

2. How should you be invoicing your clients?

Interpretation Given

Based on the situations described above, we provide the following interpretations:

Question #1:

GST/HST Memoranda Series Chapter 19.1 Real Property and the GST/HST describes the tax treatment of holdbacks. Holdbacks are governed by subsection 168(7) of the Excise Tax Act (ETA). A holdback may be defined as a part, usually a percentage, of the consideration for a supply that is retained by the recipient of the taxable supply for a period of time pending full and satisfactory performance of the supply, or a part thereof, by the supplier. Such amounts are excluded from the application of the general timing rules. Under subsection 168(7) of the ETA, 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,

(a) in accordance with either federal or provincial laws, or

(b) 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 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 remit that tax with the supplier's return for the reporting period in which the tax was collected.

Example 1

For example, a construction contractor may invoice the recipient as follows:

In this example, the construction contractor would be required to remit GST of $7,000 with its return for the period in which the invoice was issued. The recipient, if eligible, could claim an ITC of $7,000 at that time.

Example 2

Alternatively, the construction contractor might invoice the recipient as follows:

In this second example, the construction contractor invoices the same net amount to the recipient but is required to remit tax of only $6,300 with the return for that reporting period. The remaining $700 of GST on the contract will be payable when the holdback is paid by the recipient or becomes due.

A holdback that is not required by federal or provincial laws or stipulated in a written contract to construct, renovate, alter or repair any real property does not defer the time at which the tax becomes payable. In such cases, subsection 168(7) of the ETA does not apply and the tax is payable on the earlier of the day consideration is paid and the day consideration becomes due in respect of the supply.

Question #2:

Subsection 165(1) of the ETA states, in part, that "every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply." The provincial sales tax (PST) would not be included in the value of the consideration for the supply. Therefore, PST and GST are each calculated separately based on the value of the consideration of the supply in accordance. For example, if the consideration for the item is $100 then the invoice to the client would be 100 + ($100 x PST) + ($100 x GST).

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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9577. For other general inquiries you may also contact your local tax services office at the following address:

XXXXX

Yours truly,

Marilena Guerra
Senior Technical Analyst
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate