22 January 2001 GST/HST Interpretation 6309 - Sections 1 and 8 of Part III of Schedule V to the Excise Tax Act

Dear XXXXX:

Sections 1 and 8 of Part III of Schedule V to the Excise Tax Act

This is in reply to your letter of November 1, 1999, concerning the XXXXX, which you originally sent to our XXXXX office. Your inquiry has been forwarded to our office for reply. We regret the delay in our response.

The GST/HST is administered by the Canadian Customs and Revenue Agency ("CCRA") under the provisions of the Excise Tax Act ("the ETA"), and an interpretation letter such as this provides an explanation of how particular provisions of the ETA apply. As explained below, the application of the ETA to your activities will depend upon an annual comparison of your revenues from various sources. Since these revenues vary from year to year, we are unable to provide a ruling as to how the ETA applies to your organization, since this may change from year to year. Instead, we will provide the following interpretations so that you may determine how the ETA would apply in any given year.

Background

The following is our understanding of your business operations, based on your submissions.

1. You operate XXXXX ("the Corporation"), incorporated in XXXXX in XXXXX XXXXX[.] The Corporation carries on business activities as XXXXX School ("the School"), and [("]XXXXX"). All corporate records and bank accounts are in the name of the numbered company. The Corporation is a GST/HST registrant.

2. Notwithstanding that it is but one part of the numbered company, the School is licensed as a vocational school in XXXXX pursuant to the XXXXX. It is also licensed as a private vocational school in XXXXX under the XXXXX XXXXX[.]

3. The School provides a fifteen week full time course in dog grooming three times per year. The School's curriculum is approved by the appropriate provincial authority, XXXXX. Successful students are awarded a certificate as a Professional Pet Stylist. The course is aimed at providing the students an occupational skill, and the certificate attests to this. Generally, students who receive a certificate go into the dog grooming business, either opening their own service or working for somebody else.

4. Applicants to the School must meet specific entrance requirements. They must be at least 18 years old, have a Grade 10 education and pass an aptitude test. The number of students per session can range from 4 to 10, with a maximum yearly enrollment of up to 30 students. To obtain a certificate, students must write three written exams, two practical exams and one professional deportment exam. These exams are graded on a numerical basis and students must receive a 75% average to pass the course and receive their certificate.

5. The staff of the School consists of yourself as a full time instructor, one other full time instructor, certified by the provincial government, and one instructor's aide. Other part-time staff may be called in as needed. Some may be employed in the XXXXX side of the business, but only on a part-time basis, as needed.

6. The School is subject to and complies with all regulatory requirements of XXXXX XXXXX the authority responsible for regulating private vocational training in the province. The School files monthly and annual reports on its activities with XXXXX XXXXX[.]

7. The current sources of revenue for the Corporation (both the School and XXXXX) are as follows:

The School

•   Registration Fees

•   Tuition Fee

•   Tools and Supplies

     (Note: There are three teaching sessions per year with between 4 to 10 students per session. As the number of students can vary, it is not possible to predetermine the exact revenue from the School.)

     XXXXX - Sales of pet supplies and grooming supplies to the public

•   Sales of grooming services to the public.

     In advertising for the School, the fees are listed separately. Students pay the registration in advance. However, students are sent one invoice for the tuition fee and the fee for required tools and supplies.

8. The School provides from 50% to 80% of the Corporation's revenue if the charges for pet grooming services by the School's students are attributed to the School. You submit that the revenue from XXXXX dog grooming services is revenue that is related to vocational instruction since students need animals to work on and such work is integral to their education.

9. If the dog grooming fees from XXXXX are not attributed to the vocational instruction, you estimate that the Corporation's total annual revenue would, in general, be split about evenly between the School and XXXXX. In addition, you do note that it is difficult to project the School's revenue for a particular period as you cannot predict in advance how many students will actually attend each of the three sessions you offer.

10. You have been advised, informally, by XXXXX, that there is no GST on supplies of the service of instruction made by the School, since these supplies, in their view, are exempt.

Interpretation Requested

Are the supplies of the services of instruction and administering examinations to students made by the Corporation, through its operation of the School, exempt from GST?

Interpretation Given

In order that you may determine whether the supplies of instruction by the school are taxable or exempt for any particular period, we will provide you the following interpretations of the relevant ETA provisions.

Your submissions indicate that the supply of your courses is comprised of several elements, being the instruction as well as the tools and supplies necessary to participate in the course, and that a single fee is charged for this supply. Accordingly, the tax status of the supply, whether taxable or exempt, would apply to the entire fee. However, if it were the case that the charge for the tools and supplies is invoiced separately so that the students have a choice of whether or not to purchase the tools and supplies from the School, then the tools and supplies would be viewed as a supply that is separate from the course. In this situation, the section 8 exemption described below would not apply to the tools and supplies.

Generally, under the provisions of the ETA, a supply made in the course of a business activity is taxable unless it is subject to an exempting provision. It appears that the only exempting provision that might apply to the instructional services and examinations supplied by the Corporation are the provisions of section 8 of Part III of Schedule V to the ETA.

Please note that both the taxing and exempting provisions of the ETA apply to a "person" and that, pursuant to subsection 123(1), a "person" means "... a corporation." Accordingly, it is the Corporation in your situation that must meet the requirements of the exempting provision, and not just the School, if the supply is to be exempt.

