Citation: 2009TCC75
Date: 20090203
Docket: 2006-3027(GST)G
BETWEEN:
MANSHIP HOLDINGS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal with
respect to an assessment under Part IX of the Excise Tax Act (the “Act”)
dated July 6, 2005 for the period from January 1, 2001 to September 30, 2004
(the “period”). The starting point of the period under appeal had originally been
October 1, 2000, but the appellant agreed at the beginning of the hearing that
the period prior to January 1, 2001 was statute-barred pursuant to subsection 298(1)
of the Act.
[2]
The appellant at all
relevant times operated a massage parlour under the name Gentleman’s Massage
Club in various locations in New Brunswick and Nova Scotia. To provide this service, the appellant entered into verbal agreements,
called bookings, with masseuses. These so-called bookings could be for anything
from a few days to as many as 10 days.
[3]
In early 1998, the
appellant requested an interpretation concerning the application of the
Harmonized Sales Tax (HST) to the operations of its massage parlours and, in
response, the Saint John Tax Services Office of Revenue Canada issued a ruling that the masseuses were employees.
The subsequent interpretation given by the Atlantic Technical Interpretation
Services Centre was based on that fact. That interpretation was that HST was
collectable by the person who made the taxable supply and payable by the
recipient of that supply at the applicable rate on the value of the
consideration for the supply.
[4]
To the question of
whether HST applied to that part of the consideration that the appellant allocated
to the masseuses’ salaries, the answer was that the appellant had to collect HST
in respect of the consideration paid, and the fact that the appellant allocated
a portion of that consideration to its employees’ salaries was immaterial.
[5]
For the period in
issue, the appellant, collected and paid HST on the value of the consideration
paid by the recipient for the services rendered by the appellant at its various
parlours. The rates were fixed by the appellant at $70 for half hour, $120 for one
hour and $150 for what is known as a Turkish bath. The appellant would keep half
of that rate and the masseuses would get the other half. The recipient paid
cash for the services; no receipts were given and the HST was included in the
rates. The appellant calculated the HST on the total rate charged and paid it
out of its half of the fees collected.
[6]
In early 2005, the
appellant amended its HST returns for the period from January 1, 1995 to
September 30, 2004, reducing the amount of HST payable on the basis that the
HST was collected and remitted in error on the masseuses’ portion of the fees
collected, as, in the appellant’s submission, they were not his employees. The
Minister protected the appellant’s right to appeal by posting the amended
returns to its account for the period. The posting of the amended returns
resulted in a refund to the appellant, as the HST collected was reduced with
respect to each of the amended returns except those prior to January 1, 2001.
The Minister determined, though, that the refunds generated by the amended
returns were not valid and assessed the appellant for the period in issue by
adjusting the amended returns to reflect appellant’s initial returns. The
Minister’s position is that the masseuses were under a contract of service,
that the appellant was required to collect HST on the total consideration
received for the services it provided, and that, accordingly, no HST was remitted
in error and therefore no refund is available.
[7]
The parties agreed, at
the hearing, that the refund amount at issue for the period in question is
$90,962.68.
[8]
While the main issue raised
in the pleadings is centred on the question of whether the masseuses were working
as independent contractors or as employees, the respondent’s position is that
the nature of the transaction between the appellant and the customer is an equally
important consideration in that the appellant is the actual supplier of the services
notwithstanding the nature of the relationship between the appellant and the
masseuses. In the alternative, the respondent submits that only the person who
bears the burden of payment of the tax is entitled to a rebate under s. 261 of
the Act. The respondent submits that when the appellant remitted the tax,
it was calculated on the basis of the total sales by its club, as required by
virtue of the fact that the appellant was the supplier of the taxable supply. Thus,
there was no overpayment. The respondent submits lastly that subsection 232(3)
of the Act is of no assistance to the appellant, since that subsection
requires a person who has overcharged or overcollected from another to issue a
credit note containing prescribed information, and there has been no overcharge
or overcollection here.
