Citation: 2010 TCC 278
Date: 20100520
Docket: 2007-3849(GST)G
BETWEEN:
ADRIENNE ARNOLD AND JOHN R. ARNOLD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, C.J.
[1]
Adrienne Arnold
and her husband John R. Arnold have appealed an assessment for Goods
and Services Tax ("GST") under Part IX of the Excise Tax Act
("Act") for the reporting periods ending December 31 in
each of 2000, 2001, 2002, 2003 and 2004 on the basis that they operate a children's
day care facility. Therefore the services they provide are exempt supplies
under section 1 of Part IV of Schedule V of the Act
during the said periods. The respondent's position is that the Arnolds operated a recreation facility and the services in issue
are taxable supplies.
[2]
Subsection 165(1) of
the Act imposes on every recipient of a taxable supply made in Canada a tax at the rate of five percent on the value of the
consideration of the supply. Subsection 123(1) of the Act defines words
and terms used in the Act: "taxable supply" means "a
supply that is made in the course of commercial activity"; a
"commercial activity" means "a business carried on by a person …
except to the extent to which the business involves the making of exempt
supplies by the person"; and an "exempt supply" means "a
supply included in Schedule V of the Act". No tax is imposed
on the recipient of an exempt supply. Part IV of Schedule V of the Act
lists child care and personal care services as exempt supplies. Section 1
of the Part IV of the Act describes a supply of child care service:
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CHILD AND PERSONAL CARE SERVICES
1. A supply of child care
services, the primary purpose of which is to provide care and supervision to
children 14 years of age or under for periods normally less than 24 hours per
day, but not including a supply of a service
of supervising an unaccompanied child made by a person in connection with a
taxable supply by that
person of a passenger transportation service.
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SERVICES
DE GARDE D’ENFANTS ET DE SOINS PERSONNELS
1. La fourniture de services de garde d’enfants qui
consistent principalement à assurer
la garde et la surveillance d’enfants de quatorze ans ou moins pendant des
périodes d’une durée normale de moins de vingt-quatre heures par jour. Est
exclue la fourniture d’un service qui consiste à surveiller un enfant non
accompagné, effectuée par une personne à l’occasion de la fourniture taxable
par celle-ci d’un service de transport de passagers.
|
[3]
Mr. and Mrs. Arnold
declare that they are supplying child care services as defined in section 1
of Part IV and therefore since this is an exempt supply, they were not
required to collect GST.
[4]
A second issue, added in
the Amended Notice of Appeal, is that if the supplies are taxable supplies,
whether the Arnolds are entitled to any input tax credits in
accordance with section 169 of the Act.
[5]
At all relevant times,
Mr. and Mrs. Arnold carried on business in partnership with the name and
style of Club Adagio. Mr. Arnold has a 90 percent interest in the
partnership; Mrs. Arnold has a 10 percent interest.
[6]
Mrs. Arnold's interest
in rhythmic gymnastics was the motivation for the creation of Club Adagio. She
has been interested and active in rhythmic gymnastics since the mid‑1980s,
if not earlier. Mrs. Arnold has been board member of many rhythmic
gymnastics sports organizations, national and international, including B.C.
Rhythmic Gymnastics Federation of which she was its president and vice‑president.
Other positions held by Mrs. Arnold include Board Member of the Canadian
Rhythmic Sportive Gymnastic Federation, the Commonwealth Games Association of
Canada, and the Board of Directors of the Canadian Olympic Committee. She led
the Canadian delegation at several world championships in rhythmic gymnastics.
She is also an international level judge of rhythmic gymnastics.
[7]
The history of the Arnold's involvement in the activities carried on by Club
Adagio started in 1990 when the Arnolds and two other parents hired a coach to
instruct their daughters in rhythmic gymnastics. A competitive program was
developed and later other children joined the group. By 1995 the club was
offering competitive and recreational activities to about 75 girls from
ages seven to 20 years of age. Mrs. Arnold gave up her job to
volunteer as sole administrator of the club. In 1995 she met with parents of
the children and requested some compensation for her efforts.
