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Citation: 2005TCC376
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Date: 20051025
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Docket: 2004-2522(GST)I
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BETWEEN:
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HAWKINS TAXIDERMISTS OF CANADA LTD.,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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AMENDED REASONS FOR JUDGMENT
(Corrections indicated in bold print.)
Hershfield J.
[1] The Appellant operates a taxidermy business in Canada. Its taxidermy supplies to non-residents were assessed for the period June 1, 2000 to August 31, 2000 under the provisions of the Excise Tax Act (GST Portions) (the "Act") that require goods and services tax (GST) to be collected and remitted for the supply of services (as opposed to the supply of goods).
[2] It is not in issue that the Appellant made a supply in Canada to non-resident hunters who delivered body parts of game shot in Canada (referred to as specimens) to the Appellant to be made into life-like wildlife mounts. The completed wildlife mounts were exported without collection or remittance of GST.
[3] The Appellant relies on sections 4 and 12 of Part V of Schedule VI of the Act which, if applicable, would zero-rate the supplies in question. The Respondent relies on section 7 of Part V of that Schedule which, if applicable, would deny zero-rated treatment to such supplies.
[4] Sections 4 and 12 relied on by the Appellant provide as follows:
4. A supply of
(a) a service (other than a transportation service) in respect of tangible personal property that is
(i) ordinarily situate outside Canada,
(ii) temporarily imported for the sole purpose of having the service performed, and
(iii) exported as soon as is practicable after the service is performed; and
(b) any tangible personal property supplied in conjunction with the service.
. . .
12. A supply of tangible personal property (other than a continuous transmission commodity that is being transported by means of a wire, pipeline or other conduit) if the supplier
(a) ships the property to a destination outside Canada that is specified in the contract for carriage of the property;
(b) transfers possession of the property to a common carrier or consignee that has been retained, to ship the property to a destination outside Canada, by
(i) the supplier on behalf of the recipient, or
(ii) the recipient's employer; or
(c) sends the property by mail or courier to an address outside Canada.
[5] Paragraph 7(e) relied on by the Respondent provides:
7. A supply of a service made to a non-resident person, but not including a supply of
. . .
(e) a service in respect of tangible personal property that is situated in Canada at the time the service is performed;
[6] To avoid the application of paragraph 7(e), the Appellant asserts there is a sale or supply of tangible personal property to which section 12 applies. The Appellant's position is based on the following scenarios:
(a) the ownership of the specimen is transferred to the Appellant prior to the Appellant making a supply so that on delivery of the final product to the hunter, there is a sale of a tangible personal property to a non-resident which is zero-rated under section 12; or
(b) the value of the specimen, when delivered to the Appellant, is nominal and what is purchased by the hunter is a newly manufactured product with new component materials, making it distinct from the property delivered to the Appellant. The manufacture and delivery of this new tangible personal property is a zero-rated supply under section 12.
[7] In relying on section 4, the Appellant also takes the position that the specimens that are delivered to the Appellant ought to be regarded as ordinarily situated outside Canada. A distinction is being drawn between wildlife shot in Canada and the carcass which is said to be temporarily in Canada pending taxidermy services. However, no such distinction can be made in light of the express language of the section. Section 4 only zero-rates specimens temporarily imported into Canada to be refashioned here and then delivered back to the non-resident customer. Wildlife shot outside Canada and sent to the Appellant for taxidermy services would be zero-rated under this provision. However, in the case of creating life-like mounts of wildlife shot in Canada, section 4 cannot apply as no animal parts used in creating the mount are imported.[1]
[8] With respect to the Appellant's arguments that section 12 applies, the Respondent takes the position that specimens are always the property of the non-resident hunter unless and until abandoned and that accordingly, pursuant to paragraph 7(e), a 7% rated supply is made in every case where abandonment has not occurred. There is a supply of a service which is to treat and artfully mount the specimen on a form. This is a supply of a service in respect of tangible personal property situated in Canada at the time the service is performed and paragraph 7(e) applies. That the service enhances the value of the property and incorporates new materials does not change the nature of the supply from a service to the supply of tangible personal property. The Respondent also argues that the supply of component materials is part of a single supply and cannot be separated as a zero-rated supply of tangible personal property.
