|
Citation: 2004TCC48
|
|
Date: 20040116
|
|
Docket: 2002-706(GST)I
|
|
BETWEEN:
|
|
1219261 ONTARIO INC.,
o/a HIDDEN BAY LODGE,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Hershfield, J.
[1] This is an appeal from a GST
assessment under the Excise Tax Act (the
"Act") for the period of April 1, 1997 to
December 31, 1998 covering the Appellant's commercial
activities for both the 1997 and 1998 years.
[2] The Appellant operates a fishing
lodge in North Western Ontario utilizing seven remote fly-in
fishing camps, access to which is provided from a main lodge.
Guests, primarily from the United States, arrive at the main
lodge by car, some having rented cars at regional airports and
others having driven longer distances.
[3] The fishing packages include the
supply of food for guests during their stay. The issue in the
appeal is the extent to which such supply is zero-rated pursuant
to Part III of Schedule VI of the Act which, subject to
enumerated exceptions, provides:
1. Supplies of food or beverages for human consumption
(including sweetening agents, seasonings and other ingredients to
be mixed with or used in the preparation of such food or
beverages), other than supplies of . . .
[4] While it is not in dispute that
the fishing packages sold by the Appellant included a supply of
basic groceries, the Respondent takes the position that such
supply was an integral part of the fishing holiday sold to
guests. The Respondent relies on the principle in O.A. Brown
v. The Queen[1]
to the effect that where there is one overall supply, the
separate component supplies cannot be isolated for the purposes
of applying a zero rate under Schedule VI.
[5] The Appellant argues that the food
supplies are not an integral part of the overall supply. It
argues that the essence of the supply sold did not require the
provision of food and that having included food supplies in the
package is not determinative of its being considered as an
integral part of the overall supply.
[6] At the hearing of the appeal the
Appellant called two witnesses, namely the President of the
Appellant corporation and the Appellant's accountant.
[7] The Appellant's president (Mr.
Reinke) testified that the Appellant did not charge GST on food
as he was instructed by the CCRA not to do so. He testified that
when GST was introduced he could not find any literature on the
Appellant's type of business so he called the GST hotline and
was told that GST should not be charged on foods that were not
cooked (prepared) for its customers. While Mr. Reinke was
not a good witness (at one point he actually said "I'm
trying to be serious now"), I accept this part of his
testimony. That is, I believe he made an honest attempt to follow
the rules. I accept that he did call the CCRA for instructions on
at least one occasion and was instructed not to collect GST on
food supplies. While such communication lacks in reliability in
terms of the factual background he may have provided at the time,
one can imagine, even today, some eight years after the O.A.
Brown decision, that the Appellant might still be advised
that groceries supplied to outposts in the circumstances of its
business are zero-rated. This is not to pre-judge the
appeal but rather only to underline the difficulty one faces in
determining whether the food supplies in this case are zero-rated
or not. Applying the legislation without the
qualifications advanced in O.A. Brown would clearly
support the view that the food provided in the case at bar
is zero-rated.
[8] Before I elaborate on the facts of
this case, I note that Appellant's counsel advanced a due
diligence argument in respect of both penalties and interest
included under the assessment. The due diligence defence in
respect of the application of penalties is well established.[2] However, there is
no such defence in respect of interest and properly so in my
view. Interest runs with the liability once determined and only
the Minister may waive or cancel the interest liability pursuant
to subsection 281.1(1). There is no common law basis for the
courts to relieve a statutory interest liability. The statutory
basis for doing so rests solely with the Minister. On the other
hand, the statutory authority for the Minister to waive penalties
pursuant to subsection 281.1(2) does not operate to prevent the
courts from exercising their common law authority to relieve
penalties where due diligence has been demonstrated.
[9] I will now elaborate on the facts.
I will summarize them as follows:
· The main
lodge consists of a main building with a dining area and a
kitchen run by a cook employed by the Appellant. There are no
sleeping quarters in the main building. There are separate cabins
near the main building that provide sleeping quarters but there
are no cooking facilities in these cabins.
· The
Appellant promotes the fishing holiday as a package that includes
food supplies and a prepared dinner and breakfast at the main
lodge. Most guests (some 60%) did not stay at the main lodge long
enough for a prepared meal. They were frequently flown directly
to their remote fishing camp on arrival (without dinner) and
would frequently leave the main lodge (without a meal) on being
flown back from the remote camps on the day of departure.
However, Mr. Reinke testified that his guests were well provided
for and that he often had sandwiches for them when they could not
dine at the main lodge.
· The cabins
at the remote fishing camps had propane refrigerators and cooking
facilities. Kitchen supplies and utensils were provided as well
as household and housekeeping supplies. Except in limited cases
at one of seven camps, no cooks were provided. Guides were not
provided at any of the camps.
