Whether GST Payabale Addtionally If Contract Is Silent ?
The issue of whether payments under a contract for a taxable supply include GST or whether GST is payable in addition to the payments continues to crop up periodically.
The issue was dealt under the implication of GST Laws in Canada . The question of whether payments under an agreement were GST-extra or GST-included arose in the CSE Driver Enhancement case.
Issue – An individual carried on business in Nova Scotia as a driving instructor under the name “CSE Driver Enhancement”. The individual entered into an arrangement with a driving school to provide instruction services as an independent contractor. The parties entered into a contractor agreement in April 2005 specifying that the individual was an independent contractor, but the agreement was silent on the application of harmonized sales tax under the Excise Tax Act (the “Act”), likely because at the time the individual was a “small supplier”.
The operator of the driving school was registered under the Act but, during the relevant period, had elected to use the quick method of GST accounting so that he was unable to claim input tax credits. The individual did not initially register for GST purposes, but was advised by the Canada Revenue Agency (“CRA”) in September 2007 that he had ceased to be a small supplier as of February 2006 and was required to collect HST on the amounts paid to him under the agreement from that time on.
The individual notified the driving school and issued an invoice for the HST that he had not collected for periods back to February 2006. The driving school refused to pay the HST, but did pay HST on invoices issued for subsequent periods.
Litigation -The individual brought a small claims action to recover the HST. The driving school argued that the contract should be interpreted to include the tax. The Court noted that the operator of the school was an experienced businessman who was aware of the requirement for suppliers to collect and remit HST.
The Court stated that the obligation to pay GST is on the recipient of a taxable supply and that obligation cannot be changed other than by way of an express provision in a contract, i.e., making the payments GST-included.
The Court also noted that earlier cases had concluded that where a contract is silent as to the application of GST, the tax should be considered as being payable in addition to the amounts payable under the contract. Further, the obligation of the individual to disclose the amount of tax payable had been satisfied by issuing an invoice after he had been assessed by the CRA.
Accordingly, the Court found that the individual had the right to recover the HST and the fact that the driving school had been using the quick method of accounting and could not claim an offsetting input tax credit was not relevant. The Court also confirmed, however, that the individual had no right to recover the penalty and interest assessed against him by the CRA.
This was consistent with how other decisions have dealt with the recovery of penalty and interest by a supplier. The decision in CSE Driver Enhancement is another case that follows the general line that
where a contract is silent as to the application of GST, the tax is payable in addition to any payments under the agreement.
Given that the courts have been fairly consistent in applying this interpretation that where
suppliers that fail to collect and remit GST can generally be confident that they can recover the tax if necessary where there is no express GST provision.
As noted, however, the practical approach is to deal with the application of GST upfront. This will become even more important with the implementation of HST in Ontario and British Columbia effective July 1, 2010. ( Source CCH , Canada )