3 December 1999 GST/HST Interpretation 7730/HQR0001336 - Application of the GST/HST to Flight Training

GST/HST Rulings and Interpretations Directorate Place de Ville, 320 Queen Street Tower "A", 14th Floor, Ottawa, ON K1A 0L5XXXXXAttention: XXXXX

7730/HQR0001336December 3, 1999

Subject:

GST/HST INTERPRETATION Application of the GST/HST to Flight Training

Dear XXXXX

Thank you for your letter concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of flight training courses. I apologize for the delay in responding to your inquiry.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency ("CCRA").

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. It is our understanding that XXXXX[.]

Statement of Facts

Our understanding of the background facts is as follows:

XXXXX

Interpretation Given

Is the GST applicable to the XXXXX supplies of flight training?

Interpretation Given

When supplied by a vocational school, the following are exempt supplies:

•   Ground school training, dual and solo flight times for the Commercial Pilot Licence (Aeroplane) and the Airline Transport Pilot Licence; and

•   Ground school training, dual and solo flight times for the following Ratings:

•   multi-engine rating;

•   instrument flight rating;

•   VFR Over-the-Top rating;

•   night rating;

•   sea plane rating;

•   land plane rating; and

•   flight instructor rating[.]

Please be aware that only the minimum flight time requirements, as outlined in the federal legislation, will be eligible for exemption. The Aeronautics Act, the Canadian Aviation Regulations (CARs) and the Canadian Aviation Regulations Standards (CARs Standards), which are collectively referred to herein as "federal legislation", set out the minimum flight time requirements an individual must meet in order to obtain a Commercial Pilot Licence (Aeroplane) and the Airline Transport Pilot Licence. The federal legislation also sets out minimum flight time requirements an individual must complete in order to obtain classes or ratings in respect of these licences. Flight times that exceed these minimum requirements are subject to the GST at a rate of 7%. Where the supplier is not a vocational school, all the above supplies are subject to the GST at a rate of 7%.

Regardless of whether the supplier is a vocational school, the following are taxable supplies:

•   Ground school training and all flight time requirements (solo, dual, and build-up) in relation to the Private Pilot's Licence (Aeroplane) and the Recreational Pilot Permit;

•   Build-up time for the Commercial Pilot Licence (Aeroplane) and the Airline Transport Pilot Licence;

•   Build-up time for flight instructor ratings; and

•   Flight time in excess of the minimums set by federal legislation.

Please refer to the analysis section for information with respect to whether an organization qualifies as a vocational school. Additionally, the analysis section will provide a detailed explanation of the above interpretation.

Analysis

Section 8 of Part III of Schedule V to the Excise Tax Act ("section 8") states the following:

A supply, other than a zero-rated supply, made by a school authority, vocational school, public college or university of a service of instructing individuals in, or administering examinations in respect of, courses leading to certificates, diplomas, licences or similar documents, or classes or ratings in respect of licences, that attest to the competence of individuals to practice or perform a trade or vocation where

(a) the document, class or rating is prescribed by federal or provincial regulation;

([b]) the supplier is governed by federal or provincial legislation respecting vocational schools; or

(c) the supplier is a non-profit organization or a public institution.

XXXXX

A. the organization making the supply must be a vocational school;

B. the organization making the supply must

(a) issue certificates or licenses prescribed by federal or provincial regulation;

(b) be governed by provincial legislation respecting vocational schools; or

(c) be a non-profit organization or a public institution; and

C. the supplies of instruction in courses must lead to a certificate or licence that attests to the competence of individuals to practice a trade or vocation.

Each of these criteria are discussed below.

A. The Organization Making the Supply Must be a Vocational School

Prior to January 1, 1997, the definition of "vocational school" in section 1 of Part III of Schedule V to the Excise Tax Act ("section 1") included an organization certified for purposes of subsection 118.5(1) of the Income Tax Act ("ITA"), whether or not it was primarily an educational institution. Effective for supplies made after 1996, the definition of vocational school was amended to remove any reference to subsection 118.5(1) of the ITA. Section 1 now defines a vocational school as an organization that is "established and operated primarily to provide students with instruction in courses that develop or enhance students' occupational skills." Accordingly, organizations that previously qualified as vocational schools because they were certified for the purpose of subsection 118.5(1) of the ITA, will no longer qualify if they are not established and operated primarily to provide students with instruction in courses that develop or enhance students' occupational skills.