· Each remote
camp was stocked with food staples ranging from a wide variety of
condiments to a variety of dry goods and canned goods. Dry goods
included flour, cornmeal, fish coating, beer batter, pancake mix,
spaghetti and cereal. Canned good supplies included canned
vegetables, fruits, meats and a variety of soups. Condiments
included a variety of sauces and jams as well as the basics and
specialty items that one might expect in the preparation of fresh
caught fish. Coffee, tea and hot chocolate were stocked as well
as certain boxed juices. These were staples, not separately
ordered by guests. They were stocked as a matter of course in the
operation of the fishing camps. With few exceptions they remained
at each remote camp throughout the season, being restocked as
required. There was an inventory sheet completed by guests and
pilots as required to ensure each camp remained stocked with
these basic provisions.
· In addition
to the basic provisions of the type described above, guests
ordered fresh foods according to their own preferences. Fresh
bread, dairy products, fruit, vegetables and meats so provided
were flown to the remote camps with the guests on their arrival.
Fresh food orders were filled from stores in the main building at
the main lodge.
· Invoices to
guests broke out separate charges for the air transport, fishing
licences and bait but provided no other breakdown. All other
amounts were charged at a daily rate per person, so the Appellant
was unable to track exactly what charges there were for food
except by working backward from invoices which only charged GST
on a portion of the invoiced charges (said to be the non-food
portion of the totals charged). The accountant prepared a
schedule based on sample invoices that he testified were
representative. The schedule calculated the average food portion
of a total average charge per person per day to be $64.00 (out of
$176.50). Based on total sales reported, a total number of
customer days was calculated as well. The resultant calculation
(food charge per day x number of customer days) was that food
charges were $218,624.00 in 1997 and $173,120.00 in 1998. These
were the totals on which the accountant testified GST had not
been paid.[3]
· Based on a
review of purchase invoices and deliberations during an
adjournment, the parties agreed on the following allocations
which total the amounts provided by the Appellant's
accountant:[4]
|
|
1997
|
1998
|
|
|
|
|
|
Fresh Foods (dairy, meats, fruit, vegetables, bread)
|
$99,167.84
|
$80,016.00
|
|
Canned Goods
|
28,486.71
|
19,251.00
|
|
Beverages
|
28,530.43
|
25,310.00
|
|
Dry Goods
|
13,270.48
|
88,988.00
|
|
Condiments
|
16,003.28
|
12,482.00
|
|
Supplies
|
17,402.47
|
15,511.00
|
|
Other Miscellaneous
|
15,762.79
|
11,652.00
|
|
Total:
|
$218,624.00
|
$173,120.00
|
· No
allocations were agreed to as between food supplies used for
prepared foods at the main lodge and supplies used at the remote
camps.
· The
accountant testified that he (his firm) acts for 50 businesses
that offer fishing holidays and that the Appellant is the only
one that supplies food. While he was not specific in his
comparisons, I take his testimony to mean, at least, that other
remote fishing camps would not arrange for fresh food to be
provided by the operator. I cannot assume he meant to testify
that other operations did not provide any foods such as basic
condiments or emergency provisions.
· The
accountant testified that Mr. Reinke told him when they first
talked that he (Mr. Reinke) had been advised not to charge GST on
foods. The accountant testified that in his judgment that
position was appropriate. Groceries bought for guests for
preparation of their own meals were zero-rated in his view
and in talking to Mr. Reinke he confirmed the position that the
CCRA had given.
[10] While I sympathize with the Appellant
to the extent it did not collect GST based on an honest and
reasonable belief that the food component of the charges was not
subject to such tax, I am not impressed with an invoicing system
that does not clearly show, separately, the zero-rated supply and
that ultimately depends on mathematical reconstruction and
extrapolation based on averages derived from representative
sample invoices. Still, there has been sufficient agreement for
me to set aside the burden of proof issue and I commend
Respondent's counsel for his efforts in this regard.
Accordingly, I have been provided agreed upon allocations which I
can work with in the event I find that the principle in O.A.
Brown does not apply.
[11] In O.A. Brown, Justice Rip draws
from English cases which distinguish a single (compound) versus a
multiple supply. A multiple supply is a transaction involving the
supply of separable goods or services. Each supply would
be considered independently for tax purposes. A single
consideration paid for a multiple supply must be apportioned
among the separate supplies. On the other hand, a compound supply
is one where component parts of a supply determine the quality
(nature) of the final (overall) supply. In such cases
apportionment is not appropriate.
[12] As recognized by the English
authorities cited in O.A. Brown, it would, lacking
statutory authority, be wrong to attempt to propound a rigid and
precise definition of a single (compound) supply. Factors
include: the degree of interconnectedness of constituent elements
of a supply; the extent of interdependence; and, whether each is
an integral part or component of a composite whole. Whether the
services are rendered under a single contract, or for a single
undivided consideration, are matters to be considered but are not
conclusive. How can they be? To so find would mean the Minister
could never assess a separate taxable supply where it is coupled
with a non-taxable supply under one contract at one price.
[13] If the test is simply: "Is there a
composite whole being supplied of which a particular supply is a
component?" then the Appellant would fail in this appeal.
