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In everyday business, we understand the implication of GST/HST on our supplies and purchases but there are some unusual situations wherein we need to go back to the law to understand its impact on our business.
One such situation which needs to be carefully looked into is disputes arising as a result of a breach of contract. The disputes often end up in court or arbitration and one party is awarded settlement/ damage payment.
Such a situation is covered under Section 182 of ETA. Section 182 levies GST/HST on payment made to a registrant as a consequence of a breach, modification, or cancellation of an agreement (other than as consideration for a supply) deeming it to be a taxable supply. The applicability of this provision is subject to certain conditions. Therefore, it is important to make an in-depth analysis to understand the applicability of this provision to the facts of the case.
Canada Revenue Agency (CRA) has issued a policy statement (P-218) explaining the application of section 182 of the ETA in the context of such payments. The policy statement elaborates the application of GST/HST on payments made while listing certain exceptions. The CRA provides a few examples as well to explain when these rules would and would not apply.
In the event company fails to correctly understand the GST/HST implication in these kinds of scenarios, the payments received shall be deemed to be inclusive of tax. Thus, it shall result in the reduction of the amount received to the extent of 5/105 or 13/113 in Ontario. Alternatively, if you are the party whose making the payment, you can lose out on input tax credit in the event of an oversight. It would be prudent to understand the GST/HST implications through an expert while carefully drafting the contract.
For assistance or advice with applying these rules, please contact our team. Leyton has a huge team of Indirect Tax professionals who possess vast experience in dealing with complex subjects like this.
Bhavnoor Singh Bhatia – Sales Tax consultant