[9]
The appellant’s main
argument is that the evidence clearly supports a finding that the masseuses were
independent contractors. As a result, the legal characterization of the nature
of the transactions is that there were multiple supplies, that is to say, the
appellant made a supply to the masseuses of the use of the facilities at the
club and the masseuses made a supply of massage services to the customers or
the appellant made the supply to the customers and the masseuses made a supply of
their services to the appellant or the appellant and the masseuses all made
separate supplies to the customers.
[10]
It is my belief that
the question that must be answered is the following: Who is the supplier of the
services? It need only be answered, however, if the masseuses are held to have been
independent contractors, for if they are employees, they cannot be suppliers
for HST purposes.
[11]
The parlours operated
by the appellant consisted of a reception area, a waiting room or lounge area
and the rooms where the services were rendered. Those services are described as
non-therapeutic massages for entertainment purposes and included what was
described as a Turkish bath. In addition, at the appellant’s facilities, but on
another floor, free living accommodation was provided for the use of the masseuses
during their shifts or for the duration of their booking.
[12]
The appellant employed
a manager for each parlour, whose responsibilities were to book the masseuses,
greet the customers and generally manage and supervise the parlour. The parlours
or clubs were open 7 days a week with slightly different hours, ranging from noon
to 3 a.m.
[13]
In general, the
masseuses would call the club to book their time. The bookings at the Moncton, New Brunswick, club were usually for 10 days and those
at the Dartmouth, Nova Scotia, club were for three days. On occasion, the club would
call a masseuse to book her if there was a need to replace one who did not show
up or if the club was short of masseuses for the number of rooms available.
Masseuses could also book in advance or leave at the club details as to their
availability. In a year, the Moncton, New Brunswick, club could book up to 60
different masseuses, and up to 50 could be booked at the Dartmouth Club.
[14]
The masseuses were
free to advertise their services. They did not do such advertising under the club’s
name but they did mention in it the club at which they would be working. They
informed the customers of their return dates. Some operated on their own from
their home and had a website and business cards. What was not permitted by the
appellant was for the masseuses to leave with a customer at a club information
on obtaining their services at places other than the club.
[15]
Once a customer had
chosen the service to be provided by the masseuse, she handed the money over to
the club manager who was on duty. In 2002, time cards were introduced. At the
end of each day, the appellant would collect its flat rate amount on the basis
of those time cards. The masseuses were not allowed to charge more than double
the flat rate but could charge less with respect to their own share of the rate.
If caught charging more, they were not booked again. They also had the right to
refuse a customer. No fines were levied by the appellant against the masseuses.
[16]
The masseuses were not
required to be licensed and did not come under any provincial legislation that
could restrict their services. The manager-receptionist did supervise the
activities carried on at the club by making sure that no alcohol or drugs were
consumed on the premises and that the rates charged did not exceed those
determined by the appellant.
[17]
The appellant had the
right to terminate a booking if a masseuse did not adhere to her schedule or
was caught stealing a customer or consuming drugs or alcohol. On the other hand,
a masseuse was allowed to leave if her services were not requested by
customers. A masseuse whose services were not requested was not remunerated and
she owed nothing to the appellant. The masseuses were allowed to have a
flexible schedule if they so chose. They were also free to choose what they wore
when performing their work. The appellant did not provide clothing but did
provide the necessary tools, supplies and equipment. The masseuses could
provide their own oils or other paraphernalia if they so chose.
[18]
There were no specific
areas set up at the clubs that any of the masseuses could designate as her own
workspace. If a masseuse became unavailable or could not be reached, the
appellant would find a replacement to cover the day’s appointments. The
masseuses were not paid vacation time and did not receive any pension benefits
or health care coverage.
