28 July 2003 GST/HST Interpretation 46064 - Damage Claim Settlements

Dear XXXXX:

Thank you for your fax XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to damage settlement payments made by carriers to their customers.

Interpretation Requested

Adrien Venne's letter XXXXX stated that damage settlement payments made by freight carriers to their customers for freight damaged in transit are not subject to GST. Is this letter valid and still current?

Interpretation Given

Based on the information provided, our interpretation is that, generally, damage settlement payments made by freight carriers to their customers for freight damaged or lost in transit are not subject to GST/HST. However, it is important to remember that some payments that are described as damage settlement payments could be consideration for supplies in some instances, so could be subject to GST/HST.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act (ETA), 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.

Explanation

As Mr. Venne indicated in his letter, it is implicit in a contract of carriage that the freight carrier will deliver the goods in the same condition as they were in when received from the customer. If the goods are lost or damaged in transit, the freight carrier must replace the goods or make some other restitution to the customer, such as paying an amount as a damage settlement payment. To the extent that such a payment is made in order to compensate the customer and not in order to obtain a supply, it should be regarded as other than consideration.

GST/HST is only payable with respect to a payment that is other than consideration if it falls under subsection 182(1) of the ETA. Subsection 182(1) applies where an amount other than consideration is paid to a registrant as a consequence of the breach, modification or termination of an agreement for the making of a taxable supply by that registrant. A damage settlement payment that is made by a carrier to a freight customer as compensation for lost or damaged freight does not fit under subsection 182(1) because it is made to the recipient of the supply of freight services and not to the supplier (i.e., the carrier). Consequently, GST/HST would generally not apply to such amounts.

A damage settlement payment made by a freight carrier to its customer is generally not consideration for a supply even where the carrier acquires title to the damaged property that it was transporting. This is because, in most instances, the payment is made in order to compensate the customer for its loss, and the property that the carrier acquires ownership of, as a result of the payment, is of no value to the carrier.

There could be some exceptions where a payment by a freight carrier to its customer is referred to as a damage settlement payment, but the payment can be linked directly to the provision of some property or service by the carrier in return for the payment. In such a case, all or a portion of the payment could be regarded as consideration for a supply, rather than as a damage settlement payment.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9211.

Yours truly,

Don Dawson
Corporate Reorganizations Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate