19 August 2004 GST/HST Interpretation 48872 - GST/HST Status of "Dim Sum" and other Chinese Food

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX, (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of dance lessons. We apologize for the delay in our response.

Interpretation Requested

You were inquiring whether, in view of the decision reached in Forever Dance Inc. v The Queen, (2003) TCC 661, your client could now be considered a vocational school and the dance lessons it supplies thus exempt of GST/HST.

Interpretation Given

It remains a question of fact as to whether an organization meets the definition of a vocational school as given in section 1 of Part III of Schedule V to the Excise Tax Act (the ETA). In Forever Dance Inc. v The Queen, an appeal heard under the Informal Procedure, the judge determined that the focus of that particular school was to train instructors. It does not necessarily follow that all dance schools have the same focus and can hence be considered vocational schools. The status of each organization must be determined on a case-by-case basis.

As we do not have any information concerning the types of courses offered by your client, or the primary objectives of the organization, we cannot comment on whether your client meets the legislative definition of a vocational school or whether the courses it provides are exempt. We hope, however, that the following information will assist you in determining your client's status.

Vocational School

Section 1 of Part III of Schedule V to the ETA sets out three principle criteria that an organization must meet in order to be considered a vocational school:

1. The organization must be established primarily to provide correspondence courses or instruction in courses, that develop or enhance students' occupational skills;

2. The organization must be operated primarily to provide correspondence courses, or instruction in courses that develop or enhance students' occupational skills; and,

3. The correspondence courses or instruction in courses must develop or enhance students' occupational skills.

(1) "... established primarily ..."

To determine whether an organization is "established primarily" to provide courses that develop or enhance students' occupational skills, the Canada Revenue Agency (CRA) will normally review the organization's governing documents. Where these documents are not determinative, the CRA will look to the activities of the organization for evidence of the purpose for its establishment.

Also, although not conclusive evidence of its primary purpose, where an organization is governed by provincial legislation respecting vocational schools, this will be considered an indication that one of the main purposes of the organization is to provide vocational training.

(2) "... operated primarily ..."

The CRA considers an organization to be "operated primarily" to provide courses that develop or enhance students' occupational skills if more than 50% of its 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.

Please note that an organization should review its operations on a yearly basis so as to ascertain whether it satisfies 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.

(3) "... develop or enhance students' occupational skills ..."

Occupational courses must have a direct link to skills that are essential for an individual to gain or retain employment. Courses in sports, hobbies, or other recreational or cultural pursuits that are designed for personal interest are not considered to develop or enhance a student's occupational skills.

As stated in policy paper P-229, Definition of "Vocational School" in Section 1 of Part III of Schedule V to the Excise Tax Act, the CRA 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) will also provide insight into whether its courses "develop or enhance students' occupational skills."

Qualifying Courses

Once it has been determined that an organization meets the definition of a "vocational school", this does not necessarily mean that any of the courses it supplies are exempt. The courses must also meet the requirements of the applicable exempting provisions of Part III of Schedule V. Sections 6 and 8 are the provisions most commonly applicable to courses supplied by vocational schools.

Section 6 exempts, among other things, a supply by a vocational school of a service of instructing individuals in courses leading to, or for the purpose of maintaining or upgrading, a professional or trade accreditation recognized by a regulatory body. Supplies of dance instruction are unlikely to fit within the provisions of section 6, as there are no regulatory bodies with the statutory authority to regulate dance. (A regulatory body is a body constituted or empowered by an Act of Parliament or of the legislature of a province to regulate the practice of a profession or trade by setting standards of knowledge and proficiency for practitioners of the profession or trade.)

To be exempt under section 8, 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.

The CRA will consider a course to provide individuals with the competence to practise a trade or vocation if the course has a direct link to skills that are recognized as relating to the ability to gain or retain employment. Generally, this requirement is not met by taking courses in sport, games or hobbies or other recreational or cultural pursuits, or courses designed for personal interest.

Thus, if all the other conditions are satisfied, courses supplied by a vocational school that are designed to train professional dance instructors may be exempt of tax pursuant to section 8. However, other dance courses (e.g., those designed to be taken for recreational purposes) would not be exempt under section 8.

Exemption under V/III/8 prior to October 5, 2000

Section 8 of Part III of Schedule V to the ETA was amended in 2001. Prior to the amendment, the exemption for courses provided by vocational schools was limited to cases where the requirements were not only (as now) that the courses should lead to certificates, diplomas, licences or similar documents, or classes or ratings in respect of licences, that attested to the competence of individuals to practise or perform a trade or vocation, but it was also required that

(a) The document, class or rating be prescribed by federal or provincial regulation;

(b) The supplier be governed by federal or provincial legislation respecting vocational schools; or

(c) The supplier be a non-profit organization or a public institution.

The amendment repealed these additional conditions and applies to supplies for which all consideration became due after October 4, 2000, or is paid after that day without having become due. The amendment also applies to any supply for which consideration became due or was paid on or before that day if the supply had been treated as exempt.

Refund, adjustment or credit of tax "collected in error"

You have requested a refund for your client of GST "collected in error". Please note that if the supplies in question were actually exempt, pursuant to section 225 of the ETA, any amounts collected as or on account of tax must be included in net tax. If, however, any tax is collected in error from a person (e.g., GST collected on exempt courses), section 232 of the ETA provides that a supplier may, within two years after the day the amount was collected, refund or credit that amount to that person. If the supplier should provide any adjustment, refund or credit of tax, it must issue a credit note containing prescribed information. After such tax has been refunded or credited, the supplier may then subtract (on its GST/HST return) the amount of tax adjusted, refunded or credited from net tax to the extent it was previously added to net tax. In other words, if tax is collected in error and reported on the supplier's GST/HST return, it must first be refunded or credited to the purchaser before the supplier ay claim any credit for it.

If any GST/HST was claimed in error by your client as an input tax credit (ITC) where none was actually available (e.g., GST paid on purchases relating to making exempt supplies), it should be repaid to the CRA immediately.

Apportionment of inputs to taxable and exempt supplies

Where a person makes both taxable and exempt supplies, in order to calculate a person's eligibility for ITCs, the inputs used to earn revenues must be apportioned between those used to make taxable supplies and those used to make exempt supplies. Subsection 141.01(5) of the ETA requires that a person use a fair and reasonable method in order to determine the extent to which properties or services are acquired, imported or brought into a participating province by the person for the purpose of making taxable supplies for consideration or for other purposes, or to determine the extent to which the consumption or use of properties or services is for the purpose of making taxable supplies for consideration or for other purposes.

The CRA's position with respect to ITC allocation methods is that the direct allocation method is the preferred method of allocation. Where it cannot be used, another input-based method may be used. In limited cases, an output-based approach (e.g., ratio of taxable to exempt revenues) may be considered. Policy Statement P-063, Output Based Method For Input Tax Credit Allocation, elaborates on the use of this method.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the CRA with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9592.

Yours truly,

Helena Ingr
Charities, NPOs and Educational Services Unit
PSBs and Governments Division
Excise and GST/HST Rulings Directorate

2004/07/27 — RITS 48971 — Section 201 of the Excise Tax Act