Employees or independent contractors
[19]
The leading case on
this question is the decision of the Supreme Court of Canada in 671122
Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983, which
reaffirmed the test enunciated in Wiebe Door Services Ltd. v. Minister of
National Revenue, [1986] 3 F.C. 553, a decision of the Federal Court of
Appeal. The factors to be considered are set out in paragraph 47 of the Sagaz
decision:
Although there is no universal test
to determine whether a person is an employee or an independent contractor, I
agree with MacGuigan J.A. that a persuasive approach to the issue is that taken
by Cooke J. in Market Investigations, supra. The central question
is whether the person who has been engaged to perform the services is
performing them as a person in business on his own account. In making this
determination, the level of control the employer has over the worker's
activities will always be a factor. However, other factors to consider include
whether the worker provides his or her own equipment, whether the worker hires
his or her own helpers, the degree of financial risk taken by the worker, the
degree of responsibility for investment and management held by the worker, and
the worker's opportunity for profit in the performance of his or her tasks.
[20]
In support of their
respective positions, the parties referred to several decisions of this Court with
similar fact situations to that in the present case. In particular, reference
was made to Zivkovic v. R., [2000] G.S.T.C. 16, Maltais v. R.,
[2008] G.S.T.C. 122 and Vergara v. Minister of National Revenue, 2004
TCC 263. These cases were ably distinguished by counsel to support their
respective positions, but each case must be decided on its own facts.
[21]
The first factor in
analyzing the fact situation of a case is the determination of the level of
control exercised by the employer over a worker. In our fact situation, the
masseuses would make their availability known to the appellant and their
bookings were scheduled accordingly. The schedule was also, at times, set so as
to accommodate the masseuses. They had the right to refuse a customer, and
although they could not charge more than the rates determined by the appellant,
they could choose to charge less, albeit at their own expense. The appellant
did not provide any training nor was there any supervision of the masseuses. In
fact, the appellant did not exercise any control over how the services were
performed. If any control was exercised, it was very minimal. Thus this key
factor points towards the masseuses being independent contractors.
[22]
With regard to the
factor relating to the degree of financial risk or the chance of profit or
loss, the masseuses would call in to book their schedules with the appellant
according to their availability. They were allowed to have a flexible schedule
if they so chose. A masseuse could leave if business was slow, and she earned
nothing if she was not picked by the customers. She could choose to charge less
for her services, but at her own expense, not the appellant’s. If she was good,
she could earn more. The masseuses were also free to provide their services in
their own home and some had websites. All these facts also point towards the
masseuses being independent contractors or individuals in business for
themselves.
[23]
The appellant provided
the facilities at which the services were to be rendered, together with the necessary
equipment and supplies. The masseuse would decide what to wear, and if she so
chose, she could provide her own oils or other paraphernalia. In the context of
ownership of tools, in order for the appellant to be able to provide the
services on its premises, it is clear that it had to have and provide the
above-mentioned facilities so that the masseuses would be able to perform their
work at the appellant’s club. Although these aspects could point in the
direction of the masseuses being employees, they are not conclusive.
[24]
In Zivkovic, Judge
Mogan concluded that since the masseuses in question needed a licence to
perform and could only perform in a licensed establishment, they were to be
considered as employees. There is no such requirement in our fact situation. I
therefore find the masseuses in the present case to be independent contractors.
Single supply or multiple supplies
[25]
Having come to the above
conclusion, it now becomes necessary to address the issue of who had the duty
to collect the HST. The answer to that question will depend on the nature of
the service provided, that is, on whether a single supply or multiple supplies
were made.
[26]
The duty to collect is set
out in subsection 221(1) of the Act which reads as follows:
221 (1) Every person who makes a taxable supply shall, as agent of
Her Majesty in right of Canada, collect the tax under Division II payable by
the recipient in respect of the supply.
[27]
A taxable supply is
defined in subsection 123(1) to mean a supply that is made in the course of a
commercial activity, and a supplier, in respect of a supply, means the person
making the supply. Supply is defined as follows:
“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.
