14 May 2002 GST/HST Interpretation 37914 - Settlement of Freight Claims

XXXXX

Thank you for your letter of October 3, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to payments of freight claims made by carriers to their customers. We apologize for the delay in responding to your inquiry.

You would like a letter or some other more current document, which confirms the CCRA's position provided in a letter dated XXXXX, regarding the settlement of loss, and/or freight damage claims. The enclosed Policy Statement P-218, Tax status of damage payments not within section 182 of the Excise Tax Act, explains, among other things, our interpretative policy on this issue. For purposes of the policy statement, a damage payment is the payment of an amount of money from one person to another as compensation or indemnification for damages that the first person has caused the second person to suffer, or allegedly suffer.

Sample ruling number 4 in the policy statement specifically discusses payments made by a carrier to a customer to compensate the customer for the damage done to the goods in transit. The payment is meant to restore, to some degree, the customer to the position it was in prior to the damage occurring. In this situation, the payment made by the carrier to its customer to compensate for the damage done to the goods in transit, was not consideration for a taxable supply of property or services. As a result, the payment is not subject to GST/HST. In addition, it should be noted that even though the ownership of the damaged goods was transferred to the carrier as part of the settlement of the claim, the payment is not consideration for the supply of those goods.

In summary, the payment of money by a carrier in settlement of a freight claim for lost or damaged goods is generally not consideration for a supply. However, 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 of service by the payee in return for the payment, and for which purpose the payment is being made. The payment is not made to compensate the payee, but rather to obtain the property or service being provided by the payee. Sample ruling number 5 in Policy Statement P-218 is an example of this type of payment. A distinction must also be drawn between those cases where a person compensates another by payment of money and those where the person contracts with a third party to repair the damage. Please refer to the bottom of page two of the attached policy statement for an example of a case where the person contracts with a third party to repair the damage.

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 Canada Customs and Revenue Agency 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) 954-4394.

Yours truly,

J. Allard
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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