Canada: When Do You Need To Charge GST/HST On Chargebacks?

Many trucking companies have entered into arrangements with subcontracted carriers or owner-operators/contractors for charges such as fuel, insurance, or licensing fees. Anyone who has entered into such an arrangement should review their contracts from a GST/HST perspective. While the nature of such a payment may not make a material difference economically, the parties may be unknowingly exposing themselves to GST/HST liability.

Very generally, GST/HST must be charged on the consideration paid in respect of a taxable supply (e.g., sale) made in Canada. A true reimbursement for out-of-pocket expenses should not be regarded as consideration for a supply and, therefore, should not attract sales tax. Depending on the nature of the agreement, the amount of a chargeback payable under the agreement may be consideration for a supply or it may be a reimbursement. Sometimes the parties to an agreement use the word "reimbursement" without considering whether that is the appropriate legal term in the context, creating confusion with respect to the appropriate GST/HST treatment.

The following is an illustrative example for purposes of this discussion. Assume a trucking company (the "Primary Carrier") subcontracts certain freight movements to another company (the "Subcontracted Carrier") and pays the Subcontracted Carrier a fee (the "Transport Fee"). The Subcontracted Carrier has the option to acquire insurance, motor vehicle licenses, fuel, and/or other items (the "Purchased Items") from the Primary Carrier. The amount the Subcontracted Carrier owes for the Purchased Items is partially offset against the Transport Fee and the Primary Carrier pays to the Subcontracted Carrier the net amount.

There have been several tax disputes arising from whether the amount payable by a Subcontracted Carrier to a Primary Carrier for the Purchased Items, in situations similar to the one described above, is subject to GST/HST.

For example, the CRA took the position in a 2001 Federal Court of Appeal ("FCA") case that the Primary Carrier should have charged GST/HST on the Purchased Items. The Primary Carrier was assessed for unremitted GST/HST. The FCA found that the Primary Carrier was purchasing the Purchased Items (in this case, insurance, motor vehicle licenses, and fuel) on its own account and reselling those items to the Subcontracted Carrier. The FCA upheld the CRA's assessment.

Similarly, in a 2021 Tax Court of Canada case, the CRA assessed a Primary Carrier approximately $120,000, representing the GST/HST the CRA alleged the Primary Carrier failed to charge on fuel charges in relation to pre-funded T-Check cards issued to a Subcontracted Carrier for fuel purchases. The Primary Carrier in this situation was found to be reselling the fuel but, since most of the fuel was purchased in the U.S. (rather than Canada), was able to reduce the assessed amount to $35,000. While the Primary Carrier enjoyed a partial win, it still needed to expend time and other resources to challenge the assessment through the administrative and court process. Further, unlike income tax disputes where CRA's collection powers are held in abeyance, the CRA can take collection action while a GST/HST assessment is in dispute.

Rather than structuring an agreement to be a "resale," an agreement can be structured to be a true reimbursement for out-of-pocket expenses. In a reimbursement situation, the amount paid to the Primary Carrier by the Subcontracted Carrier is not subject to GST/HST. This type of arrangement was the subject of a 2001 FCA case, where the court found that amounts paid for licenses and insurance were not subject to GST/HST.

Whether the Primary Carrier is "reselling" the Purchased Items to the Subcontracted Carrier will depend on the terms of the relevant agreement. Some indicators include, but are not limited to: charging a markup, charging a flat rate for fuel (rather than the actual rate the fuel was purchased), and the identity of the party legally responsible to pay for the item.

It is important that Primary Carriers understand the nature of their agreement and confirm that their GST/HST treatment of contractor chargebacks is correct. This should also be important for directors of Primary Carriers, as they can be held personally liable for unremitted GST/HST.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.