[9] An officer and principal of the Appellant testified at the hearing. He explained that the Appellant's business consists of the following four supplies:
(1) the supply of taxidermy component parts other than in the course of creating a wildlife mount;
(2) creating wildlife mounts using specimens shot outside of Canada;
(3) creating fish mounts; and
(4) creating wildlife mounts using specimens shot in Canada.
[10] The first three aspects of the business can be dealt with at the outset:[2]
(1) the supply of taxidermy supplies (manufactured materials and component parts presumably sold to other taxidermists) other than in the course of creating wildlife or fish mounts are a sale of tangible personal property. As such the sale of these parts to non-residents would be zero-rated pursuant to section 12;
(2) as noted above, specimens imported into Canada to be mounted and subsequently exported to the non-resident hunter would be zero-rated pursuant to section 4; and
(3) at the hearing the Respondent conceded that the fish mounts are not subject to GST because they are a sale of tangible personal property. This was an appropriate concession as the large majority of the fish mounts do not use the original fish skin and are manufactured by the Appellant with 100% of the components being supplied by the Appellant.[3] The fish mount is a replica manufactured product sold to non-residents and is zero-rated under section 12.
[11] The remaining supplies and the vast majority of the Appellant's business relates to the mounting of various types of animal wildlife and birds sent from hunting lodges and depots in Canada. On receipt of the specimens (presumably skinned and fleshed to some extent in most cases) they are processed and treated by the Appellant. Treating skins, for example, involves mixing and applying chemical treatments perfected by the Appellant over three generations although outside tanners are also used by the Appellant. Where specimens are of a poor quality, hunters are given the option to dispose of them, have them patched and repaired or, in some cases, they might be afforded the option of being given a complete replacement.[4] After initially treating a suitable wildlife specimen, the Appellant creates a wildlife mount according to the specifications in the hunter's written order.
[12] Following the delivery of the specimen to the Appellant, the hunter specifies the type of mount required on an order form the Appellant sent to the non-resident customer at his home address or electronically transmitted by way of the Appellant's website. The order form acknowledges receipt of the skinned specimen and its licence identification number. The form sets out mounting options, prices and the deposit required to start mounting. If the order and deposit are not received the specimen is discarded or used for patching and repairing other mounts.
[13] After the order is placed members of a team of some 12 qualified taxidermists employed by the Appellant, each trained and skilled in one or more areas of the art of taxidermy, incorporate the treated skins and/or horns, antlers etc. of the specimen together with specially designed manufactured components and a specially designed manufactured manikin to create an artistic life-like rendering of the specimen.[5] Some weeks prior to final completion and delivery of the mount, payment in full is required. If payment is not made, the Appellant will frequently display and sell the mount for its own account. The Appellant's representative at the hearing argued that this reflected the commercial practice in the industry of treating ownership as having passed to the taxidermist. The hunter is regarded as having given up any interest in the property either from the outset (on delivery to the Appellant) with the right to purchase the mount on payment in full, or at the stage it has been incorporated into the final mount.
[14] Regarding the order, it is a very particularized and detailed instruction as to the end-product required by the hunter. These are built to order mounts. The order determines the components or materials to be supplied. The order might be for a rug (bear) with a full head or not. It may be for a partial or full-size life mount or for a head and horn mount (deer/moose). The variations and combinations available for a surprisingly wide variety of wildlife are beyond listing. In short, what is most relevant is the degree of manufacturing that goes into the making of the mounts. Indeed so much so, that the animal skin, or part, might often appear to be a very minor, albeit to the hunter a significant, component of the end-product. The Appellant manufactures head and body forms (virtual manikins in a wide variety of poses), artificial noses, ear-liners and jaw sets with artificial teeth and tongues. Only the artificial eyes are imported. If necessary, the Appellant uses patches from its own inventory of abandoned specimens. In short, wildlife mounts are largely comprised of components supplied by the Appellant. Further, many mounts involve the creation of settings of natural surroundings for life-size models.
