File: 11605-1; 11710-1(lhk)
Leg. Ref.: s. 182(1)
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Subject:
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GST and Penalty Charges
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Further to your phone discussion with Lalith Kottachchi of my staff on November 17, 1995, you have requested that we provide you a written response to the question of whether the GST applies to penalty charges.
More specifically, your question is whether the GST should apply to a penalty charged by a trailer park operator to the users of the trailer park. The penalty (a one time fee) is charged in addition to the usual facility fees (fees taxable at 7%) charged for leasing sites of the trailer park. The fee is not a late payment penalty. It is charged to discourage people from bringing trailers from other parks and sales outlets. The lessee had reluctantly paid the penalty. In this case, the lease agreement was not breached, modified or terminated.
It is the Department's view that the tax status of a "penalty" payment would depend on the transaction to which it relates. The point is that the term "penalty" can merely be a label used to identify a payment rather than a term used to characterize it. Depending on the specific facts of the situation, the payment may take any one of the four forms suggested below:
(i) The payment is further consideration for the initial supply, i.e. leasing the site
It is important to note that "consideration" need not be a fixed amount agreed by the parties at the time agreement was entered into, because the supplier could later demand, legally or otherwise, an additional amount in order for the agreement to be maintained (i.e. the lease to continue). Where the payment is for the same lease terms to continue (also not a late payment fee for section 161 to exclude it from consideration) one could reasonably conclude that it is paid as further consideration for leasing the site.
(ii) The amount is paid otherwise than as consideration for leasing the site
The question is whether the amount falls within the scope of subsection 182(1) of the Act. Only an amount paid or forfeited as a consequence of "breach, modification or termination of an agreement for the making of a taxable supply" could fall within the scope of subsection 182(1). In this case, however, there was no breach, modification or termination of the lease and thus, subsection 182(1) does not apply.
(iii) The payment is consideration for a new supply
If the penalties become payable pursuant to a settlement agreement between the parties, then that amount could be regarded as consideration for a new supply. This is a rare occurrence because a settlement is usually reached after breach, modification or termination of an existing agreement where subsection 182(1) applies. However, if the parties had agreed that the payment is an amount payable outside of the existing lease arrangement, it may fall into this category. The nature of the supply in such circumstances would depend upon the contents of the settlement agreement.
(iv) The payment is not consideration for a supply.
The penalties imposed by statute which are not payments for agreeing to provide or actual provision of property or a service would generally fall into the category of "not consideration for a supply". In the trailer park case, the "penalties" are not imposed by statute and thus would not fall into this category.
Currently, we are working on a series of policy papers on "damages" including penalty charges. Nevertheless, the views expressed in this letter reflect the interim policy position of the Department on the issue of the application of the GST to penalty charges.
If you have any questions or require additional information, please contact one of the members of the Imposition Team in the Taxing Provisions Unit. They are: Serge Bernier (613) 952-9580, Lalith Kottachchi (613) 952-9588, Francois Paris (613) 952-8812 and Anny Roy (613) 954-2560.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations Directorate
1525(REG)
| c.c.: |
Mitch Bloom
Lalith Kottachchi
Imposition Team/Application Team |
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