Exclusion of certain damages
[S]ituations where one or more of the conditions in subsection 182(1) are not met ... include:
- no prior agreement for the making of a supply existed between the parties;
- the original agreement was for the making of an exempt or a zero-rated supply;
- the amount is not paid or forfeited to the person making the original supply, or used to reduce or extinguish a debt of the supplier, e.g., where the person making the payment is the supplier of the original supply;
- the original agreement was for the making of a supply by a person who was not a registrant;
- the payment is consideration for the supply under the agreement; or
- the amount is paid otherwise than as a consequence of the breach, modification or termination of the agreement for the making of a supply.
... There are situations where one person makes a payment to another person as compensation for damages and the payment is not subject to GST/HST. However, there are also situations where a payment is made in the context of a claim for damages, but the payment can be linked to the provision of a taxable supply of property or a service made by the payee in return for the payment, and for which purpose the payment is being made. This type of payment would be subject to GST/HST.
Example No. 3
- The lessee of leased equipment agrees to pay the lessor, a registrant, damages for damage to the leased equipment due to improper use.
- Result: s. 182(1) applies and the payment and 6/106 or 14/114 of the payment is deemed to be GST or HST.
Example No. 4
- The purchaser of software services agrees to release the software service supplier from its contractual obligations.
- Result: s. 182 does not apply because the payment was not made under the original agreement, and the payment is not subject to GST/HST.
Example No. 7
- An amount received by a registrant (Qco), following trade name and logo infringement by Rco and upon a court settlement, in exchange for Qco’s agreement to change its name to Zco, is not subject to s. 182(1 and is consideration for a taxable supply.
