Chroniques Juridiques

Collecting sales taxes : our civil courts will not allow it

October 2023 – In Construction VX Inc. c. Lainco Inc.[1], the Superior Court of Quebec confirmed that sales taxes had to be subtracted from the amount of compensation a corporate entity or a subrogated insurer is allowed to receive.

As the principle of fair compensation is deeply rooted in Quebec’s legal framework (especially when it comes to the payment of damages), we shall examine how said principle has been applied by our courts in connection with the payment of sales taxes – a matter that raises a few subtleties which are rather unique to tax law.

Relevant context

Following the occurrence of a loss, the breakdown of the costs associated with corrective work, materials, manpower, and related services (as shown on invoices) will most likely include specific amounts which are payable as sales taxes. Within the province of Quebec, relevant case law confirms that such amounts will not be refundable whenever the corporate entity to whom the insurer must pay insurance proceeds (and who, in fact, may be the insured party or any third-party claimant) is registered with a program that allows for recovery.[2]

Hence, the subrogated insurer must withdraw from the claim it files against the responsible third party the amount of any and all sales taxes that appear on the invoices it submits as supporting evidence. The same reasoning must apply to the corporate entity who sues its insurer in order to be paid insurance proceeds. Conversely, the civil liability insurer who is ordered to compensate the damages sustained by a corporate entity will be entitled to deduct the amount of sales taxes from the indemnity it must pay.

As a principle, fair compensation precludes enrichment

In Langlois c. Great American Insurance Company[3], a case that dates back to 2015, the Plaintiff requested that their Insurer compensate the damages caused to a fishing boat that had caught fire while renovations were carried out. The Superior Court of Quebec, while granting the claim, reduced the quantum of damages by refusing to allow for the refund of the sales taxes calculated on the invoices submitted by the Plaintiff. As Langlois Navigation Inc. was registered with the input tax credit (ITC) program, the Court stated as follows:

« In such a context, allowing the plaintiff to recover the amount of sales taxes would amount to enrichment rather than to compensation. »

The same reasoning was followed in 2016 in a case known as Entreprises LT Ltée c. Forage et dynamitage de la Rive-Sud Inc.[4], in which the Plaintiff requested compensation for the damages caused to stone-crushing equipment by a metal rod the Defendant had inadvertently left on the jobsite. The Superior Court of Quebec, while concluding that Forage et dynamitage de la Rive-Sud Inc. was indeed responsible for the loss, refused to order the refund of sales taxes on account of the fact that Entreprise LT Ltée was registered with a program that allowed for the reimbursement of such taxes:

« Such a refund by tax authorities would correspond to a second indemnity, which goes against the fair compensation principle. »

In Bozzi c. Daigle[5], a case ruled upon in 2019, the Superior Court of Quebec once again excluded sales taxes from the insurance proceeds payable in connection with the correction of construction defects.

The same principle still applies in 2023. In Construction VX Inc. c. Lainco Inc.[6], a case in which each party claimed that the other was responsible for the damages caused to a construction project located in the municipality of Amos, the Superior Court of Quebec refused to grant the refund of sales taxes on account of the fact that both corporations were registered with the input tax credit program.

« This court has come to the conclusion that sales taxes cannot be added to the amount of the claim, since they would overlap with the input tax credit both parties are entitled to. »

What we must keep in mind

From the standpoint of reviewers and claim adjusters, amounts invoiced as sales taxes cannot be paid to an insured party or a third-party claimant who also happens to be a corporate entity that is registered with a sales tax recovery program such as input tax credits (ITCs) or input tax refunds (ITRs). As emphasized on several occasions by the relevant case law, refunding sales taxes to a corporation who is entitled to recover them from the outset would amount to double indemnity and personal enrichment – two (2) outcomes that fly in the face of the fair compensation principle.

[1] 2023 QCCS 1755

[2] Such as input tax credits (ITCs) and input tax refunds (ITRs).

[3] 2015 QCCS 791, par. 131.

[4] 2016 QCCS 1672, par. 74.

[5] 2019 QCCS 5155, par. 97.

[6] 2023 QCCS 1755, par. 171.