Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 140892
September 4, 2013
Dear [Client]:
Subject: GST/HST INTERPRETATION
GST/HST Exemption for Dance Schools
Thank you for your fax of December 14, 2011, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a dance school owned and operated by your client. We apologize for our delay in responding.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references made refer to the Excise Tax Act (ETA) unless otherwise specified.
We understand that the following statements describe your client's situation.
You indicate that your client's situation is similar to the situations of the Appellants in 2 Canada Tax Court of Canada cases: in 2003, Forever Dance Inc. v Her Majesty the Queen, 2003 TCC 661 (referred to below as "Forever"), and, in 2007, Fleming School of Dance Limited v Her Majesty the Queen, 2007 TCC 651 (referred to below as "Fleming"). You emphasize that your client's fact situation is particularly similar to the school in Forever, especially in the following ways: [...]
INTERPRETATIONS REQUESTED
[...], you would like an interpretation, [...], that responds to the following questions.
Issue 1
Are your client's dance school fees subject to the GST/HST or is your client correct in treating the supplies as exempt?
Issue 2
How does the GST/HST apply to students who receive credits toward their high school diploma?
INTERPRETATIONS GIVEN
Issue 1
Forever and Fleming were decided under the Tax Court's Informal Procedure. The CRA does not view decisions made under the Informal Procedure to be binding precedents.
The following information may assist you in determining the status of your client's school. The applicable legislation can be summarized as follows.
There are three principle criteria that an organization must meet to be considered a vocational school:
(a) The organization must be established primarily to provide correspondence courses or instruction in courses, that develop or enhance students' occupational skills;
(b) The organization must be operated primarily to provide correspondence courses or instruction in courses that develop or enhance students' occupational skills;
(c) The correspondence courses or instruction in courses must develop or enhance students' occupational skills.
GST/HST Policy Statement P-229, entitled: Definition of "vocational school" in Section 1 of Part III of Schedule V to the Excise Tax Act (http://www.cra-arc.gc.ca/E/pub/gl/p-229/README.html), explains how to determine if an organization is a "vocational school" within the meaning of the ETA. The exemption for courses is explained in Policy Statement P-231, Courses that Qualify for exemption Pursuant to Section 8 of Part III of Schedule V to the Excise Tax Act (http://www.cra-arc.gc.ca/E/pub/gl/p-231/README.html).
A summary of the application of the CRA's policy statements to dance schools follows.
Established primarily
To ascertain whether an organization is "established primarily" to provide correspondence courses, or instruction in courses that develop or enhance students' occupational skills, the CRA will review the organization's governing documents.
These documents, which include the letters patent, articles of incorporation, memoranda of agreement, by-laws, and articles should reveal the purpose of the organization. Where these documents are not available or are not determinative, the CRA will look to the activities of the organization (i.e., the extent to which the organization provides courses that develop or enhance students' occupational skills) as evidence of the purpose for its establishment.
Operated primarily
One method that the CRA will accept to demonstrate that an organization is "operated primarily" to provide correspondence courses or instruction in courses that develop or enhance students' occupational skills is based on total revenues, as follows.
Income test
If more than 50% of an organization's total annual revenues are derived from tuition for courses, or may be attributed to the provision of instruction in courses, that develop or enhance students' occupational skills, the CRA will consider the organization to be operated primarily as a vocational school. Consequently, revenues earned from the provision of property or services that are related to, or dependent on, the provision of the instruction [in such courses] will be included in the revenue calculation for determining the primary purpose of the organization.
The determination of whether more than 50% of a dance school's total annual revenue is derived from courses which develop or enhance a student's occupational skills can be somewhat complex and is ultimately a question of fact to be decided on a case-by-case basis. This income stream may include fees for the provision of property or services that are related to, or dependent on, the provision of courses or instruction which clearly develops or enhances a student's occupational skills such as the purchase of manuals, an examination or testing fee or a certification fee. It may also include courses which develop or enhance a student's occupational skills but which are not exempt of tax because they do not meet the requirements of section 8 which are described below.
For the purposes of this income test, income from non-vocational dance lessons (e.g. courses taken for general interest, fitness or recreation) cannot be included in the amount of revenue derived from courses that develop or enhance a student's occupational skills, even if the dance school uses this source of added income as a means of defraying the costs of providing courses which are vocational in nature.
Other evidence
There is other evidence that, when weighed together, may be acceptable to the CRA. The person who established and operates the school may state that their intention was to establish and operate a school that would give every graduate the tools to find a vocation in dance. The statement would have to be supported with documentation (e.g., promotional material) and a detailed presentation of facts as to how that primary intention was accomplished (e.g., the business plan). Marketing expenditures may be reviewed in order to determine if more than half the amount of money the school spends on marketing is aimed at attracting serious students who want to become teachers of dance or professional dancers.
