23 March 2001 GST/HST Interpretation 7404 - Subcontractors' Progress Payments

Dear Sir:

Thank you for your letters of November 27, 1997 and March 16, 2000 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to progress payments received by subcontractors. Reference is also made to your telephone conversation with Gunar Ozols on March 15, 2000. You have requested that we apply our policy with respect to requests for payments issued by general contractors to requests for payment issued by subcontractors.

Please note that as of November 1, 1999 Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Usually, construction contracts provide for a contractor to submit requests or applications for payment on a regular basis during the term of the contract. Based on a request or application for payment covering a progress billing period, another person, often a consultant, engineer or architect, certifies the value of the work completed and materials delivered to approve a specific amount for payment. Under the terms of the contract, the recipient of the supply, is required to pay the amount approved within a specific number of days following certification of the value of work completed. In such cases, the request or application for payment by the contractor will not be considered to be an invoice even if it may be referred to as such, so no tax is payable at that time. However, GST/HST is payable on the amount approved on the earlier of the day that the recipient pays the amount approved, the day that the recipient is required to pay the amount approved pursuant to the contract, the day the supplier issues an actual invoice for that amount, or the date of such an invoice, if issued.

The above is set out in the GST/HST Memoranda Series at paragraph 77 of Chapter 19.1, Real Property and the GST/HST. For your convenience, a copy is enclosed.

Where a general contractor enters into a subcontract with a subcontractor who will perform part of the construction work, the subcontract will also generally provide for progress payments, rather than a one-time payment. The timing of the progress payments may be subject to various conditions or the occurrence of certain events. The exact wording may differ from one subcontract to another. You provided the following wording as an example:

30 (or 50) days following the submission date of the payment application OR

7 days following certification by the architect (or engineer), whichever is the later date.

Another example you provided is the situation where the payment provisions of the subcontract make payment to the general contractor by the owner a condition precedent to any payment obligation under the subcontract. While such a provision may not expressly refer to certification as a condition precedent to a subcontract payment, payment to the general contractor by the owner is a condition precedent and the payment terms of the prime contract will in almost every case make certification a condition precedent to payment to the general contractor and hence the subcontractor as well.

You indicated in our telephone conversation that subcontractors normally submit their requests to the general contractor, who will then combine those with its own request for payment and submit them for certification. Only one certificate is issued in respect of all the requests for payment and it is not normal practicefor the subcontractors to receive copies of the certificate.

Interpretation Requested

You have asked us to review our position on progress payments made to subcontractors and advise. You also asked that we confirm that our comments made in our letter to you of XXXXX on the timing of GST/HST liability in respect of construction contracts are still valid.

Interpretation Given

Based on the information provided, we confirm that where a request for a progress payment is issued by a subcontractor under circumstances in which, pursuant to the subcontract, a certificate of work completed must be issued to verify the amount due, the request for payment is not an invoice. Tax will become payable at one of the times specified in paragraph 77 of Chapter 19.1 of the Memoranda Series. Such time must be determined on a case-by-case basis. If the subcontractor's progress payment is not dependant on a certificate for work completed but on the contractor being paid by the recipient, the CCRA will not treat the request for payment as an invoice. Generally, the CCRA will accept the day payment is received by the subcontractor as the date when tax became payable, unless there is evidence to show that the tax was payable at an earlier date.

We also confirm that our letter to you of XXXXX remains in effect. Please note that we stated in that letter that the written agreement between a particular supplier and a recipient must state that certification is a condition precedent to payment.

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 CCRA 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 Catherine Séguin-Ouimet at (613) 952-0419.

Yours truly,

Adrien Venne
Director
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate