Aug 16th, 2023
Oct 22nd, 2018
By Barry Landy
On July 18, 2018, the Tax Court of Canada rendered a little-known but momentous decision in the case of THD v. The Queen. https://decision.tcc-cci.gc.ca/tcc-cci/decisions/fr/item/316428/index.do
THD was a company that operated a trucking business. One of its clients, McKesson, purported to modify several delivery routes that it had awarded to THD by contract and arbitration ensued.
The arbitrator held that McKesson had improperly modified the contract and that THD was accordingly entitled to damages of $778,000, calculated by applying the terms of the contract to the cancelled or modified routes until the term of the contract, without THD actually having supplied services to McKesson for the period in question. Essentially, the damages were established as a function of the loss of profit by THD for the period in question.
The Minister assessed GST on the basis that THD was deemed to have received the amount of $778,000 as a taxable supply in the course of carrying on its commercial activities, even though McKesson had not paid GST on the amount in question and had not sought or taken any input tax credit with regard to the amount. THD tried to claim the GST from McKesson, but McKesson refused to pay on the basis that the arbitral judgment against it did not include any amount for GST and it had no obligation to pay pursuant to the judgment.
The Tax Court of Canada decided that the Minister was correct. The net result that was from the $778,000 of damages that THD received, it was obliged to remit approximately $39,000 of tax.
In short, damages received for the “modification” of a supply contract were deemed to be GST-inclusive irrespective of whether or not the payor claimed an input tax credit.
The same tax treatment is applicable in all circumstances where a Plaintiff is claiming damages for loss of profit in the context of the operation of a commercial venture. The applicable provision of law will deem that a portion of any damage award received is received on account of GST and QST if an amount is paid to a registrant as a consequence of the breach, modification or termination after 1990 of an agreement for the making of a taxable supply (other than a zero-rated supply).
Any commercial business that is a GST/QST registrant currently involved in legal proceedings where a portion of the claim relates to loss of profit as a result of a contractual breach should give immediate consideration to amending the claim to include GST and QST on the damages being claimed, failing which the amount of damages received will be deemed to include GST and QST, whether or not the payor takes an input tax credit.
For more information regarding this issue, do not hesitate to contact me.