19 February 2003 GST/HST Interpretation 41177 - Application of GST/HST to Additional Amount Received from Client

Dear XXXXX:

Thank you for your letter XXXXX, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. We regret the delay in responding.

Our understanding of the facts is as follows:

You are a partner in XXXXX and the partnership is registered for GST/HST purposes. The partnership has provided consulting services to XXXXX. In XXXXX was sold to XXXXX. In your letter, you indicate that the partnership received $XXXXX from XXXXX. The amount received was XXXXX.

Pursuant to a letter you received XXXXX, a copy of which you have provided to us, money XXXXX is being distributed to your partnership in appreciation for your involvement in the XXXXX success. In the letter XXXXX indicates that the amount recognizes the partnership's accomplishment in building XXXXX into a cohesive dynamic team with a world leading product line.

Furthermore, the letter from XXXXX requests that the partnership invoice XXXXX XXXXX. You state in your XXXXX facsimile that you are unable to find evidence of invoicing XXXXX for the amount received and XXXXX.

The former employees of XXXXX are now employees of XXXXX. You indicate that the partnership is now providing consulting services to XXXXX.

Ruling Requested

You requested a ruling as to whether the $XXXXX received from XXXXX is subject to GST. You contend that the amount is similar to a dividend, bonus or profit sharing arrangement and therefore not subject to GST.

Pursuant to section 1.4 of the GST/HST Memoranda Series (copy enclosed), a ruling can only be issued where clearly defined facts are established. As these are not established, we are pleased to provide you with the following interpretation of the application of the Excise Tax Act (ETA) in lieu of a ruling.

Interpretation Given

Generally, every recipient of a taxable supply made in Canada shall pay tax in respect of the supply calculated at the GST rate of 7% on the value of the consideration for the supply. In addition, the supplier of a taxable supply is generally required to collect the tax payable by the recipient.

The consulting services provided by the partnership to XXXXX are taxable supplies made in Canada that are taxable at 7% GST and the partnership is required to account for the tax payable in respect of those supplies in its net tax.

With respect to the additional amount paid by XXXXX to the partnership, it appears that the amount is paid as additional consideration for the services provided by the partnership. It appears that XXXXX recognizes that the partnership's efforts in assisting XXXXX have resulted in the successful sale. In other words, it appears that XXXXX has determined that the partnership's services rendered in the past are deserving of additional consideration. If the partnership did not provide the consulting services, XXXXX would not have given the partnership the $XXXXX.

Consequently, the partnership is required to account for the GST in respect of the additional consideration. Whether the additional amount paid to the partnership by XXXXX includes the GST payable, is a question of fact that may be resolved in discussion with XXXXX. It should be noted that XXXXX may be entitled to claim an input tax credit (ITC) for the GST paid or payable to the partnership provided that XXXXX is a registrant and that the conditions for claiming an ITC are met. With respect to these conditions, XXXXX will be required to meet the documentary requirements for claiming an ITC. To this effect, the partnership, upon XXXXX request, is required to furnish the necessary written information to substantiate XXXXX ITC claim.

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.

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 me at (613) 952-8814.

Yours truly,

Robert Douthwright
Rulings Officer
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate