Trucking companies that charge subcontracted carriers, owner-operators, or contractors for things like fuel, insurance, or licensing fees may want to review their contracts and billing practices since those charges might be subject to GST/HST.

Economically, whether a payment is treated as revenue or a reimbursement may not make a material difference to the parties involved. But, for tax purposes, it is important to get it right and make sure you are remitting GST/HST to the Canada Revenue Agency (CRA) when it’s due. A director of a corporation could potentially be personally liable for the amount of tax assessed by the CRA.

Generally, subject to several exceptions, GST/HST must be charged in respect of the sale of property and services. However, a payment of a reimbursement does not attract sales tax. It can sometimes be hard to distinguish whether, in the context of GST/HST, a payment is in respect of a “sale” or considered a “reimbursement”. To complicate things, sometimes the term “reimbursement” is used between parties without considering whether it is the proper legal term to use.

Take, for example, a situation in which a trucking company (primary carrier) subcontracts certain routes to another company (subcontracted carrier).

The primary carrier agrees to pay the subcontracted carrier a certain percentage of the gross revenue from the particular route or pays an amount per kilometer – a transport fee. The primary carrier also provides the subcontracted carrier with the option to purchase items like insurance, motor vehicle licenses, and fuel.

The cost of purchased items that the subcontracted carrier is due to pay the primary carrier may be deducted from the transport fee that the primary carrier owes the subcontracted carrier. So, the amounts are partially offset. The primary carrier pays the subcontracted carrier the net amount.

Tax disputes

This type of arrangement has been the focus of several tax disputes.

In a 2001 Federal Court of Appeal case, the CRA took the position that the primary carrier should have charged GST/HST on the purchased items, and it assessed the primary carrier for the unremitted GST/HST. The court agreed with the CRA and upheld the reassessment. It was found that the primary carrier was purchasing the insurance, motor vehicle licenses and fuel, and reselling those items to the subcontracted carrier.

A similar result occurred last year in a case when the CRA assessed a primary carrier approximately $120,000 for failing to charge GST/HST on fuel charges. The subcontracted carrier had been issued a pre-funded T-Chek card, which was used to purchase fuel. The reassessed amount was reduced to approximately $35,000 by the Tax Court of Canada based on a technicality since most of the fuel was purchased in the U.S. However, the CRA can still take steps to collect the reassessed amount owing until the dispute is resolved.  

It is possible to structure an arrangement to be a true reimbursement. In another 2001 case, the contract clearly stated the primary carrier was only arranging for insurance and licences for the subcontracted carrier, and there was no resale between the two parties. The Federal Court of Appeal found that the amounts the subcontracted carrier paid the primary carrier for the licenses and insurance were not subject to GST/HST.

Some indicators that a primary carrier is “reselling” purchased items to a subcontracted carrier include: charging a markup, charging a flat rate for fuel (when, as we all know, fuel charged at the pump fluctuates constantly), and who is legally responsible to pay for the items in the first place. However, it will come down to the specific terms of the particular contract.

• Colleen Ma is a Tax Partner in Miller Thomson’s Calgary office. This article was co-authored by Thomas Ghag, an Associate in Miller Thomson’s Vancouver office. This articles is for informational purposes only and does not constitute legal advice.