[28]
The issue of single
versus multiple supplies has been analyzed in many decisions of this Court and
the Federal Court of Appeal. The case most cited is the decision of Judge Rip (as
he then was) in O. A. Brown Ltd. v. Canada, [1995] G.S.T.C. 40. Judge Rip,
after reviewing principles from the United Kingdom pertaining
to the value added tax, summarized as follows the central determination that
must be made:
In deciding this issue, it is first
necessary to decide what has been supplied as consideration for the payment
made. It is then necessary to consider whether the overall supply comprises one
or more than one supply. The test to be distilled from the English authorities
is whether, in substance and reality, the alleged separate [supply] is an
integral part, integrant or component of the overall supply. One must examine
the true nature of the transaction [to] determine the tax consequences. The
test was set out by the Value Added Tax Tribunal in the following fashion:
In our opinion, where the parties enter
into a transaction involving a supply by one to another, the tax (if any)
chargeable thereon falls to be determined by reference to the substance of the
transaction, but the substance of the transaction is to be determined by
reference to the real character of the arrangements into which the parties have
entered.
One factor to be considered is whether
or not the alleged separate supply can be realistically omitted from the
overall supply. This is not conclusive but is a factor that assists in
determining the substance of the transaction. The position has been framed in
the following terms:
What should constitute a single supply
of services as opposed to two separate supplies, is not laid down in express
terms by the value added tax enactments. It would therefore be wrong to attempt
to propound a rigid and precise definition lacking statutory authority. One
must, it seems to us, merely apply the statutory language, interpreting its
terminology, so far as the ordinary meaning of the words allows, with the aim
of making the statutory system of value added tax a practical workable system.
For this purpose one should look at the degree to which the services alleged to
constitute a single supply are interconnected, the extent of their
interdependence and intertwining, 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 for the reasons given above are not conclusive. Taking the
nature, content and method of execution of the services, and all the
circumstances, into consideration against the background of the value added tax
system, particularly its methods of accounting for and payment of tax, if the
services are found to be so interdependent and intertwined, so much integral
parts or mere components or items of a composite whole, that they cannot
sensibly be separated for value added tax purposes into separate supplies of
services, then Parliament, in enacting the value added tax system, must be
taken to have intended that they should be treated as a single system,
otherwise, they should be regarded for value added tax purposes as separate
supplies.
The fact that a separate charge is made
for one constituent part of a compound supply does not alter the tax
consequences of that element. Whether the tax is charged or not charged is
governed by the nature of the supply. 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.
[29]
Another interesting
passage from Judge Rip’s decision is that in which he cites Lord Widgery C.J.
in Customs and Excise Commissioners v. Scott, [1978] S.T.C. 119 (U.K.)
at paragraph 28.
I think it would be a great pity if we allowed this subject
to become over-legalistic and over-dressed with legal authorities when, to my
mind, once one has got the question posed, the answer should be supplied by a
little common sense and concern for what is done in real life.
[30]
The appellant in O. A.
Brown was in the business of purchasing livestock for customers, which was
a zero-rated supply. In doing so, the appellant incurred costs for other
supplies, such as feed, inoculation, transportation and insurance. The appellant
charged a markup fee to cover these costs. The respondent contended that each
of the disbursements for those items was a separate supply and that the goods
and services tax ought to have been charged. The appellant argued that there
was a single zero-rated supply of livestock and any disbursements were included
in that single supply. In finding for the appellant, Judge Rip made the
following comment at paragraph 31:
. . . 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. In substance and reality, the alleged
separate supply, that of a buying service, is an integral part of the overall
supply, being the supply of livestock. The alleged separate supplies cannot be
realistically omitted from the overall supply and in fact are the essence of
the overall supply. The alleged separate supplies are interconnected with the
supply of livestock to such a degree that the extent of their interdependence
is an integral part of the composite whole. The services are rendered under a
single contract, for a single consideration, albeit the invoice is itemized.