[8]
Mrs. Arnold
recalled that during the summer of 1995 the Arnolds
went on vacation and when they returned home they learned that the two parents
who originally formed the club with Mrs. Arnold in 1990 convinced the
other parents to leave the club and form their own club. Mrs. Arnold found
herself in a situation where her daughters had no program and no coach and she
had no job.
[9]
As a result of their
club losing its participants, the Arnolds,
Mrs. Arnold stated, "reformed" the club and rebuilt the program.
Their idea, according to Mrs. Arnold, was to have an after school child
care program with a sports component. The club would emphasize after school
care at first, but later would promote recreation and competitive programs. In
February 1996, the club had 25 gymnasts and two high calibre coaches.
[10]
Mrs. Arnold
described the after school care program. Children would be dropped off at the
facility between 3:00 p.m. and 3:30 p.m. and be picked up starting at
6:00 p.m. The club closed at 7:00 p.m. but if a parent had not
arrived by 7:00 p.m. to pick up the child, someone would remain with the
child until the parent arrived. There would be someone from Club Adagio to meet
the children on arrival at the Club. The children were supervised and were
given a snack. The children could sit and socialize, catch up on homework,
participate in activities or, if not well, relax. Academics came first,
Mrs. Arnold insisted; it was "not central" to participate in an
activity. Activities included games, yoga and conditioning, which included at
least 30 minutes of rhythmic gymnastics. The program was "free
form"; the Arnolds wanted to provide a good service for good
consideration. The Arnolds also had a summer program for children.
[11]
At trial,
Mrs. Arnold testified that the after school care program was operated
primarily out of the Vancouver Hellenic Centre and, when the Hellenic Centre
was not available, at the Shaughnessy Heights Church in Vancouver. The Amended
Notice of Appeal does not refer to any after school care program operating at
the Hellenic Centre or anywhere else. However, paragraphs 3 and 4 of the
Amended Notice of Appeal declare that the "primary purpose of Club Adagio,
at all material times, was to provide care and supervision to girls from four
to 13 years of age" and a part of the care and supervision may
involve gymnastics and recreational activities.
[12]
Originally,
Mrs. Arnold recalled, the after school care program was the larger of the
two components, after school care and competitive, "but later [it] got top
heavy on the competitive side". If there were no after school program,
Mrs. Arnold admitted, the club "would have few kids in [the]
recreational [program]". Mrs. Arnold said there was "great
turnover" in the after school program" "but some could become
recreational children and competitors". She estimated that one girl in 20,
"if that high", could become a competitor. By 2001 the Arnold's goal
of having a strong competitive program was achieved and they decided to spin
off the "top layer" of the competitive program to a club called
"The International Rhythmic Gymnastics Academy of Vancouver"
("International"), operated by their daughter, Megan, and the head
coach. The International would teach only "competitive girls", that
is girls who would compete nationally and internationally and, said
Mrs. Arnold, was completely separate from Club Adagio.
[13]
Mrs. Arnold
testified that she tried to "low key" the ambition level of the
children since only a few children could potentially compete internationally or
even provincially. She described rhythmic gymnastics as a very elite sport;
national athletes train 40 hours a week. She said she had
"issues" with competitiveness. Her philosophy was to train and be
serious but not at all costs. However, Mrs. Arnold volunteered that she is
"passionate" about rhythmic gymnastics, "trying to get Canadians
on the world stage".
[14]
In the meantime,
Mrs. Arnold recalled, Club Adagio continued with a "small"
competitive program of about 15 provincial competitors and later on others
participated in satellite facilities in Maple Ridge, North Vancouver and other
locations in the Vancouver area.
[15]
Mrs. Arnold
explained that the programs offered at the satellite centres were in
partnership with local people. Club Adagio would receive 60 percent of the
income earned by the satellite, from which Club Adagio would pay the coaches
and purchase equipment.
[16]
Leanne Karpus was
originally hired as coach by Club Adagio and later formed a satellite club in Maple
Ridge. The participants in the Maple Ridge Club are not at high levels. At
Maple Ridge rhythmic gymnastics are taught at a basic level with no intention,
Ms. Karpus stated, to go beyond a basic recreational level.
Ms. Karpus described the program at Maple Ridge as "safe and secure …
a fun activity".
