|
Citation: 2003TCC936
|
|
Date: 20031219
|
|
Docket: 2003-1918(GST)I
|
|
BETWEEN:
|
|
MARCO POLO TRAVEL LTD.,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Miller J.
[1] On December 11, 2002, the Minister
of National Revenue ("the Minister") assessed the
Appellant, Marco Polo Travel Ltd. ("Marco Polo")
respecting goods and services tax ("GST") returns for
the period from December 1, 1999 to December 31, 2001, on the
basis that Marco Polo had understated GST by $63,259.46. The
understatement arose as a result of the Minister's
application of section 163 of the Excise Tax Act (the
Act) to include, as part of the taxable portion of the
price of a Marco Polo Las Vegas package tour, approximately 47%
of Marco Polo's mark-up or profit margin. The Minister
arrived at the 47% figure by averaging the cost of the taxable
airfare on Marco Polo's Las Vegas package tours, compared to
the total cost of airfare and the non-taxable US accommodation
costs. Mr. Ma, the owner of Marco Polo, argued that none of the
mark-up, the profit margin, related to the airfare, but only to
the US hotels, and therefore none of it should be attributed to
the taxable airfare portion of the tour package price, and
consequently not subject to GST.
[2] While Mr. Ma presents an
intriguing, and indeed logical, argument, it does not accord with
my interpretation of section 163, and his appeal must be
dismissed.
[3] Marco Polo sells package tours to
Las Vegas from Vancouver on a wholesale basis. Its customers are
travel agents. Marco Polo has a stable of approximately 15
three-to-five stars Las Vegas hotels, upon which to draw in
packaging its tours. Marco Polo had a deal at the relevant time
with Alaska Airlines for Vancouver - Las Vegas return flights at
a certain price. Mr. Ma provided an internal company worksheet
(although for 2003, he stated it would have been the same format
in 2001), which illustrated the standard cost of airfare and the
cost of each hotel for varying lengths of stay. By way of
example, the following is the first line of the Aladdin Hotel
package:[1]
|
3 NIGHTS
|
ALADDIN RESORT
|
ADJUSTED PRICES
|
|
OUT
|
RETURN
|
ROOM
|
AIR
|
HTL/AIR
|
M/U
|
TWIN
|
EXTRA PERSON
|
½ TWIN
|
TRIPLE
|
QUAD
|
|
Mar 1
|
5
|
Mar 4
|
1
|
268
|
250
|
518
|
40
|
558
|
499
|
678
|
648
|
638
|
[4] The room was estimated at $268,
airfare at $250, Marco Polo's mark-up of $40 and the final
price to the agent of $678: the additional $120 was the
agent's estimated commission.
[5] Mr. Ma testified that there was no
room for profit for a wholesale tour operator on the airfare
portion of the package. Indeed, according to Mr. Ma, the travel
industry has changed so dramatically over the last few years, a
customer is as likely to get a better airfare on the internet,
than what Marco Polo can offer. There are no commissions on
airfare anymore. Mr. Ma further testified that the attraction of
Marco Polo's tours has nothing to do with airfare, and
everything to do with getting a good Las Vegas hotel at a good
price. He suggested that if just the hotel package was sold,
without airfare included, in the Aladdin Hotel example above, the
mark-up would remain at $40. Mr. Lyle Ralph Ware, the GST auditor
from Canada Customs and Revenue Agency, first assessed Marco Polo
simply relying on the ratio of air to hotel, in respect of just
one hotel. On appeal, he averaged all 15 hotels' costs,
compared to airfare, and came up with a percentage of 47.21% (see
Appendix "A").[2] Mr. Ma made it clear that he had disagreed with this
percentage, as it did not accurately reflect the actual
percentage on a hotel-by-hotel basis, taking into account the
volume of tour packages. More significantly, Mr. Ma maintains 0%
was the applicable rate to be applied to the mark-up. He took
exception to Mr. Ware's reliance on GST Memorandum 27.1,
as that memo was issued in 1995, at a time prior to the
tremendous change in the industry; at a time when a tour operator
such as Marco Polo could have made some profit on the air
portion of its package. By 2001 that was not possible.
[6] What Mr. Ma is arguing is that the
government should exercise some discretion in making a reasonable
allocation of the mark-up between the taxable and non-taxable
portion of the tour packages based on the realities of travel
industry - the reality that the operator does not make money from
the air portion.
[7] It is necessary to dissect the
provisions of subsection 163(1) to determine if indeed there is
any room for an exercise in reasonableness
vis-à-vis Marco Polo's allocation of the
mark-up. The relevant provision is section 163:
163(1) For the purposes of determining tax payable in
respect of portions of a tour package, the consideration for a
supply of the provincially taxable portion of the tour package or
the non-provincially taxable portion of the tour package, as the
case may be, (in this subsection referred to as the "relevant
portion") is deemed to be
(a) where the
supply is made by the first supplier of the tour package, the
amount determined by the formula
A x B
where
A is the
taxable percentage in respect of the relevant portion at the time
the supply is made, and
B is the
total consideration for the entire tour package; and
(b) where the
supply is made by any other person, the amount determined by the
formula
A x B
where
A is the
percentage that the consideration for the supply to the person of
the relevant portion is of the total consideration paid or
payable by the person for the entire tour package, and
B is the
total consideration paid or payable to the person for the entire
tour package.
