3 April 2017 Interpretation 164742

A registered corporation, in a judgment for infringement of its copyright, was awarded costs on a solicitor and client scale plus GST/HST thereon. Should any GST or HST be included in its net tax calculation under s. 225(1)(a)?

In giving its interpretation that “where the Court awards judicial costs plus GST or HST directly to a winning party, there is no amount of GST or HST to be included in the net tax calculation under paragraph 225(1)(a),” CRA stated:

The costs awarded by the Court directly to the winning party are not subject to the general taxing provisions, as they do not constitute consideration for a taxable supply or a service and do not form part of the consideration paid for the lawyer’s services of the winning party. In order for a party to be the recipient of a taxable supply, the other party must be conferring something of value to him in exchange for the payment. Since the losing party has received nothing in exchange for the payment of judicial costs, there is no supply made and the payment falls outside the scope of the Act. As a result, generally, where judicial costs, including reasonable disbursements and applicable taxes are awarded by the Court to the winning party, there is no amount of GST or HST to be included in the net tax calculation under paragraph 225(1)(a). In other words, since the amount awarded is not consideration for a taxable supply, the amount equal to the GST/HST that is included does not represent an amount collectible or collected as or on account of tax that has to be included in the net tax calculation.

A registered corporation, in a judgment for infringement of its copyright, was awarded costs on a solicitor and client scale plus GST/HST thereon. Should any GST or HST be included in its net tax calculation under s. 225(1)(a)?

In providing its interpretation that “subsection 225(3.1) does not apply to the solicitor-client costs awarded by the Court as this amount was not otherwise rebated, refunded or remitted to the Corporation, or otherwise recovered by the Corporation under the ETA or other Act of Parliament,” CRA stated:.

[L]egal fees were paid by the Corporation in the course of a lawsuit launched under the Copyright Act to protect its copyright. Therefore, the Corporation is entitled to claim an ITC in relation to the GST/HST paid or payable on the fees incurred since it was the recipient of these legal services, to the extent that they were acquired for consumption, use or supply in the course of the Corporation's commercial activities. The awarding of costs by the Court does not change the recipient of the legal services, and the restrictions to ITC entitlement under subsection 225(3.1) do not apply in this case.

CRA considered that as court awards of costs (including any award on a solicitor and client scale) “do not constitute consideration for a taxable supply or a service and do not form part of the consideration paid for the lawyer’s services of the winning party,” that party is not required to account for any GST or HST in computing its net tax for the reporting period in question, even where the award of such costs included a GST or HST amount.