[17]
By 2008, a year not in
issue, the competitive side of Club Adagio had grown to the extent that the
Arnolds and their daughter, Megan, merged their two clubs. The merged
organisation registered under the GST legislation and collected GST.
Mrs. Arnold declared that "each time [it was] strictly sports, we
knew we had to charge GST".
[18]
The coaches in the
after school program were young women, usually university students, who had
been in the rhythmic gymnastics program earlier and who, in Mrs. Arnold's
words, "understood" children and kept them in "a safe and happy
environment". These people were not specially trained for child care work
and were not certified by the Province
of British Columbia with respect to child care services.
[19]
Megan Arnold
worked for Club Adagio at the Hellenic Centre and as an advisor at the Shaughnessy Church; she also worked in her own club once it was
organized. She stated that the after school care program was to expose children
to rhythmic gymnastics. However, the after school care program was basically
"fun and games" with lots of supervision and concern for health of
the children. Ms. Arnold declared that the parents of the children
attending the after school care program wanted their children in a program
where the children were active, not sitting around doing nothing. The children
were attending for their enjoyment; in the meantime she was looking for
potential talent.
[20]
In the after school
program, Ms. Arnold recalled, the children would want to talk about school
and home life. Activities included ball games, ribbon games, musical hoops and
rope games. Ms. Arnold usually had eight to 14 children, between
eight years and 13 years old under her supervision, Monday to Friday
afternoons during the school year. Not all children attended each day; attendance
of individual children could vary as the parents required. The younger children
would require bathroom breaks. From time to time the supervisor would have been
taught how to administer medication to children. Ms. Arnold described the
after school care program as "really glorified baby sitting with rhythmic
gymnastics".
[21]
Today the partnership
operates under the name Adagio Rhythmic Academy
("Academy"). The Academy's website contains a history of the club
from 1990 to the present time.
On the website, the history of the club is divided into four periods, The Early
Years: 1990‑1993, The Middle Years: 1993‑1996, Recent History: 1996‑2000
and The Update: 2000‑present. The site describes the history of Club
Adagio as a club devoted to rhythmic gymnastics. There is no reference to the
after school care program. The website clarifies that once Club Adagio spun off
its elite program to the International
Academy in 2001,
Club Adagio would remain as a large Provincial Stream Competitive
and Recreational Program and we would add a new Club Adagio Maple Ridge Program
as well. Club Adagio, as envisioned, would provide a talent identification
system and support system for the new International Academy and both clubs would work together sharing expertise,
facilities and hosting events.
[22]
Mrs. Arnold stated
that this history of Club Adagio was written in 2006 to emphasize the
competitive program.
[23]
Mrs. Arnold
referred to the various coaches who worked at Club Adagio, in particular after
the split in the Club and its reorganization. The first coach, Blagovesta Borisova
Ignatova, later joined Megan Arnold in forming International. Mrs. Arnold
stated Ms. Ignatova coached the younger children and competitive gymnasts and
also took part in the after school program. Some coaches worked only with
beginners at the main site and in satellite locations such as Maple Ridge and North Vancouver. The only staff identified on Club Adagio's web page
are rhythmic gymnastic instructors who apparently had no background in child care.
[24]
Again, in what appears
to be an advertisement or flyer, Club Adagio advertises rhythmic gymnastics programs
for 2005, a period after any period in appeal. The advertisement does not refer
to any day care. Mrs. Arnold said one would not advertise after school care
programs in an advertisement for a competitive program. She stated that by 2005
the after school program was "diminishing in importance" and the club
was emphasizing competitive and recreational rhythmic gymnastics.
Mrs. Arnold declared that the club was built on the after school program
which brought young girls to the club to join the recreational and competitive
programs.
[25]
All registration
records for the after school care program for the periods in appeal were
destroyed after the end of each year's program. Mrs. Arnold stated that
she had no records or material advertising the after school program; she said
she never thought she would be assessed. Mrs. Arnold could not inform me
with any certainty what proportion of participants received only care and
supervision and what proportion received training in gymnastics.