A vocational dance school would be expected to have a highly trained faculty. The teachers of a vocational school would be expected to have earned certification that demonstrates that they are qualified to teach courses beyond those that are recreational in nature. A review of leading vocational dance schools' faculty finds that their teachers also have extensive professional experience. A vocational dance school would be expected to provide more emphasis (e.g., reflected in the number, frequency, availability of its courses) on vocational courses rather than the recreational ones. Similarly, a vocational dance school would be expected to provide more emphasis on vocational courses rather than on those courses of a recreational nature (e.g., reflected in the ratio of students registered in the 2 streams).
Direct link to employment
With respect to the courses being offered, P-229 states:
To be considered a vocational school, the correspondence courses, or instruction in courses offered by an organization must develop or enhance students' occupational skills. On this basis, "occupational courses" must have a direct link to skills that are essential for an individual to gain or retain employment.
The Department does not consider the following courses to develop or enhance a student's occupational skills:
• sports;
• games;
• hobbies; or
• other recreational or cultural pursuits, that are designed for personal interest.
The Department will examine the curriculum and promotional material of an organization to identify the type of courses provided, whether the courses lead to certificates, diplomas or similar documents, and whether the courses are marketed as providing skills needed for employment or for recreational or personal interest. How the organization promotes its activities (e.g., in its brochures, advertisements, literature, course calendar, telephone listings) will also provide insight into whether its courses "develop or enhance students' occupational skills."
Annual review
An organization should review its operations on a yearly basis so as to ascertain whether it continues to satisfy the "operated primarily" requirement for a "vocational school." If an organization meets the requirements as a vocational school in its previous fiscal year, and its intent continues to be primarily to offer courses that develop or enhance students' occupational skills, it will continue to be a vocational school for the following fiscal year. If, however, in that following year the organization fails to meet the "operated primarily" requirement, it will cease to be a vocational school for supplies made after that year.
Courses
Meeting the definition of a vocational school does not in itself relieve an organization from collecting and remitting the GST/HST.
In order to be exempt, courses provided by the vocational school must meet the requirements of section 8, Part III, of Schedule V. The courses must lead to certificates, diplomas, licences or similar documents, or classes or ratings in respect of licences, that attest to the competence of individuals to practise or perform a trade or vocation. Courses that do not meet this requirement are taxable even when provided by a vocational school.
For example, in all six levels of the Royal Academy of Dance Vocational Syllabus a student must pass an exam in order to continue to the next level. A student is awarded a certificate only on successful completion of the level being examined. The certificate attests to the student's ability to audition for entrance into a higher-level of dance instruction, or to pursue a non-performing career in dance.
On the other hand, we understand from a review of dance school websites that a dance school may offer a number of programs, such as "recreational," "drop-in," and "adult social-event" dance classes, which are promoted to prospective students who do not have ambitions to be a dance teacher or professional dancer. These classes are not considered to be vocational classes.
Vocational Dance Companies
The heading found in the ETA above section 8 of Part III of Schedule V is: Vocational Courses. As mentioned previously, the tax exemption applies to services of occupational instruction made by certain educational institutions including public colleges, universities and vocational schools. Many privately operated training schools offer only specialized occupational training to eligible students. Individuals choosing to enroll at such vocational schools want to become: heavy equipment operators, court reporters, barbers, industrial cooks and veterinary assistants, to name a few. These vocational schools do not usually offer training or classes intended for recreational purposes. However, a number of businesses exist to offer both vocational and recreational courses. Examples may include: swim schools, martial arts and yoga studios, scuba diving schools and flight schools.
The ETA is specific in requiring that educational institutions be established and operated primarily to develop or enhance students' occupational skills, as opposed to being established and operated mostly to offer general interest or recreational courses. Some vocational dance schools that were established primarily to offer tax-exempt dance classes for students wishing to pursue dance as a vocation may find a growth in popularity of their recreational courses. This growth may impact their standing as a vocational school over time. They may wish to consider creating a separate legal entity to provide these recreational type dance classes that would be subject to GST/HST if supplied otherwise than by a person qualifying as a small supplier.
Issue 2
Whereas the tax exemption pursuant to section 8 of Part III of Schedule V applies to services of occupational instruction made by educational institutions such as public colleges, universities and vocational schools, subsection 9(a) of Part III of Schedule V provides an exemption for services provided by other types of service providers. It provides an exemption to:
A supply of a service of tutoring or instructing an individual in
(a) a course that is approved for credit by ... a school authority.
In Policy Statement P-233, Tutoring or Instructing in Courses Approved for Credit by a School Authority, the CRA takes the following position:
The supply of a course will be exempt of tax pursuant to paragraphs 9(a) and 9(c) based on a "supply-by-supply" basis. That is, the exemption under 9(a) only applies to supplies to those individuals in a class for whom the course is approved for credit by a school authority. Where only a portion of the individuals in a class may receive a credit from a school authority, and others may not, the exemption will apply only to the supplies made to those individuals who may receive the credit.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-1175. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Dwight Kostjuk
Aboriginal Affairs & Educational Sectors Unit
Public Service Bodies & Governments Division
Excise and GST/HST Rulings Directorate
Email this Content