An organization will qualify as a vocational school if it meets all of the requirements of the definition, as follows:

•   it must be established primarily to provide instruction in courses that enhance students' occupational skills;

•   it must be operated primarily to provide instruction in courses that enhance students' occupational skills; and

•   the courses offered by the organization must enhance students' occupational skills.

To ascertain whether an organization is "established primarily" to provide courses that enhance students' occupational skills, CCRA will review the organization's governing documents. These documents, which include letters patent, articles of incorporation, memoranda of agreement, by-laws, and articles, should contain information as to the reason or purpose for the establishment of the organization. In circumstances where this information is not readily available, how the organization is operated will be evidence of the purpose for its establishment. Also, where an organization is governed by provincial legislation respecting vocational schools, this will be considered as an indication that one of the main purposes of the organization is to provide vocational training. However, registration with a province as a vocational school is not in and of itself conclusive evidence that the organization is "established primarily" as a vocational school for purposes of the Excise Tax Act ("ETA").

CCRA will consider an organization to be "operated primarily" to provide correspondence courses or instruction in courses that develop or enhance students' occupational skills, if more than 50% of its total annual revenues are derived from, or are related to, instruction in courses that develop or enhance students' occupational skills.

CCRA does not consider as developing or enhancing students' occupational skills courses in respect of sports, games, hobbies or other courses that are designed to be taken for recreational purposes, or for personal interest. The purpose or the intent of the course may be obtained from a review of the curriculum and the organization's promotional materials.

Courses leading to the Private Pilot Licence and Recreational Pilot Permit are considered to simply allow the holder to operate a particular mode of transportation for personal use (similar to a private passenger vehicle licence). The holder of a Private Pilot Licence or a Recreational Pilot Permit does not normally derive an occupational benefit from having that license. It is only where the person acquires a commercial pilot licence that an occupational benefit may be realized. Thus, private and recreational pilot lessons are not considered to develop or enhance students' occupational skills and revenues derived therefrom will not be included in the revenue calculation as revenues derived from, or related to, instruction in courses that develop or enhance students' occupational skills. Where a flight school derives most of its revenue from the provision of private and/or recreational pilots' lessons, the school will not be considered to be operated primarily to provide instruction in courses that develop or enhance students' occupational skills.

It is the position of CCRA that the following programs develop or enhance students' occupational skills:

•   Commercial Pilot Licence (Aeroplane);

•   Airline Transport Pilot Licence;

•   VFR Over-the-Top rating;

•   night rating;

•   multi-engine rating;

•   instrument flight rating;

•   sea plane rating;

•   land plane rating; and

•   flight instructor ratings.

In addition, the Basic Commercial Pilot Licence (Aeroplane) and Advanced Commercial Pilot Licence (Aeroplane) are considered to be programs that develop or enhance students' occupational skills. Both programs are part of an Integrated Commercial Program to be introduced by Transport Canada in the year 2000.

Federal legislation sets out minimum requirements or elements that must be completed by a student in order to obtain a Commercial Pilot Licence (Aeroplane) an Airline Transport Pilot Licence; and Classes or Ratings in respect of these licences. For example, as per the legislation, students seeking to obtain a Commercial Pilot Licence (Aeroplane) must complete a minimum amount of ground school instruction (40 hours), solo flight time instruction (30 hours), dual flight time instruction (35 hours) and build-up flight time (90 hours). Revenues derived from the minimum requirements set by the federal legislation may be included in the revenue calculation as revenues that relate to the provision of instruction in courses that develop or enhance students' occupational skills. Therefore, revenues derived from 40 hours of ground school, 30 hours of solo flight time instruction, 35 hours of dual flight time instruction and 90 hours of build-up flight time related to the Commercial Pilot Licence (Aeroplane) will be included in the revenue calculation as revenues that relate to the provision of instruction in courses that develop or enhance students' occupational skills.

