Good and Services Tax (GST) matters...

Good and Services Tax (GST) matters are frequently overlooked when negotiating a payment agreement. Generally, the settlement payment has already been made before consideration is given to by what means GST applies.

A settlement or damage payment can issue m either a GST liability or an input tax credit opportunity. To avoid unforeseen inferences for both the payer and the recipient of a arrangement payment, the settlement agreement should include a clause that addresses the application of the GST to the payment.

Settlement or damages-a question of fact

For GST intentions a distinction is drawn between: a) a reconciliation that relates to a contract or agreement for a furnish and b) a damage payment that is made where no agreement exists and the payment is intended to compensate a party that has supported a loss.

The nature of the payment and the underlying agreements determine whether or not GST is exigible.

Settlement payments

Section 182 of the Excise Tax Act ( 182) includes several deeming provisions that relate to adjustment payments.

Based on s.182, where an agreement for a taxable invest in Canada is breached, modified, or terminated and an amount is paid (including forgiving a shortcoming or forfeiting a deposit) to the bodily form making the supply, otherwise than as consideration for the replenish (i.e. in settlement), a portion of the pacification payment is deemed to be consideration for the give as follows:

(100/107) ?— (settlement payment) = thinked consideration

The person who receives the arrangement payment is deemed to have heap uped GST on the deemed consideration, and the bodily form who makes the settlement payment is thinked to have paid GST forward the deemed consideration. In other words, if the original provide was taxable, the settlement payment is regarded as a GST included amount. It come [i]or[/i] go after [i]or[/i] behinds that the deemed GST mustered must be remitted, and the look uponed GST paid may qualify as an input tax credit or a GST rebate, as the case may be.

The deeming provisions generally do not apply to:

* Agreements that were come intoed into before 1991;

* Late payment charges;

* Charges among railways corporations relating to a delay in returning railcars;

* Demurrage;

* Zero-rated or exonerate supplies; and,

* Payments made according to the person who makes the taxable supply

By excluding payments made by the agency of a supplier, the deeming provisions generally do not apply to a payment made subject to a standard warranty contract.

If you have made or received a payment payment, or if you are popularly negotiating a settlement agreement, it is important to consider the application of the deeming provisions to determine if the amount being paid or received will include the GST

The following example illustrates for what reason the deeming provisions apply to a typical arrangement payment.

Assume that a manufacturer jot downs into an agreement with a supplier to purchase a pre-determined number of composing parts during the next five years. In order to convenient the needs of the manufacturer, the supplier invents and operates a special plant, including hiring staff to manufacture the constituent parts. Three years into the agreement the manufacturer determines that it no longer wants to purchase the parts from the supplier. A liquidation agreement is negotiated, which includes a payment of $5000000 to be paid through the manufacturer to the supplier.

In the case where the manufacturer was a non-resident, and the constituting parts were all exported by the agency of the supplier, GST should not apply to the arrangement payment, because the original afford was zero-rated.

Planning

It will always be beneficial to address the GST when negotiating a liquidation agreement to provide certainty for one as well as the other parties and to avoid unnecessary re-negotiation and possible GST liability after the fact.

There may be an argument that the deeming provisions do not apply to a particular discharge payment. It is our experience that the Canada receipts Agency (CRA) will generally assess GST in succession all settlement payments, on the assumption that s182 applies, without a thorough consideration of the legislation.

If you have received a discharge payment, and you have not accounted for the GST you should review the situation to determine if an argument can be made that the deeming provisions do not apply to the payment. If an argument cannot be made, consideration should be given to initiating a voluntary disclosure with the CRA and contacting the payer of the discharge in order to attempt to re-open negotiations.

Damage payments

The deeming provisions do not apply to a discharge payment where there has been no breach, modification, or termination of an agreement for a taxable supply; this protoplast of payment is generally referr to as a damage payment.

Distinguishing between a adjustment payment and a damage payment can be a source of confusion. The CRA has published its views onward damage payments in GST Policy Statement P-218 Tax Status of Damage Payments Not Within section 182 of the Excise Tax Act. This policy applies to "payments of coin where one person causes another bodily form to suffer damages (e.g., wealth damage, loss of income, inconvenience, etc) and pays an amount of circulating medium to that person as compensation for the damages go throughed or allegedly suffered."