[26]
John Arnold is a
psychologist who carries on a consulting business and, since 1977, a private
care practice. Although his partnership interest in Club Adagio was
90 percent, this "did not reflect [his] participation in the
business". He declared that he "knew nothing" about the
business.
[27]
Nevertheless Dr. Arnold
testified that the club's after school program was an emotional, long term
relationship in which the club aimed to take care of a child's needs. He stated
that the club had to dismiss people who were not sensitive to the needs of the
children. The club followed the Health Guide published by the Government of British
Columbia which looked for the various characteristics, including a well
organized daily program offering appropriate activities to match the
developmental levels of the children. According to the Health Guide, the
facility should have sufficient space for the children for quiet activities as
well as group activities and outside play areas, appropriate age trips and
supplies and equipment and other material that are safe for children.
[28]
It was Dr. Arnold
who represented the club at interviews with Julie Cheng, a business
auditor at the time with the Canada Revenue Agency ("CRA") and who
audited Dr. Arnold's sole proprietorship and the partnership with
Mrs. Arnold. Ms. Cheng's notes of their initial meeting on
July 14, 2005 state that 70 percent of business activities are
focused on competitive gymnastics and 30 percent of the business is
focused on recreational gymnastics. Dr. Arnold stated at trial that the
numbers ought to be reversed. Dr. Arnold did not offer what number of
participants or portion of participants attended the facility at the Hellenic
Centre for care and supervision only.
[29]
Dr. Arnold
testified that because he received advice from his accountant, a Certified
Management Accountant, that his consulting business was subject to GST he made
inquiries in 1990 whether Club Adagio was liable to collect GST. The accountant
advised that Club Adagio was GST exempt since the program was primarily
supervision and the children were under 14 years of age. After the audit
for the periods in issue, Dr. Arnold sought the advice of a Chartered Accountant
to prepare a Notice of Objection.
[30]
Dr. Arnold informed
me that paragraph 9 of the Amended Notice of Appeal, which follows, is an
error:
The appellant's employees do not have any education in instructing
nor are they experts in rhythmic gymnastics or any other athletic activity.
Their primary responsibility is to care for, supervise and protect the
children.
[31]
Earlier in the Amended
Notice of Appeal the appellant alleged that the primary purpose of Club Adagio,
at all material times, was to provide care and supervision to girls four to
13 years of age.
[32]
It was Dr. Arnold
who was responsible for keeping the books and records of Club Adagio. These
records for 2000 to 2004 were kept at the Arnold's
residence and he testified that he believed that he gave the records to
Ms. Cheng. However, these records did not include any leases for the
premises used by Club Adagio, agreements with the parents nor records of the
number of children registered for any period. Dr. Arnold confirmed that
Mrs. Arnold destroyed all the registration records.
[33]
Dr. Arnold said
that the CRA has an estimate of the number of children attending Club Adagio.
Mrs. Arnold, he asserted, "never broke down the number of kids
between competition and recreation". No discussions took place between him
and Ms. Cheng concerning the program at the Hellenic Centre. In a letter
of June 20, 2006 to Ms. Cheng, a Mr. Ralph Mueller C.M.A.,
referred to Club Adagio providing "programs only after school and during
summer months for children ages five and six up to the age of 13, and only in
conjunction with community centres and St. Georges School". (In his letter Mr. Mueller refers
to "Adagio Training Camps"; I assume that this is Club Adagio.)
[34]
Dr. Arnold was not
aware if Club Adagio operated at a number of different facilities over the
course of the week or at one particular facility for five days a week. He was
not disturbed that parents may have had to bring their children to a different
facility at different days during a week.
[35]
Respondent's counsel
asked Dr. Arnold what due diligence he undertook to operate a child care
facility. He could not recall but he was "always aware" there was no
need for a provincial licence to operate a child care facility.
[36]
When respondent's counsel
referred him to the Community Care Facility Act ("B.C.
Act") and Child Care Licensing Regulation ("Regulation")
for British Columbia Dr. Arnold declared that he "never heard of this". He
denied he ever verified this because he and Mrs. Arnold's intention was to
set up a gymnastics program and not an after school care program.
[37]
A "community care
facility", in the B.C. Act means any facility that provides
care, supervision, social or educational training, with or without charge, to
three or more persons not related to the operator of the facility.