Similarly, revenues derived from the 625 hours of solo flight time and the 875 hours of build-up time associated with obtaining an Airline Transport Pilot Licence, along with revenues derived from the flight time requirements for Classes or Ratings, will also be included in the revenue calculation as revenues that relate to the provision of instruction in courses that develop or enhance students' occupational skills.

Hours of instruction provided to a student over and above the minimums set by federal legislation will not be included in the revenue calculation, as revenues derived from courses that develop or enhance students' occupational skills. Where revenues derived from courses that develop or enhance students' occupational skills exceed 50% of an organization's total annual revenues, the organization will qualify as a vocational school within the meaning of section 1.

Please note that grants and contributions received from government bodies to provide occupational training courses to individuals will also be included in the calculation of revenues received for providing instruction to individuals.

An organization should review its operations on a yearly basis to ascertain whether it qualifies as a vocational school. If an organization meets the requirements of a vocational school in its previous fiscal year, it will continue to be a vocational school for the following fiscal year. However, if in that following year, the organization fails to meet the requirements in the definition (i.e., it is not operated primarily) it will cease to be a vocational school for supplies made after that year.

B. The Organization Making the Supply Must

(a) Issue Certificates or Licences Prescribed by Federal or Provincial Regulation;

(b) Be Governed By Provincial Legislation Respecting Vocational Schools; Or

(c) Be A Non-Profit Organization Or A Public Institution.

Commercial Pilot Licences (Aeroplane), Airline Transport Pilot Licences and Ratings are all prescribed by federal legislation; therefore, this condition has been met.

D. Instruction in Courses Leading To A Certificate, Diploma, Licence or Similar Document That Attests to the Competence of Individuals To Practice A Trade or Vocation

It is our position that courses or instruction leading to a Private Pilot Licence or Recreational Pilot Permit do not relate to a trade or vocation, and are not exempt pursuant to section 8. However, ground school instruction components of commercial pilot programs and ratings are exempt pursuant to section 8 when supplied by a vocational school. With regard to dual and solo flight time, CCRA considers the student to be under instruction and direct supervision. For the purposes of the build-up time, the student is not considered to be under instruction and direct supervision.

As stated above, only the minimum required time, as set out by the federal legislation, is exempt pursuant to section 8. Where a student purchases hours of flight time over and above that set out as the minimum requirements in the federal legislation, the additional hours will not be exempt pursuant to section 8.

The following summarizes the application of the GST to supplies of flight time supplied by a vocational school:

(a) Private Pilot Licence (Aeroplane) & Recreational Pilot Permit

The CCRA does not consider flight time leading to a Private Pilot Licence (Aeroplane) or a Recreational Pilot Permit to be exempt under section 8, since they do not have a direct link to skills that are recognized as relating to the ability to gain or retain employment. Specifically, we consider these licences to be obtained for personal interest, providing the individual with the right to fly a vehicle, and therefore not related to a trade or vocation. Supplies of flight time leading to a Private Pilot Licence (Aeroplane) or a Recreational Pilot Permit are subject to the GST at a rate of 7%.

(b) Commercial Pilot's Licence (Aeroplane)

The federal legislation stipulates that an individual must complete the following flight time, in order to obtain a Commercial Pilot Licence (Aeroplane):

Dual flight time	35 hours
Solo flight time	30 hours
Total hours from private licence instruction	45 hours
Build-up flight time	90 hours

The supply of the 35 hours of dual flight time and the 30 hours of solo flight time are exempt supplies pursuant to section 8.

The 45 hours flight time from the private licence instruction is not exempt under section 8, since it does not otherwise meet the requirements of the section.

The 90 hours build-up time is not exempt under section 8, since the student is not under instruction and direct supervision while completing the 90 hours of build-up time. The supply of the 90 hours of build-up time is subject to the GST at a rate of 7%.