[15] The charge for the mounts reflects the cost to the Appellant of all these tangible supplies. Approximately 40-50% of the cost of mounts is attributed to manufactured component parts supplied by the Appellant; 50-60% of the cost is attributed to labour. The Appellant asserts that no value can be attributed to the specimen supplied by the hunter. With rare exception, such as in the case of a grizzly or polar bear, I accept the Appellant's uncontradicted evidence on this point. A vast number of the specimens would be little more than piles of hair or valueless odds and ends of fur on a factory floor.
[16] The issue in this case would be easily resolved if the evidence supported the Appellant's first assertion which is that the animal skin or part has somehow become the property of the Appellant at some point prior to the transfer of the mount to the non-resident. In such case the transfer would clearly be a supply (a sale) of tangible personal property. However, I see no basis upon which to imply any transfer to the Appellant from the hunter who is the legal owner of the carcass.[6] Implying such legal transfer on the basis of trade practice is more than a bit presumptuous without legal arguments, distinguishing bailment or liens or personal property rights issues, having been made. Giving hunters legal options including returning treated skins evidences that but for an act of abandonment, the specimens are the property of the hunter. While there does appear to be a good argument that a transfer of ownership takes place on abandonment, that is of no assistance to the Appellant as the GST issue in this appeal only arises in cases where there is no abandonment. In any event, the burden of proof rests with the Appellant and it has not been met with respect to this issue. This takes me to the Appellant's alternative argument.
[17] That argument is to the effect that the hunter purchases a newly manufactured product with new component materials which is distinct from the property delivered to the Appellant. The prior ownership of one component of the final product is either irrelevant in making this determination, or is of such nominal significance and value as not to be determinative of the essence of the supply. The argument is that the supply is the delivery of a newly manufactured tangible personal property which is a zero-rated supply pursuant to section 12.
[18] The Respondent argues that the substance of the single supply contracted for is the expertise and skill reflected in the workmanship or labour component of the supply. That is, the essence of the supply is a service, not the supply of tangible personal property. The Respondent relies on Robertson v. Canada,[7] a decision of this Court, that held that taxidermy was not a supply of tangible personal property but rather was a supply of a service and, accordingly, not zero-rated by virtue of paragraph 7(e). While the facts in Robertson are similar to those in the present appeal, there are differences. The major difference is that Robertson, a competitor of the Appellant, did not manufacture components to the same extent as the Appellant and had no separate taxidermy supply sales business. Also, it appears that in Robertson there may have been less evidence than in the case at bar as to degree of manufacturing that goes into taxidermy. The analysis in Robertson then did not likely have to consider the alternative argument made in this appeal. I turn now to an analysis of the law in this area with the extent of the Appellant's material inputs in mind.
[19] When property is added by a workman to a customer's property (as in the case at bar) the general rule is that the workman's property attaches to and becomes the property of the customer by accession. This is referred to as a contract for work and materials. It is a supply of a service and not a sale of goods. This is clearly established in a wealth of cases in Canada which have followed the principles laid out in an English case Robinson v. Graves.[8]One Canadian income tax case of particular interest is Crown Tire Services Ltd. v. The Queen,[9] which is cited with approval by the Supreme Court of Canada in Will-Kare Paving and Construction Ltd. v. R.[10] The issue in Crown Tire was whether its income was from the manufacture or processing of goods for sale so as to be entitled to an incentive tax rate. The appellant, Crown Tire, applied rubber strips to customers' old tires and returned newly re-treaded tires. In confirming that the property of Crown Tire (the rubber strips) passed by accession when added to customers' property, the case relies on the general rule; namely, that when work is done on the property of the customer which involves affixing materials of the worker to that property, the contract is for work and materials. Accordingly, in that case there was no income earned in respect of goods for sale. To reinforce this view on the facts of that case, Strayer J. (as he then was) at page 224 relied on evidence that tire treads were not sold to anyone without being affixed to a customer's tire. In the case at bar, unlike the case in Crown Tire and unlike the case in Robertson, the Appellant does have such a separate sales business in respect of the materials that are incorporated into the wildlife mounts supplied to hunters using their specimens. While this supports the Appellant's position, it cannot be determinative. Further analysis is required. I rely on Will-Kare as being authority to approach such analysis by reference to general principles of common law distinguishing a contract for a sale of goods from a contract for work and materials. I rely on the principles of construction set out in that case as appropriate to the construction of the subject provisions of the GST portions of the Act under consideration in this appeal even though it dealt with a question of construction of provisions of the Income Tax Act.
