The Goods and Services/Harmonized Sales Tax (HST) applies to
virtually all taxable supplies of goods and services made in
Canada. Not surprisingly, there are HST considerations
whenever there is a payment made as a result of a breach,
modification or termination of an agreement for the making of a
taxable supply. The payment may even be deemed to be HST-inclusive,
such that the payee must remit a portion to the tax
authorities. Regardless of whether the payment is made as a
result of court-ordered damages, a settlement of litigation, or a
negotiated amendment to, or termination of, an agreement, clients
need to understand the HST implications. Otherwise, they may not
receive the treatment they bargained for.
In the ordinary course, the supplier of goods or services
charges and collects HST from the recipient of the supply and
remits the HST to the tax authorities. A recipient of the
supply that is engaged in commercial activity is generally able to
claim an input tax credit (ITC) to recover the HST paid to the
Where a dispute arises between the parties, one party may be
ordered, or may agree, to make a payment to the other. Where the
payment can be regarded as consideration for a taxable supply of
goods and services, the normal HST rules apply and the supplier
will be obliged to charge, collect and remit the HST.
However, the HST also contains an important deeming
provision. Section 182 of the HST legislation can deem a
payment to be inclusive of HST where:
the payment is made as a consequences of a breach, modification
or termination of an agreement for the making of a taxable
the payment is made by the party that was the recipient of the
supply under the agreement; and
the payment is made otherwise than as consideration for the
Where section 182 applies, the payee is deemed to have
collected, and the payer is deemed to have paid, 13/113 of the
payment as HST. The payee is required to remit this amount to
the tax authorities and the payer may be entitled to claim an ITC
in respect of such amount. The deeming provision transforms what
might otherwise be regarded as a compensatory payment into a
taxable payment and can have a significant impact on the economics
of a settlement, as the payee will receive significantly less than
it bargained for. Conversely, the payer may be paying
significantly less, provided that the payer is entitled to an
Instances in which section 182 can have application include:
the cancellation of a contract for services that results in the
purchaser paying an amount to the service provider;
the breach of a contact for the sale or lease of property that
results in the purchaser/lessee paying an amount to the
a liquidated damages clause in an agreement; and
a dispute resulting in the substitution of one agreement for
The CBB Tax Group can suggest ways in which to manage the
exposure to these HST consequences and to ensure that clients get
what they bargained for.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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