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Citation: 2003TCC805
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Date: 20031031
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Docket: 2003-1742(GST)I
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BETWEEN:
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TRAVEL NOW PAY LATER (CANADA) CORP.,
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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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REASONS FOR JUDGMENT
Bowie J.
[1] This appeal is from an assessment
for goods and services tax (GST) under Part IX of the Excise
Tax Act[1] (the
Act). At issue is the correct method of computing the
input tax credits (ITCs) to which the Appellant is entitled for
the period between January 1, 1996 and March 31, 2002. The appeal
was heard under the informal procedure of the Court. Mr. Harold
Heck, who is the major shareholder and the directing mind of the
Appellant, represented it. He was the only witness.
[2] Mr. Heck developed the concept of
a private label credit card to be issued under the name
"Travel Now Pay Later" to be marketed by travel
agencies to their customers to assist them in financing purchases
of travel. He incorporated the Appellant company to develop and
promote the concept. The Appellant supplies to travel agencies
who join the right to participate in the credit card plan by
issuing cards to their clients, and the physical supplies
necessary for them to do so. For this they pay the Appellant a
one-time set-up fee. Initially the fee was $925; later it was
reduced to $199. The cards can be used to pay for travel, and
also to purchase American Express travellers' cheques. Credit
is supplied to the customers by Citifinancial Services Canada
Ltd. (Citi). When a customer uses a card to make a purchase she
signs a voucher that the travel agent submits to the Appellant;
the Appellant in turn submits it to Citi. Citi deducts its fee
from the face of the voucher, and pays the balance to the
Appellant. The Appellant in turn deducts both the Citi fee and
its own fee, and remits the balance to the travel agent. The
Appellant also receives a commission on the sale of
travellers' cheques.
[3] It is common ground between the
parties that the supply of the right to participate in the
program, and the supplies that the agencies receive when they
join the program, are taxable supplies made for a consideration
equal to the set-up fee paid. It is also common ground that
the supplies of credit and of travellers' cheques are
financial services as defined by subsection 123(1) of the
Act, and therefore are exempt services. The parties are
also in agreement that the Appellant was not at any relevant time
a financial institution as defined in the Act.
[4] According to uncontested
assumptions pleaded by the Minister of National Revenue (the
Minister), the Appellant, in reporting under the Act,
claimed ITCs for all the GST paid by it for all the supplies that
it purchased during the period under review, making no allocation
between those supplies used in its taxable activities and those
used in its exempt activities. In its Notice of Appeal, and at
the hearing, the Appellant now takes the position that there
should be an apportionment, but that it should be on the basis
that 40 per cent is to be attributed to exempt activities and
60 per cent to taxable activities. As I understand Mr.
Heck's evidence, and his argument, this is based upon the
proposition that the major part of the expenses of the company
(and thus the goods and services acquired by it) were in support
of his personal activity visiting and selling to travel agencies
the right to participate in the Travel Now Pay Later credit card
program. He goes on to assert that these expenses give rise only
to the revenue from set-up fees paid by the agencies when they
first join the program. He would attribute all of the revenue
from commissions and from the credit card charge fees to the
expenditures incurred to run the office, which he says are less
than the expenses that he incurs travelling to visit the
agencies. His thesis is that once he has sold the program to the
travel agency the exempt transactions simply take place with no
need to incur expense other than that associated with the work of
the one clerk in the office who processes transactions.
[5] As the assessor did not give
evidence, and neither the assessments nor the audit report were
put into evidence, it is somewhat difficult to say with certainty
what was precisely the rationale behind the assessments in this
case. However, as I understand the Reply to the Notice of Appeal
and the argument of counsel, it appears that the Minister's
assessments were arrived at by attributing the supplies acquired
by the Appellant in each reporting period to taxable and exempt
supplies made by it in the ratio of the commercial and exempt
revenues that it earned in the period, and then applying section
141 of the Act, together with the Minister's
administrative policy that 90 per cent or more satisfies the
expression "all or substantially all". The result of
this was to entitle the Appellant to ITCs in the early period of
its existence when the set-up fees were a substantial part of its
income and the fees from financial services were negligible.
However, it was denied any ITCs in the later periods when the
fees from credit cards and the commissions on travellers'
cheques greatly exceeded the set-up fees.
