Revenu Québec recently published an interpretation on the application of GST/QST to a payment made to terminate a commercial lease, which clarifies that, in the circumstances provided, the payment is consideration for a supply of intangible personal property (IPP) and is not covered by section 182 of the ETA.
This interpretation states in particular:
“In June 20X2, Landlord and Tenant entered into an agreement (Agreement) to terminate the Lease effective January 31, 20X3.
The Agreement provides for the termination of the Lease in consideration of the payment by Landlord to Tenant of an indemnity of $*****, payable in various instalments until March 1, 20X4.
In civil law, a lease is defined as a contract by which one person, the lessor, undertakes to provide another person, the lessee, with the enjoyment of movable or immovable property for a certain period of time, in return for rent. The right to enjoy the property is a personal right, not a real right.
The alienation of a personal right, as provided for in the Agreement, constitutes a supply of intangible personal property (IPP).
Section 182 of the ETA covers cases where, as a result of the termination of an agreement for the making of a taxable supply, an amount is paid by a person to a registrant otherwise than as consideration for the supply. Having previously determined that the amount of $***** paid by the Landlord constitutes consideration for a supply of IPP, it follows that section 182 of the ETA cannot apply.”
The application of GST/QST is not obvious for this type of payment. In this specific case, section 182 of the ETA does not apply, since the indemnity is paid by the landlord and not by the tenant. Section 182 of the ETA provides that when an amount is paid to the supplier to terminate an agreement for a taxable supply, this amount is generally covered by section 182 of the ETA. This distinction is very important for both the payer and the recipient of the compensation, because when section 182 of the ETA applies, the GST/QST is deemed to be included in the amount of compensation paid, whereas, if it is consideration for a taxable supply of IPP, the amount of GST/QST will apply in addition to the amount of compensation paid.
Do not hesitate to contact us if you need help determining the application of GST/HST/QST for payments of a compensatory nature such as lease termination.