Section 8 (As recently announced, the Ways and Means Motion of October 4, 2000 proposes to repeal paragraphs (a), (b) and (c) below, as well as to provide a election for the exemption of section 8 not to apply.) is set out as follows:

A supply, other than a zero-rated supply, made by a school authority, vocational school, public college or university of a service of instructing individuals in, or administering examinations in respect of, courses leading to certificates, diplomas, licenses or similar documents, or classes or ratings in respect of licenses that attest, to the competence of individuals to practice or perform a trade or vocation where

(a) the document, class or rating is prescribed by federal or provincial regulation;

(b) the supplier is governed by federal or provincial legislation respecting vocational schools; or

(c) the supplier is a non-profit organization or public institution.

We will address the above conditions in reverse order. First, it is apparent that the Corporation meets the requirements either (a), (b) or (c) above. That is, since it is governed by provincial legislation respecting vocational schools, it meets the requirements of paragraph (b).

With respect to the preamble above, it is quite apparent that the Corporation supplies "courses leading to certificates, diplomas, licenses or similar documents, or classes or ratings in respect of licenses that attest, to the competence of individuals to practice or perform a trade or vocation." Accordingly, the only remaining requirement for the exemption to apply is for the Corporation to qualify as a vocational school (it is apparent that it is not a school authority, public college or university).

The definition of "vocational school" is set out in section 1 of Part III of Schedule V to the Act ("section 1") as follows:

'vocational school' means an organization that is established and operated primarily to provide students with correspondence courses or instruction in courses, that develop or enhance a student's occupational skills.

The CCRA's policy on this provision is set out in Policy Statement No. P-229, Definition of Vocational School in Section 1 of Part III of Schedule V (copy enclosed). The criteria outlined in the policy, and our analysis of how they might apply in your situation, are, in summary, as follows:

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

In order to meet the definition of "vocational school," an organization must be established primarily to provide courses that develop or enhance a student's occupational skills. To determine this, the CCRA will review the organization's governing documents. When these documents are not available, the CCRA will look to the activities of the organization (i.e. the extent to which the organization provides courses that develop or enhance student's occupational skills) as evidence of the purpose of its establishment.

Also, 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, although it is not conclusive evidence.

It is our understanding that the Corporation's governing documents are not useful in ascertaining its corporate objects. However, its website clearly emphasizes that it is "committed to providing the knowledge and training to become a Professional Dog Groomer" and the School is governed by the XXXXX. Given these factors, as well as the fact that it derives most of its revenue from the School and School related activities (dog grooming revenues earned by students), it is reasonable to conclude that the Corporation is "established primarily to provide courses that develop or enhance a student's occupational skills."

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

The policy statement explains that a qualifying vocational school will meet the test of "being operated primarily to provide students with ... (vocational) courses" if more than 50% of an organization's total annual revenue is derived from course tuition, or revenue that may otherwise be attributed to the provision of instruction in courses that develop or enhance a student's occupational skills.

Grants and contributions received from governments to provide occupational training courses to individuals, and revenue earned from the provision of property or services related to providing occupational instruction will be included in this revenue calculation. For example, this may include revenues from dog grooming fees earned by students in the course of their dog grooming instruction.

Because this test is based on a comparison of revenues from various sources, it is a test that must be applied on a yearly basis. As you have pointed out, it is usually not possible to predict in advance what the year's revenue from various sources will be. Our policy addresses this difficulty. The enclosed policy statement provides that "... if an organization meets the 'operated primarily' requirements in its previous fiscal year, and its intent continues to be to primarily offer courses that develop or enhance students' occupational skills, it will be considered a vocational school for the following fiscal year (emphasis added)." In other words, if it meets this revenue based test in 1998, for example, it will be considered a vocational school for its 1999 fiscal year.

On another matter, it appears that the fee charged for registration is a separate charge for this administrative service, rather than being a partial payment of tuition. In this case, the registration fee would be viewed as consideration for a taxable supply, since there is no exemption for it.

Proposed Amendments

The Department of Finance, on October 4, 2000, announced a Notice of Ways and Means Motion which, in part, contained certain proposed amendments to the exemption for vocational schools under section 8 of Part III of Schedule V. Of particular interest to you might be the following measure:

(The) proposed amendments to section 8 would provide an authority for suppliers to elect not to have their supplies exempted under this section. If the election were made by a supplier, all supplies that would otherwise be exempt under the section made by the supplier would be taxable (assuming the supplies were not covered by another exempting provision) ... . The amendment adding the election by a supplier is proposed to apply only to supplies for which all of the consideration becomes due after Announcement Date (October 4, 2000) or is paid after that day without having become due.

Summary

As outlined above, the Corporation will qualify as a vocational school for purposes of the exemptions under Part III of Schedule V for those years in which more than 50% of the previous year's revenues are from activities related to the vocational courses. This will include the course fees, charges to students for supplies related to the vocational courses, and revenues earned by students from dog grooming where this service was provided as part of their course program.

It is apparent that once the Corporation qualifies as a vocational school, its supplies of instruction in courses and administering examinations made by the Corporation, through its operation of the School, would be exempt pursuant to section 8 of Part III of Schedule V. In these circumstances, the Corporation would not be required to charge GST on fees charged for the supply of instruction, being tuition fees which include the charge for tools and supplies. However, the tools and supplies will not be covered by the exemption if they are viewed as a supply that is separate from that of the course.

The Corporation would not be entitled to recover the tax paid on purchases related to exempt supplies by claiming input tax credits. Input tax credits are available only with respect [to] purchases that are related to taxable supplies.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. The 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 Canada Customs and Revenue Agency 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) 954-7936.

Yours truly,

J. Michael Place
Charities, NPO's and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate