Date: 20011115
Docket: 2001-405-GST-I
BETWEEN:
CINNAMON CITY BAKERY CAFÉ INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Hamlyn, J.T.C.C.
[1]
This is an appeal from an assessment under Part IX of the
Excise Tax Act (the "Act") dated November
15, 1999.
[2]
Cinnamon City Café Inc. (the "Appellant")
was incorporated pursuant to the laws of British Columbia and was
registered under Part IX of the Act, in 1994. The
Appellant was required to file its GST returns on a quarterly
basis. Between 1994 and 1999, the Appellant established and
operated cafés in major shopping malls in western Canada
and subsequently sold the cafés as franchises. The
Appellant sold a total of 13 franchises and collected a total of
$260,000.00 in franchise fees. On November 15, 1999, the Minister
assessed the Appellant Goods and Services Tax ("GST")
of $18,200.00, not remitted on the collected franchise fees. The
Appellant filed a Notice of Objection on March 6, 2000. The
Minister confirmed the assessment on October 30, 2000. The
Appellant filed a Notice of Appeal with the Tax Court of Canada
on January 25, 2001.
[3]
From Exhibit A-1 - "Franchise Agreement", the
franchisee, upon payment of the franchise fee, obtained a grant
of a franchise and a turnkey retail store utilizing the
Appellant's format and system and obtained the benefits of
the Appellant's training services, format of operation, the
trademarks and the goodwill.
[4]
The Appellant admitted that GST on the franchise fees was not
collected. However, the Appellant argued that GST was not
collected because section 167 of the Act applied to
exempt the sale of the franchises from GST. The election forms
for the subsection 167(1) election were filled out and
signed but not filed with the Minister.
[5]
The Respondent submitted that the Minister properly assessed the
Appellant for underreported GST of $18,200.00 in respect of the
franchise fees. The franchise fees are in respect of a taxable
supply of property and as such are subject to GST. Even if the
Appellant filed the requisite forms as required under section 167
of the Act, the franchise fees are exempt from the
election pursuant to
subparagraph 167(1.1)(a)(ii).
ISSUES
I.
Is the franchise fee amount excluded from the section 167
election?
II.
Did the Appellant file the requisite election forms as required
under section 167 of the Excise Tax Act, in order to
qualify for the section 167 election?
STATUTORY FRAMEWORK
[6]
The relevant provisions of theAct[1] are:
167. (1) Supply of assets of business - Where a supplier makes
a supply of a business or part of a business that was established
or carried on by the supplier or that was established or carried
on by another person and acquired by the supplier, and, under the
agreement for the supply, the recipient is acquiring ownership,
possession or use of all or substantially all of the property
that can reasonably be regarded as being necessary for the
recipient to be capable of carrying on the business or part as a
business,
(a)
for the purposes of this Part, the supplier shall be deemed to
have made a separate supply of each property and service that is
supplied under the agreement for consideration equal to that part
of the consideration for the supply of the business or part that
can reasonably be attributed to that property or service; and
(b)
except where the supplier is a registrant and the recipient is
not a registrant, the supplier and the recipient may make a joint
election in prescribed form containing prescribed information to
have subsection (1.1) apply to those supplies.
(1.1) Effect of Election - Where a supplier and a recipient
make a joint election under subsection (1) in respect of a supply
of a business or part of a business and the recipient, if a
registrant, files the election with the Minister not later than
the day on or before which the return under Division V is
required to be filed for the recipient's first reporting
period in which tax would, but for this subsection, have become
payable in respect of the supply of any property or service made
under the agreement for the supply of the business or part, or on
such later day as the Minister may determine on application of
the recipient,
(a) no tax is payable in respect of a supply of any
property or service made under the agreement other than
(i) a taxable supply of a service that is to be rendered by
the supplier,
(ii) a taxable supply of property by way of lease, licence or
similar arrangement, and
(iii) where the recipient is not a registrant, a taxable
supply by way of sale of real property; and
(b) for the purposes of this Part,
(i) where, but for this subsection, tax would have been
payable by the recipient in respect of a supply made under the
agreement of property that was capital property of the supplier
and that is being acquired by the recipient for use as capital
property of the recipient, the recipient shall be deemed to have
so acquired the property for use exclusively in the course of
commercial activities of the recipient, and
(ii) where, notwithstanding this subsection, tax would not
have been payable by the recipient in respect of a supply made
under the agreement of property that was capital property of the
supplier and that is being acquired by the recipient for use as
capital property of the recipient, the recipient shall be deemed
to have so acquired the property for use exclusively in
activities of the recipient that are not commercial
activities.
167.1 Goodwill - For the purposes of this Part, where a
supplier makes a supply of a business or part of a business that
was established or carried on by the supplier or that was
established or carried on by another person and acquired by the
supplier, the recipient is acquiring ownership, possession or use
of all or substantially all of the property that can reasonably
be regarded as being necessary for the recipient to be capable of
carrying on the business or part as a business, and part of the
consideration for the supply can reasonably be attributed to
goodwill of the business or part, that part of the consideration
shall not be included in calculating the tax payable in respect
of the supply.
123. (1) Definitions - In section 121, this Part
and Schedules V to X,
. . .
"supplier", in respect of a supply, means the person
making the supply;
"supply" means, subject to sections 133 and 134, the
provision of property or a service in any manner, including sale,
transfer, barter, exchange, licence, rental, lease, gift or
disposition;
"property" means any property, whether real or
personal, movable or immovable, tangible or intangible, corporeal
or incorporeal, and includes a right or interest of any kind, a
share and a chose in action, but does not include money;
"registrant" means a person who is registered, or
who is required to be registered, under Subdivision d of Division
V;
"recipient" of a supply of property or a service
means
(a) where consideration for the supply is payable under
an agreement for the supply, the person who is liable under the
agreement to pay that consideration,
(b) where paragraph (a) does not apply and
consideration is payable for the supply, the person who is liable
to pay that consideration, and
(c) where no consideration is payable for the
supply,
(i) in the case of a supply of property by way of sale, the
person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise than by way
of sale, the person to whom possession or use of the property is
given or made available, and
(iii) in the case of a supply of a service, the person to whom
the service is rendered,
and any reference to a person to whom a supply is made shall
be read as a reference to the recipient of the supply;
"taxable supply" means a supply that is made in the
course of a commercial activity;
ANALYSIS
I.
Is the franchise fee amount excluded from the section 167
election?
[7]
Subsection 167(1) of the Act provides for a joint election
such that no tax is payable on the sale by a vendor to a
purchaser of all or substantially all of the property used in a
commercial activity that forms all or part of a business.
Essentially, the election provides relief to a purchaser by
eliminating the obligation to pay tax, generally in circumstances
where the purchaser would be able to claim full input tax
credits. However, the election provided for in
subsection 167(1) is available only if certain conditions
are met. Even after these conditions are met,
paragraph 167(1.1)(a) exempts certain types of
property from the election.
[8]
The Appellant sold fully operating cafés to the
franchisees. Such arrangements included the necessary premises,
equipment and inventory to operate the cafés. I therefore
conclude that the sale of the franchises was a supply of a
"business that was established" pursuant to
subsection 167(1).
[9]
The second condition is that the recipient acquires possession or
use of all or substantially all of the property required to carry
out the business.[2] The franchisees acquired fully operating or ready to
operate entities. I therefore conclude the franchisees acquired
all or substantially all of the property necessary for the
franchises to carry on the business.
[10]
Subsection 167(1.1) states that where a supplier and a recipient
make a joint election under subsection 167(1), so long as the
election is properly filed, no tax is payable in respect of a
supply of property or service made under an agreement. However,
exceptions to this rule are listed under subparagraphs
167(1.1)(a)(i) to (iii).
[11]
Subparagraph 167(1.1)(a)(i) states that a taxable supply
of a service that is to be rendered by the supplier is exempt
from the section 167 election. This includes initial training
services provided by a franchisor to a franchisee. The Appellant
provided initial training and procedure manuals to the
franchisees, and this service was covered in the price of the
franchise fee, thus this portion of the franchise fee is exempt
from the section 167 election.
[12]
Subparagraph 167(1.1)(a)(ii) states that a taxable supply
of property by way of lease, licence or similar arrangement is
excluded from the section 167 election. The franchise fee
amount included the licence for the right to use a trade name.
Therefore this portion of the fee is exempt from the section 167
election.
[13] Section
167.1 allows for goodwill to be transferred free of GST.
Section 167.1 does not require that a prescribed form be
filed with the Minister to qualify for this election. The
Appellant submitted that a portion of the franchise fee was
consideration for goodwill. However, the Appellant was unable to
specify in any way the value of the goodwill.
II.
Did the Appellant file the requisite election forms as required
under section 167 of the Excise Tax Act, in order to
qualify for the section 167 election?
[14] Paragraph
167(1)(b) of the Act states that a supplier (in
this case the Appellant) and a recipient (in this case the
franchisees), may make a joint election in prescribed form (Form
GST 44), to qualify for the subsection 167(1) election.
Subsection 167(1.1) states that where a supplier and a
recipient make a joint election under
paragraph 167(1)(b), if the recipient (who must be a
registrant under the Act) files the GST 44 election form
with the Minister no later than the day on or before the return
under Division V is required to be filed for the recipient's
first reporting period in which GST would, but for this
subsection, have become payable, then the transaction can qualify
for the subsection 167(1) election. Basically, to qualify for the
subsection 167(1) election, the franchisee must be a
registrant under the Act and must have filed the requisite
form within its reporting period.
[15] In the
present case the Appellant submitted that all the franchisees are
registrants under the Act. Further, the Appellant
submitted with its Notice of Appeal, 11 election forms that had
been completed by the Appellant and the franchisees. However,
none of these election forms have been filed with the
Minister.
[16] In the
case of Low Cost Furniture Ltd. v. Canada,[3] Judge Bowie found that:
Even if I am wrong in this, the Appellant must
nevertheless fail on this aspect of the appeal. Subsection
167(1.1) requires that the election must be filed within the
reporting period of the purchaser in which the tax would, but for
the election, be payable. The supply took place in February 1994.
The tax was therefore payable in the period that ended on March
31, 1994, more than a year before the election was signed. I have
no authority to either ignore or extend a time limit which
Parliament has imposed as a limitation upon those who wish to
take the benefit of the exempting provision. The election was
made more than a year too late, and it is therefore ineffective.
The Appellant is not entitled to the claimed exemption for that
reason as well.
CONCLUSION
[17] The
Appellant meets the first conditions of the
subsection 167(1) election. However, several portions of the
franchise fee amounts are excluded from the
subsection 167(1) election by paragraph 167(1.1)(a).
Also, the requisite forms for the election were completed but
never filed with the Minister as required.
[18] In
relation to that portion of the franchise fee representing
goodwill, this amount could have been excluded from GST pursuant
to section 167.1 of the Act. However, because the
Appellant was unable to quantify goodwill in any amount, the
Appellant failed to meet the onus incumbent upon him in this
appeal.
DECISION
[19] For these
reasons the appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of November 2001.
"D. Hamlyn"
J.T.C.C.
COURT FILE
NO.:
2001-405(GST)I
STYLE OF
CAUSE:
Cinnamon City Café Inc. and
Her Majesty the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
September 19, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge D. Hamlyn
DATE OF
JUDGMENT:
November 15, 2001
APPEARANCES:
Agent for the
Appellant:
Gerard Darmon
Counsel for the
Respondent:
Jasmine Sidhu
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-405(GST)I
BETWEEN:
CINNAMON CITY BAKERY CAFÉ
INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 19, 2001 at
Vancouver, British Columbia, by
the Honourable Judge D. Hamlyn
Appearances
Agent for the
Appellant:
Gerard Darmon
Counsel for the Respondent: Jasmine
Sidhu
JUDGMENT
The
appeal from the assessment made under Part IX of the Excise
Tax Act, notice of which is dated November 15, 1999 and bears
number 00000000067, is dismissed in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada, this 15th day of November 2001.
J.T.C.C.
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