Section 3 of the B.C. Act states that:
3 A person must not
(a) operate, advertise or otherwise hold himself or
herself out as operating, a community care facility,
…
unless the person holds a valid and subsisting licence or interim
permit issued under this Act that authorizes the person to provide those
services offered at the facility.
[38]
Sections 61 to 65
of the Regulation set out the rules to operate out of school care for
children who attend school and who are under 13 years of age. The
regulation describes the facility requirements, the maximum number of hours of
care, the group size and the staff to children ratio.
[39]
Earlier provisions of
the Regulation describe staff qualifications, certificate application,
records and consents among other things.
[40]
Julie Cheng audited
the Arnolds for purposes of the Income Tax Act ("ITA")
and GST and met with Dr. Arnold to discuss her review of the files.
Included in their discussions were the nature of Club Adagio's business,
expenses incurred, number of employees and related matters. Since the Arnolds did not prepare GST returns, a second interview took
place on December 21, 2005. According to Ms. Cheng's notes
Mr. Arnold stated, among other things, "that the partnership is an
establishment that provides girls with classes pertaining to rhythmic gymnastics
on a recreational and competitive level". She concluded that the
partnership should be registered for GST and that she would register the
partnership on Mr. Arnold's behalf.
[41]
In cross‑examination
of Ms. Cheng, Mr. Arnold questioned why she did not place much
significance in the hours of daily operation by Club Adagio, that is, from
4:00 p.m. to 7:00 p.m. He also questioned her conclusion in her
report of a meeting of September 5, 2006 that the children's care program
was incidental to its primary function, to provide recreational and competitive
programs for girls.
[42]
The term "child care
services" is not defined in the Act. However, several examples of
child care services are described in the opening words of the definition of the
term "child care expense" in subsection 63(3) of the ITA:
|
"child care expense"
means an expense incurred in a taxation year for the purpose of providing in Canada,
for an eligible child of a taxpayer, child care services including baby
sitting services, day nursery services or services provided at a boarding
school or camp . . .
|
« frais
de garde d'enfants » Frais engagés au cours
d'une année d'imposition dans le but de faire assurer au Canada la garde de tout enfant admissible du contribuable, en le confiant à des services de garde d'enfants, y compris des
services de gardienne d'enfants ou de garderie ou des services assurés dans
un pensionnat ou dans une colonie de vacances, […]
|
[43]
However, paragraphs 63(3)(a)
and (d) list conditions under which the services are to be provided:
|
(a) to enable the
taxpayer, or the supporting person of the child for the year, who resided
with the child at the time the expense was incurred,
(i) to perform the duties of an office or employment, [or]
(ii) to carry on a business either alone or as a partner
actively engaged in the business,
…
except that …
(d) for greater
certainty, any expenses described in subsection 118.2(2) and any other
expenses that are paid for medical or hospital care, clothing, transportation
or education or for board and lodging, except as otherwise expressly provided
in this definition,
are not child care expenses;
|
a) d'une part, pour permettre au contribuable, ou à la personne
assumant les frais d'entretien de l'enfant pour l'année, qui résidait avec
l'enfant au moment où les frais ont été engagés d'exercer l'une des activités
suivantes :
(i)
remplir les fonctions d'une charge ou d'un emploi,
(ii) exploiter une entreprise, soit seul, soit comme
associé participant activement à l'exploitation de l'entreprise,
…
toutefois …
d) pour plus de précision, les frais médicaux visés au paragraphe 118.2(2) et les autres frais payés au titre des soins médicaux ou
hospitaliers, de l'habillement, du transport, de l'éducation et de la pension
et du logement, sauf dispositions contraires à la présente définition.
|
[44]
In short, paragraph 63(3)(a)
of the ITA states that the child care expense must be incurred so as to
allow the parent to perform the duties of an office or employment or carry on a
business. This is the focus on at least two of the reported cases that consider
subsection 63(3).
Other cases consider whether the expense was incurred for child care or
recreational activity.
These are appeals from income tax assessments.
