Section 182 of the Excise Tax Act 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 a payment to a supplier by a recipient to compensate for a breach of an agreement to supply property or services, will generally be deemed to include GST/HST.
In the recent decision in THD Inc. c La Reine, 2018 CCI 147 the Tax Court of Canada had an opportunity to consider the application of section 182 to an appellant who had been awarded damages on arbitration.
In THD, the appellant was a transportation company that entered into a five-year delivery contract with McKesson Corporation of Canada. After McKesson cancelled or modified some distribution routes under the contract, a dispute arose which resulted in arbitration.
At arbitration, McKesson was ordered to pay the appellant $727,934.30 in damages, which corresponded to the revenue that the appellant would have earned if the routes had not been modified or cancelled. 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 Québec, and leave to appeal to the Québec Court of Appeal was dismissed.
Unfortunately, when requesting relief at the arbitration, the appellant was unaware that the damages payment was deemed to include the five per cent GST pursuant to section 182 of the ETA, and thus 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 $778,612.00 that was awarded at arbitration on the basis of section 182 of the ETA.
On appeal, the TCC properly recognized that section 182 of the ETA operated to deem GST to be included in the payment of the damages award by McKesson to the appellant. 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 outlined in section 165, not under section 182.).
The TCC held that the deeming rule in section 182 was clear, and 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.
In the result, the TCC agreed with Revenu Québec, and concluded that the entire $778,612.00 payment that appellant received from McKesson was deemed to include some $37,076.76 of GST pursuant to section 182 of ETA.
THD should serve as a cautionary tale of the importance of making sure one considers the application of section 182 of the ETA when resolving 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 on top of any damages awarded at the arbitration, the arbitrator would have almost certainly granted this.
That said, an interesting question that the TCC did not appear to pay much attention to was whether section 182 ought to have only applied to the damages amount (i.e., the $727,934.30 for breach of contract) or the total amount awarded by the arbiter, which also included interest and costs. An argument can certainly be made that section 182 should not have applied to the interest and costs on the basis that these amounts are not properly characterized as being paid or forfeited “as a consequence of the breach, modification or termination…of an agreement…” because of their indirect connection to the agreement. The payment of interest could also arguably be classified as an exempt financial service.
Finally, something that may be of particular interest to legal practitioners is the fact that the appellant in THD appeared to also be suing the lawyers who handled the arbitration and were not aware of the implications of section 182 of the ETA – presumably for the amount of GST the appellant was assessed – plus its costs for the unsuccessful TCC appeal.
John Bassindale is an associate with Millar Kreklewetz LLP