[20] I note here that the common law analysis (in directing a finding of either a contract of sale of goods or a contract for work and materials) seems to necessarily suggest that the supply is a single supply. This is an important observation. In a GST context that finding should be expressly made. Once it is determined that the supply is a single supply, the only finding that will favour the Appellant is a finding that the single supply is a sale of goods. Although the transfer of property by accession is a supply of goods for GST purposes,[11] that is not the case where the supply giving rise to the transfer by accession is part of a single supply of work and materials. In such case, the separate supply, the transfer of property by accession, is not recognized for GST purposes.
[21] There is unquestionably a single supply made by the Appellant in the case at bar. In O.A. Brown Ltd. v. Canada[12] the test of a single versus multiple supply is recognized as turning, in general terms at least, on the interdependency of the component supplies. Components of a composite whole that cannot be sensibly separated constitute a single supply. If the components acquired under a single contract from a single supplier have value to the consumer only when taken together, the supply is a single supply. The contract in the case at bar is clearly for the final wildlife mount. The elements of the supply by the Appellant - the expertise, the skill and artistry in the bringing together its materials with the hunter's specimen - are wholly interdependent and cannot be sensibly separated where hunters have delivered their specimens with an order for wildlife mounts.
[22] The finding of a single supply does not in itself direct a finding as to the nature of that single supply. The single supply analysis might go on to determine the essence or substance of the single supply, but at this point I note that that determination overlaps somewhat if not entirely with the common law test of whether the contract is one for the sale of goods versus one for work and materials.[13] It is preferable in my view to consider the question from the sale of goods perspective.
[23] I am satisfied in the case at bar that there are two very relevant tangible personal property components associated with the supply. One is the property of the hunter and the other is the property of the Appellant. In Robinson v. Graves, Greer L.J. found that where material is of relatively no importance compared to the labour, the contract is for work and materials.[14] While the case did not expressly say that in such case it would not matter who owned or supplied the materials, the facts of the case support such inference. The materials in that case were a canvas and oil paints. The service was the supply of a portrait. In such case it would not matter who owned or produced those materials or whether the worker sold them to other customers in the context of a separate sales business. The real substance of the supply in Robinson v. Graves was the painting of a portrait. That was clearly the primary object of the contract and primary purpose of the parties and in that context the materials supplied were of relatively little importance. That being said there could not be a finding that the contract was for the purchase of the materials. However, when relevant materials are supplied by both parties to the contract, the focus might change.
[24] When work is performed on the customer's goods, it is more likely a contract for work and materials even where relevant materials are added by the worker. This is confirmed in Crown Tire. While that case drew from factors such as the absence of a material source of revenue from sales not connected with services, it does not offer a principle in respect of which different factors might be considered when determining the possibility that accession actually goes in the opposite direction which is, essentially, the Appellant's alternative argument. That is, where both the worker's goods and the customer's goods are essential and important in the creation of a product, accession might go in either direction. The worker's materials might merge into the customer's goods or the customer's goods might merge into the worker's tangible property supplies.