The appellant is making a single supply of livestock and the commission and
disbursements charged are part and parcel of the consideration for that supply.
They do not amount to separate supplies. This is simply a matter of common
sense. No GST is collectible on the commission charged and the disbursements.
[31]
The approach taken by Judge
Rip has been adopted in many Tax Court decisions and by the Federal Court of
Appeal (see Oxford Frozen Foods Ltd. v. Canada, [1996] G.S.T.C. 76, Club
Med Sales Inc. v. R., [1997] G.S.T.C. 28, Hidden Valley Golf Resort
Assn. v. R., [2000] G.S.T.C. 42 and Camp Mini-Yo-We Inc. v. R.,
[2006] G.S.T.C. 154).
[32]
In Gin Max
Enterprises Inc. v. The Queen, 2007 TCC 223, Justice McArthur of this Court
summarized the Canada Revenue Agency’s position on the nature of supplies, as
illustrated in its policy statement P-077R2, and concluded that, in light of the
case law, the true nature of the transaction was a question of fact to be
determined by considering whether in substance the two transactions in issue were
so intertwined and interdependent that they had to be supplied together. He quoted
Justice Hershfield of this Court, who wrote as follows in 1219261 Ontario
Inc. v. R., [2004] G.S.T.C. 4:
[…] 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.
[33]
CRA policy statement
P-077R2, dated April 26, 2004, uses the following principles to
determine whether a transaction consisting of several elements is to be
regarded as a single supply or multiple supplies:
·
Every supply should be regarded as distinct and
independent.
·
A supply that is single supply from an economic
point of view should not be artificially split.
·
There is a single supply where one or more
elements constitute the supply and any remaining elements serve only to enhance
the supply.
[34]
In the case at bar, one
must ask if the supply of the massage along with the supply of the premises
constitutes a single supply or multiple supplies. Is it possible or realistic
to omit one component from the overall supply? In our fact situation, the
appellant could not supply or offer massage services without, or independently
from, the use of the premises; thus, both elements are highly interconnected
and interdependent. The true nature of the transaction for which consideration
was paid was the supply of the massage, which, in the fact situation here,
cannot be made without the use of the appellant’s premises. The supply of the
premises to the customers cannot stand by itself or be omitted from the overall
supply of the massage. In other words, the fact situation of this case would
make it impossible to purchase each of the supplies or elements separately and still
end up with a useful service. The end result is that the supply in the case at
bar is a compound supply whose elements cannot be separated for tax purposes.
[35]
A review of the facts
with this approach in mind, as opposed to an approach in which it is necessary
to define the contract between the appellant and the masseuses as being either
a contract of service or a contract for services, supports the view that I have
expressed in that customers would not come to the appellant were it not for the
massage services being offered. From a business standpoint, the appellant
supplies a massage parlour service, one element of which is to provide the
premises.
[36]
The appellant provided
the premises, the rooms and the supplies and made the appointments, although
the masseuses were free to use their own oils and could also make appointments.
The appellant had a reception area where the customers were greeted and a
manager was there to supervise, to check for drug and alcohol use, to receive
the time cards and to keep an account of the masseuses’ and the appellant’s shares
of the flat rate. The masseuses were paid on the basis of the time during which
they provided services to the appellant’s customers. A masseuse owed the
appellant nothing if she did not have any bookings during her presence on the
appellant’s premises. Replacement masseuses were found by the appellant. Were
it not for the services being offered, no one would have gone to the
appellant’s premises. In my opinion, the appellant was providing a single
supply of services to its customers who paid for a massage. The appellant was
thus obliged to collect and remit HST on the entire amount received from the
customers. The HST remittance was therefore not made in error and the appellant
cannot claim a rebate.
[37]
The appeal is dismissed
with costs.
Signed at Ottawa, Canada, this 5th day of February 2009.
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