CRA rules that per diem damages received by a construction-services recipient for construction delays were free of HST

The City’s construction agreements contained a liquidated damages clause, which required the contractor to compensate the City when work was not completed within specified timelines through the payment of “Damages” at a specified per diem rate per calendar day of the delay. The Damages were to be paid by the City reducing its payments for amounts that were invoiced to it by the contractor.

CRA ruled that GST/HST did not apply to the Damages amounts given that they were compensation for damages rather than consideration for any supply by the City, and given that s. 182(1) (which can apply to damages received by a supplier from the recipient, but not generally to damages flowing the other way) did not apply.

Thus, it did not matter that the Damages were computed on a per diem, rather than lump sum, basis and that, in a broad sense, they were an adjustment to a taxable sale price.

It might have been more tax efficient for the City to have instead required the contractor to adjust the sale price charged to it, so that the City could reduce its net HST outlay pursuant to the s. 232 rebate mechanism.

Neal Armstrong. Summary of 26 July 2022 GST/HST Ruling 232189 under ETA s. 182(1).