[25] In Benjamin's Sale of Goods, 6th ed. at page 37, paragraph 44, it is noted that:
Where an article is to be manufactured, and all the materials are supplied by the person for whom the work is to be done, it is obvious that there can be no sale unless there is a specific transfer of the materials followed by a repurchase of the product. Where each party provides some of the materials or components, the task of the court is to determine which of them has supplied the "principal materials"; it then follows that the materials supplied by the other vest by accession in the owner of the principal materials. It has been held that the question which are the principal materials depends on all the circumstances, and that their relative value is not conclusive. [Footnotes omitted]
The authors go on to suggest an analogy that is noteworthy. Where an author brings a manuscript to a printer and the printer creates a book out of materials that are its property, is there a sale of property or a supply of work and materials when the finished product is delivered back to the author? The authors of Benjamin's Sale of Goods suggest that it is an extraordinary view to think that the printer has been engaged in a contract for the sale of goods. If the employer supplies the principal materials, the contract must be for one of work and materials. At paragraph 46 the authors go on to suggest that where work or skill is involved in the making of the goods delivered, it is possible, and often correct, to view the contract as "substantially" one for the worker's services. In my view, this general principle is helpful where both contractors supply materials that might be regarded as the principal materials in the performance of the contract. In such cases where a finding of principal materials is difficult to make, the importance of the skill and expertise of the worker might be determinative in finding that the supply is of a service.
[26] The notion of "principal materials" is helpful in the context of the case at bar. I noted earlier that fish mounts were a supply of tangible personal property even if the actual fish skins were used in the making of the mount. The fish skins are of no importance relative to the fish manikin, lacquers, paints and related materials and the skill and craftsmanship that go into the manufacture of the fish mount. The compelling evidence of that is that most fish mounts sold are replicas that do not use the fish skin. Where fish skins are used, the skins merge into the property of the Appellant. A transfer of the fish skins to the Appellant occurs by accession and there is a sale of the mount back to the customer.
[27] In the case of other wildlife mounts, similar evidence, that the actual specimen or animal parts supplied by the hunter are not material, is lacking. Examples of orders for mounts using replacements for damaged specimens and of sales of abandoned specimens appear to be exceptions. There is no disinterested evidence of the Appellant's perspective that its materials are the principal materials employed in connection with its services. Indeed the evidence suggests the contrary. In respect of wildlife mounts, the Appellant would have essentially no business without hunters contracting to have their property, their specimens, mounted. The specimens are the principal material. While the Appellant's supply of goods is material and significant, the hunters' wildlife specimens is of principal importance to both the hunters and the Appellant. Certainly the Appellant has not satisfied its burden of proof to establish otherwise.
[28] I note that my finding, that the principal material in this case is the specimen, is not dependent on the relative value of inputs, the source of profit, who manufactured the components used by the Appellant to give "life" to the hunters' specimens or the extent of the Appellant's taxidermy supplies sales business. The test applied is simply to take into account the significance of the materials themselves. A fish mount is a sale of goods because the fish skin is not a principal material. Other wildlife mounts are a supply of work and materials because the specimens are the principal materials. If there is any doubt as to this conclusion, the importance of the skill of the worker in the case at bar would also lead to a determination that the supply of wildlife mounts is of work and materials. The materials employed by the Appellant are merely the means by which the taxidermist best gives expression to that skill and as such are incidental in nature. Accordingly, there is no sale of goods which is zero-rated under section 12. The supply of wildlife mounts is a service excluded from being zero-rated pursuant to paragraph 7(e).
[29] Before concluding I note that the Appellant also raised issues as to the impact of inconsistent assessing practices, retroactive changes in assessing practices and miscommunication of assessing practices. I find no evidence to support these assertions. Indeed in my view the evidence is to the contrary. Changes in assessing practices, if any, were prospective. There were no miscommunications and the only inconsistency in assessing practices that I see is the inconsistency that would have arisen had the Appellant not been assessed on the same basis as his competitor Robertson.
[30] Accordingly, the appeal is allowed, without costs, only in respect of the following supplies to non-residents: the supply of fish mounts, the supply of wildlife mounts of specimens imported from outside of Canada, the supply of wildlife mounts that have been created from specimens not supplied by the purchaser and the supply of taxidermy components other than in the course of creating a wildlife mount.
Signed at Ottawa, Canada, this 25th day of October 2005.
Hershfield J.
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