(c) Airline Transport Pilot Licence

The following flight time must be completed, pursuant to the federal legislation, in order for an individual to obtain an Airline Transport Pilot Licence:

Solo flight times	625 hour[s]
Build-up flight time	875 hours

The supply of the 625 hours of solo flight time is an exempt supply pursuant to section 8.

The 875 hours build-up time is not exempt under section 8, since the student is not under instruction and direct supervision while completing the 875 hours of build-up time. The supply of the 875 hours of build-up time is subject to the GST at a rate of 7%.

(d) Classes or Ratings in Respect of Pilots' Licences

The solo and dual flight time required by federal legislation for the following ratings is exempt under section 8:

•   multi-engine rating

•   instrument flight rating

•   VFR Over-the-Top rating

•   night rating

•   sea plane rating

•   land plane rating

The federal legislation sets out 4 different classes of flight instructor rating. Pursuant to the federal legislation, an individual must complete a minimum amount of dual flight time and a minimum amount of solo flight time, in order to obtain each class of flight instructor rating. This dual flight time and solo flight time is exempt pursuant to section 8.

The federal legislation also mandates that a student complete an additional 100 hours of build-up flight time for the Class 1 flight instructor rating and 150 hours of build-up flight time for the Class 2 flight instructor rating. Neither of these blocks of build-up time are exempt under section 8. These supplies are subject to the GST at a rate of 7%.

In order to obtain a Class 3 or Class 4 flight instructor rating, a student must complete a certain amount of dual flight time and solo flight time. These blocks of time are exempt pursuant to section 8 since we consider a student to be under instruction and direct supervision for the purposes of dual and solo flight time.

(e) Integrated Commercial Course

As noted earlier, in the year 2000, Transport Canada proposes to introduce, an Integrated Commercial Course. The Integrated Commercial Course is intended to provide an alternative means for individuals to obtain a commercial licence. The traditional means of obtaining a commercial licence (i.e., by completing the requirements for the Private Pilot Licence (Aeroplane) and then the Commercial Pilot Licence (Aeroplane)) will continue to be available.

There will be two licences that can be obtained through the Integrated Commercial Course: the Basic Commercial Pilot Licence (Aeroplane) and the Advanced Commercial Pilot Licence (Aeroplane). Both licencing programs will consist of large amounts of ground school instruction, solo flight time and dual flight time. There will not be a requisite element of build-up flight time in either program.

The supplies of solo flight time and dual flight time will be exempt pursuant to section 8 where all other requirements of that section are met. Supplies of the ground school instruction will also be similarly exempt.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings, and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation. A copy of section 1.4 of Chapter 1 of the GST Memorandum Series is enclosed for your reference.

Also enclosed are copies of the following policy statements which, in combination, explain the application of the GST/HST to supplies of flight training instruction:

•   P-229 Definition of "Vocational School" in Section 1 of Part III of Schedule V to the ETA

•   P-231 Courses That Qualify for Exemption Pursuant to Section 8 of Part III of Schedule V to the ETA

•   P-034R Tax Status of Flying Time Pursuant to Section 8 of Part III of Schedule V to the ETA

Should you have any further questions, or require clarification with respect to the matters discussed herein, please do not hesitate to contact Tim Krawchuk (Manager) at (613) 954-7957 or myself at (613) 952-4157.

Yours truly,

Lee Ann Gorman, LL.B.
Technical Analyst
Educational Services and Indians Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

Encl.:	Section 1.4 of Chapter 1 of the GST Memoranda Series P-229 Definition of "Vocational School" in Section 1 of Part III of Schedule V to the ETA P-231 Courses That Qualify for Exemption Pursuant to Section 8 of Part III of Schedule V to the ETA P-034R Tax Status of Flying Time Pursuant to Section 8 of Part III of Schedule V to the ETA
Legislative References:	Section 1 of Part III of Schedule V to the ETA Section 8 of Part III of Schedule V to the ETA
NCS Subject Code(s):	R-11915-7-2