The fishing holiday is a composite whole of which food supplies
could reasonably be considered a "component".
[14] On the other hand, if the test requires
an interdependency of component parts or a degree of
interconnectedness such as to make each component a necessary and
integral part of the whole, then the Appellant might well succeed
at least in respect of certain of the supplies.
[15] The maintenance of a supply of food
staples at the remote cabins is part of the operation of the
Appellant. They seem, in common sense, to be components integral
to the fishing holiday offered. Even Mr. Reinke acknowledged
that the canned goods supply was sufficient at each remote camp
to last a month. This was the standard of safety. Supplies in
remote areas are of critical concern. Yes, they are expected to
be consumed to some extent but they were integral to the overall
supply. On the other hand, the supply, by special order, of fresh
foods has nothing to do, necessarily, with the operation of
remote fishing operations. I accept that other fishing operations
do not offer fresh foods on order so it cannot be said that it is
inseparable. There is no interdependency of this component. If
the main lodge had a grocery store and separate fresh food
invoices were done with each order, this case would not be before
me. That the Appellant has not separated the transactions, as
stated above, cannot be determinative. Appellant's counsel
urged me to expand this analogy to the dry goods and beverages.
Simply put, I do not believe the facts, as I have found them in
this case, support extending the same treatment to dry goods and
beverages as I would extend to fresh foods specially ordered by
guests. Mr. Reinke treats the former as staples necessary to the
operation of the remote camps which need to be as well maintained
as the fishing boats do with fuel and lubricants. They are in my
view, on the evidence I have heard, part of the overall package.
However I give the Appellant the benefit of any doubt in respect
of the fresh foods.
[16] Accordingly, I would allow the appeal
in respect of fresh foods in this case if the appropriate test is
that set out in paragraph [14] above. However, I have not yet
answered the question as to whether the appropriate test is the
one posed in that paragraph versus the test posed in paragraph
[13] above. The test cited in paragraph [13] would be easier to
administer and might well be applied based on some of the
jurisprudence in this area; however, applying the test referred
to in paragraph [14] might also be justified based on similar
jurisprudence. Consider two comments made by Justice Rip in
O.A. Brown:
In each case it is useful to consider whether it would be
possible to purchase each of the various elements separately and
still end up with a useful article or service. For if it is not
possible then it is a necessary conclusion that the supply is a
compound supply which cannot be split up for tax purposes.[5]
and in holding certain activities as not being separable
supplies he said:
It is difficult to isolate these buying activities as being
distinct supplies, independent of the whole activity. Only if
taken together do they form a useful service.[6]
[17] While I do not wish, in this informal
procedure case, to categorically reject the test posed in
paragraph [13], I am inclined in this case to allow the appeal by
applying the test posed in paragraph [14]. The Minister has
legislated the Appellant as an agent in the collection of tax.
The Appellant has complied with its best understanding of its
obligations. The CCRA has some responsibility to give its agents
better guidelines than have been afforded here. Where that has
not happened and the Minister presses for compliance relying on
protection from estoppel, I think it is reasonable to apply the
test that affords the Appellant some relief.
[18] There is also the question in this case
as to the allocation between prepared foods and fresh food
orders. Only the latter are zero-rated. The parties have left
that allocation to me.
[19] Using the accountant's averaging
calculations, there were 3,416 customer days in 1998 and 2,705 in
1997. Using the agreed allocations to fresh foods of $99,167.00
in 1997 and $80,016.00 in 1998, there is a per customer day fresh
food cost of $36.00 in 1998 (which seems high) and $23.00 in 1997
(which seems more reliable). Considering that some (40%) of the
guests ate at the main lodge once and possibly twice and that
most of the others got prepared sandwiches at least once and
possibly twice and that the relative need for fresh foods at the
remote camps might be considerably reduced by the availability of
fresh fish and the staples and that one remote camp occasionally
made a cook available to guests and that some of the fresh foods
acquired may never have been supplied to guests (i.e. some
waste), I would venture that less than one-half of the
Appellant's fresh food supplies were fresh foods bought for
consumption at the remote camps. While the burden is on the
Appellant, even the Respondent's counsel acknowledged that if
I found a multiple supply (which he argued against), then some
allocation to fresh foods would be justified.
[20] Having considered probable food
consumption patterns, I believe that 40% of the fresh food costs
is a conservative allocation of what can reasonably be attributed
to use at the remote camps. It may well be higher but on a
balance of probability it is not likely to be lower in my view.
Accordingly, the assessment shall be reduced by 7% of 40% of
$99,167.00 in 1997 and 7% of 40% of $80,016.00 in 1998.
[20] Further, I accept that there has been
sufficient due diligence in this case to require the penalties
assessed to be vacated. As indicated, I have no jurisdiction to
vacate interest.
[21] The appeal is allowed accordingly,
without costs.
Signed at Ottawa, Canada, this 16th day of January 2004.
Hershfield, J.
Email this Content