[6] The right to receive ITCs, and the
manner in which they are to be computed, is governed by sections
169, 141 and 141.01 of the Act. I see no need to reproduce
these sections. They are lengthy and complex, but at the hearing
no argument was directed to them by either side, and I see no
ambiguity in them. For the purposes of this appeal they may be
summarized this way. The Appellant is entitled to receive ITCs
only to the extent that it has paid GST on property or services
that it has acquired for the purpose of making taxable supplies
for consideration. Financial services are not taxable supplies,
but the supply of the rights and property for which the Appellant
receives set-up fees are. Where the Appellant has acquired
property or services for the purpose of making both taxable and
non-taxable supplies, an allocation must be made between them.
The method of allocation must be fair and reasonable, and the
same method must be used consistently.
[7] In the present case it is not
disputed that an allocation is required. All that is disputed is
the method by which it should be done. The Appellant offered no
evidence to establish the use to which the property and services
purchased were put, other than his vague assertion that most of
it was in support of his efforts to extend the number of travel
agencies participating in the credit card arrangement. There was
no evidence of an attempt to segregate the expenses according to
their purpose. Nor was there any specific evidence resulting from
an attempt to measure the time and effort of himself and of his
staff in terms of their contribution to exempt and non-exempt
supplies. Mr. Heck in his Notice of Appeal proposed a 60-40
ratio, but his evidence did not support this or any other
specific ratio. The other impediment to accepting his argument is
that, although he did not acknowledge this in his evidence, it is
obvious that his own efforts, and the expenses for travel that
they involved, do not go only to producing the set-up fees, as he
would have us believe. Without his efforts in visiting the travel
agencies and persuading them to become participants there would
be no opportunity for the Appellant to earn either commissions on
travellers' cheques sold through the agencies or profits from
the credit card transactions. Clearly those expenditures make a
very significant contribution to the generation of income from
the financial services that the Appellant provides, although that
contribution is certainly not capable of quantification on the
evidence before me. The remaining method of allocation is that
used by the Minister's assessor, which was to allocate the
acquisitions in the ratio of the relative contributions to gross
revenue of the exempt and the taxable supplies made by the
Appellant. I find that to be the only method that is appropriate
in this case.
[8] The Appellant chose not to lead
any evidence as to its financial results for the periods that are
under appeal. The Respondent entered one somewhat rudimentary
statement of profit and loss for the period between July 1, 1999
and June 30, 2000. The Respondent has, however pleaded the
following assumptions of fact in the Reply to the Notice of
Appeal:
12. In so assessing the
Appellant, the Minister relied on the following assumptions of
fact:
...
(w) for the reporting
periods ending between:
(i) January 1,
1996 to December 31, 1996, no more than 82% of the supplies
acquired by the Appellant were for use in the course of the
Appellant's commercial activities;
(ii) January 1, 1997
to December 31, 1997, no more than 30% of the supplies acquired
by the Appellant were for use in the course of the
Appellant's commercial activities;
(iii) January 1, 1998 to
December 31, 1998 no more than 11.40% of the supplies acquired by
the Appellant were for use in the course of the Appellant's
commercial activities;
(iv) January 1, 1999 to
December 31, 1999, no more than 5% of the supplies acquired by
the Appellant were for use in the course of the Appellant's
commercial activities;
(v) January 1, 2000
to June 30, 2000, no more than 10.40% of the supplies acquired by
the Appellant were for use in the course of the Appellant's
commercial activities;
(vi) July 1, 2000 to June
30, 2001, no more than 6% of the supplies acquired by the
Appellant were for use in the course of the Appellant's
commercial activities;
(vii) July 1, 2001 to March 31,
2002, no more than 2% of the supplies acquired by the Appellant
were for use in the course of the Appellant's commercial
activities.
[9] The Appellant took no specific
objection to the Minister's application of the administrative
policy that any percentage in excess of 90 is considered to be
"substantially all". I would not want to be taken as
endorsing that policy for all cases and for the purposes of all
statutory references to "substantially all". Here the
Appellant made no effort to lead the relevant evidence, and did
not address the issue specifically in argument. In the three
periods to which the policy was applied the percentages of
revenue derived from commercial activities were 5 per cent, 6 per
cent and 2 per cent. In that context, I am of the view that it is
appropriate to consider that for those three periods the supplies
acquired by the Appellant were substantially all for use in the
course of its exempt activities. Although the Reply to the Notice
of Appeal is not entirely clear on the point, I understand that
to be the basis upon which the assessments under appeal were
generated. The appeals will therefore be dismissed. There will be
no Order as to costs.
Signed at Ottawa, Canada, this 31st day of October, 2003.
Bowie J.
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