Section 182 of the Excise Tax Act (“ETA”) generally deems any payment made to a registrant as a consequence of a breach, modification, or cancellation of an agreement (other than as consideration for a supply), to be a taxable supply. This rule, in effect, means that where there is a breach of an agreement to supply property or services, a payment to the supplier by the recipient to compensate for that breach will generally be deemed to include GST/HST.
Unfortunately, section 182 is often overlooked by parties resolving legal disputes, as the recent Tax Court of Canada (“TCC”) decision in THD Inc. c. La Reine, 2018 CCI 147 demonstrates.
In THD, the Appellant was a transportation company that entered into a five-year delivery contract with McKesson Corporation of Canada (“McKesson”). After McKesson cancelled or modified some distribution routes under the contract a dispute arose which resulted in arbitration.
At arbitration, McKesson was ordered to the Appellant $727,934.30 in damages, which reflected the revenue that it would have earned had McKesson not cancelled or modified the routes in the contract. McKesson was also ordered to pay costs and interest thereon of $50,677.60, for a total of award of $778,612.00. This award was subsequently certified by the Superior Court of Quebec, and leave to appeal to the Quebec Court of Appeal was dismissed.
Unfortunately, when requesting relief at the arbitration, the Appellant was unaware that the damages payment was deemed to include GST/HST pursuant to section 182 of the ETA, and failed to ask for the settlement payment to be grossed up to take this into account.
The Appellant was subsequently assessed by Revenu Québec for $37,076.76 in GST on the full $778,612 that was awarded at arbitration.
On appeal, the TCC properly recognized that GST was deemed to be included in the payment that the Appellant received from McKesson pursuant to section 182 of the ETA. In particular, the TCC noted that it was clear that the payment that McKesson made was to compensate the Appellant for losses flowing from McKesson’s modifications to the five-year contract, and the payment was made for something other than the supply under the agreement. (Had the payment been made for the actual supply, GST would also have been exigible, but on a tax extra basis under the general rules, not under section 182.)
The TCC held that the deeming rules in section 182 clearly applied to the Appellant’s situation, notwithstanding that the Appellant tried to argue that section 182 should not apply because McKesson had not claimed an input tax credit in respect of the damages award.
The TCC therefore agreed with Revenu Québec, and concluded that section 182 deemed the total payment that the Appellant received from McKesson (namely, $778,612) to include some $37,076.76 of GST.
THD should serve as a cautionary tale of the importance of making sure one considers the application of section 182 of the ETA when involved in a legal dispute – whether that dispute is before the court, on arbitration, or dealt with less formally between the parties. Section 182 should be considered any time a payment is received for a breach, modification, or cancellation of a contract.
Unlike settlement negotiations where the inclusion or exclusion of GST/HST in the settlement payment is something that needs to be considered and bargained for in deciding on a settlement figure, when damages are awarded by an arbitrator or judge to compensate an aggrieved party, applicable GST/HST is almost always automatically added thereon when claimed. As such, there is little doubt that had the Appellant claimed GST/HST on top of any damages awarded at the arbitration, the arbitrator would have almost certainly granted this.
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