[45]
There is a high degree of symmetry
between the definition of "child care expense" in subsection 63(3) of
the ITA and the definition of "child care services" in section 1
of Part IV of Schedule V of the Act. Subsection 63(1) of
the ITA permits a parent to deduct, in computing income for the year, an
amount incurred as a child care expense; paragraph 63(3)(a) defines
a child care expense for purposes of that statute, in short, to mean an expense
incurred for the purpose of providing child care services. Thus, on the facts
alleged by the Arnolds, the expense incurred by a parent is for child care
services supplied by the Arnolds. If what is supplied by the Arnolds are
truly child care services, the expenses incurred by the parent are deductible
in computing income for purpose of the ITA and the services are an
exempt supply and free of GST. The provisions of both subsection 63(3) of
the ITA and section 1 of Part IV of Schedule V of the Act
reflect Parliament’s intent that the parent’s cost of child care not be burdened
by taxes.
[46]
In the appeal at bar there are at
least two problems facing the appellants: firstly, no parent testified and
therefore I do not have any evidence that any parent’s purpose in placing a
child in Club Adagio was primarily for the provision of child care services,
and secondly, the Arnolds have no records of the number of children to whom
services were supplied in any year, the ages of the children and the amounts
paid for the services, among other things.
[47]
It is quite obvious that when a
parent places a child with someone who provides child care services, the parent
does not expect the child to be simply watched over or warehoused in a room
doing nothing while in child care. A good child care provider will make sure
that the child will be involved in activity, whether educational or recreational
or both. Some overlap may exist between child care services (which are an
"exempt supply") and training and recreational services (which are
not exempt supplies). When there is an overlap, one must determine which
service is essential to the supply and which service is incidental to the
supply, or, in plain words, what is the supplier really offering?
[48]
The evidence before me is that the
purpose of creating Club Adagio and its impetus over the years lies with
Mrs. Arnold and her passion for rhythmic gymnastics. Club Adagio was
created to develop high level athletes and this was the focus of its
activities. This is clear from Club Adagio’s promotion material as well as
Mrs. Arnold’s testimony. Anything else was incidental. However, one must
take account of activities offered to the children and their ages, which were
disparate. The attention span, discipline and ability of a 13 year old
girl are quite different from that of a four year old. Unless the four year old
is the female rhythmic gymnast equivalent of a Sidney Crosby or
Wayne Gretzky, her parents have put her in Club Adagio for care and
protection and perhaps, fun and not to learn any skill or discipline.
Megan Arnold’s description that the after school program was "really
glorified babysitting with rhythmic gymnastics" rings true with four year
olds, at least. On the other hand, I question whether a 13 year old girl
would want to be described being in a "glorified babysitting"
activity or want to participate in such an activity, and I doubt that the
intent of the Arnolds was to offer child care to the older girls.
[49]
At some point between ages four
and 13, the child matures and she gains the ability and interest to participate
in certain activities; her attention span has increased, and her body can
tolerate certain exercise she could not tolerate or even attempt at an earlier
age. The Arnolds would then no longer be providing that child with child
care but would be providing recreational activity to the child, at whatever
level. The child care, to the extent it may then exist, is incidental to the
rhythmic gymnastics program supplied by the appellants and the supply provided
is no longer an "exempt supply". The expenses incurred by the child’s
parents were not incurred for the purpose of engaging people to watch over the
children and to protect them, as considered by Archambault J. in Levine
v. Canada,
for example, but were incurred for the purpose of enabling the child to learn a
skill.
[50]
Again, unfortunately, no evidence
was led to even suggest what the capabilities of various age groups were or to
describe the activities supplied by the Arnolds to individual age groups. Also, the appellants have
no records as to the number of children, and their ages, who attended Club
Adagio’s after school program during the periods in issue.
[51]
With regard to the second issue,
that of input tax credits, again there is no evidence to support any such
claim. There is no evidence of rental charges for the facilities used by Club
Adagio or for costs of equipment and if GST was charged.
[52]
Therefore, because of a lack of
evidence to support the appellant's claims and on the facts before me, I am
compelled to dismiss the appeal. The respondent will be allowed costs if
demanded.
Signed at Ottawa, Canada, this 20th day of May 2010.
"Gerald J. Rip"
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