163(3) In this section and in Part VI of Schedule
VI,
"base percentage", at any time, in respect of the provincially
taxable portion of a tour package or the non-provincially taxable
portion of a tour package, as the case may be, (in this
definition referred to as the "relevant portion") means the
percentage determined by the formula
A/B
where
A is the part
of the amount (in this definition referred to as the "base
price") that would be charged by the first supplier of the tour
package for a supply at that time of the tour package that is, at
that time, reasonably attributable to the relevant portion,
and
B is the
base price;
"taxable percentage", at a particular time, in respect of the
provincially taxable portion of a tour package or the
non-provincially taxable portion of a tour package, as the case
may be, (in this definition referred to as the "relevant
portion") means
(a) where the
difference between the base percentage at that time in respect of
the relevant portion and either the initial taxable percentage in
respect of the relevant portion or the base percentage at an
earlier time in respect of the relevant portion is more than 10
percentage points, the base percentage at the particular time in
respect of the relevant portion, and
(b) in any other
case, the initial taxable percentage in respect of the relevant
portion;
"taxable portion" of a tour package means all property and
service included in the tour package and in respect of which tax
under Division II would be payable if the property or service
were supplied otherwise than as part of a tour package;
"tour package" means a combination of two or more service, or
of property and service, that includes transportation service,
accommodation, a right to use a campground or trailer park, or
guide or interpreter service, where the property and service are
supplied together for an all-inclusive price.
[8] Subsection 163(1) is the operative
deeming section: it deems the taxable portion of the entire tour
package to be the total consideration for the package multiplied
by something called the taxable percentage. This deeming
provision on its face, affords no opportunity for a determination
of reasonableness: it is strictly a mathematical calculation.
Turn then to the definition of one element of the calculation,
the taxable percentage. Unless there is a significant change in
the percentage, which I will not delve into at this stage for the
sake of simplicity, the taxable percentage will be the initial
taxable percentage. The initial taxable percentage is the part of
the amount to be charged by the tour operator which is reasonably
attributable to the taxable portion, divided by the initial
price. There is no question that it is reasonable to attribute
the cost of airfare as being the taxable portion. That is the
extent of the reasonableness determination. This definition is
not framed in terms of a reasonable allocation of the mark-up to
taxable or non-taxable. It is framed in terms of what
reasonably is the taxable portion, and what reasonably is the
taxable portion is the airfare. This is where I believe Mr. Ma is
mistakenly interpreting the provisions. To accept Mr. Ma's
interpretation would require a reading that "initial
price" includes the mark-up. GST Memorandum 27.1 suggests
the initial price is to be interpreted as only the cost of the
airfare and the hotel. I believe that is the correct
interpretation.
[9] It is helpful to look at the
meaning of "basic price", found in the definition of
"base percentage". Basic price is not defined with
great clarity in the definition. However, one can assume by the
use of the word "base" that this implies a starting
point - some amount before any add-ons. In the Marco Polo tour
package scenario this would suggest the cost of the airfare and
hotels and nothing else. To put some numbers to this, I will rely
upon the example used in GST Memorandum 27.1: assume a Las Vegas
package as follows:
|
Return Airfare Vancouver to Las Vegas
|
$200
|
|
Aladdin Hotel (3 nights)
|
$300
|
|
Profit margin (mark-up)
|
$50
|
The base price in this example would be $500 and therefore the
base percentage would be 200 divided by 500 or 40%. However, it
is the taxable percentage, not the base percentage that is the
definition used in the deeming section, subsection 163(1).
Taxable percentage can be either the base percentage or the
initial taxable percentage. It will only be the base percentage
if there is a significant discrepancy between the base percentage
and an initial taxable percentage, otherwise the taxable
percentage will be the initial taxable percentage.
[9] The initial taxable percentage is
worded slightly differently than the base percentage: the initial
price, as opposed to the base price, is the "amount to be
charged by that supplier for a supply of the tour package".
At first blush, one might assume this must mean something
different from the "base price", yet that is not the
case: the two may be the same. The definition of taxable
percentage refers to the magnitude of the difference between the
base percentage and the initial taxable percentage, which
suggests these percentages can differ one way or another or, in
fact, can be the same; in effect, the initial price and the base
price can be the same. The two elements of the percentage in each
case must be the taxable portion as the numerator and the sum of
the taxable portion and non-taxable portion as the
denominator. Only if one of those elements changes does the
initial taxable percentage differ from the base percentage. The
mark-up cannot form part of the denominator.
[10] This review simply highlights that
there is no room in working through these definitions for the
exercise of any discretion in determining the percentage of the
profit margin that is taxable. The formula is intended to simply
prorate the profit margin or mark-up, with no capacity for an
appraisal based on any other factors, such as those raised by Mr.
Ma. The fact that GST Memorandum 27.1 was published in 1995 is
not relevant, as changes in the travel industry since then have
no impact on the section 163 calculation.
[11] Notwithstanding Mr. Ma's
understandable approach to an allocation of Marco Polo's
mark-up, it is simply not in line with the requirements of
section 163. Mr. Ma presented no detailed numbers for
the tour packages in the years in question to allow me to more
exactly verify the appropriate taxable percentage. I am therefore
prepared to rely upon the Minister's taxable percentage based
on the average calculation in Appendix "A". I suggest
that in future the numbers on a tour package by tour package
basis are more appropriate for the determination of the correct
GST exigible.
[12] The appeal is dismissed.
Signed at Ottawa, Canada, this 19th day of December, 2003.
Miller J.
Email this Content