Citation: 2014 TCC 80
Date: 20140324
Docket: 2011-1556(GST)G
BETWEEN:
CAITHKIN INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1]
Caithkin Inc. is
involved in the provision of foster care to children in Ontario. It is
registered for GST. From April 1, 2004 to December 31, 2004 and April 1, 2005
to March 31, 2009, Caithkin made supplies of various services to various
Children’s Aid Societies in Ontario. Caithkin did not collect or remit GST on
those supplies. Caithkin took the position that the supplies were exempt
supplies under Schedule V, Part IV, section 2 of the Excise Tax Act (the
“Act”). Despite believing that the supplies were exempt supplies,
Caithkin nonetheless claimed input tax credits in respect of those supplies.
[2]
The Minister of
National Revenue (the “Minister”) reassessed Caithkin for its reporting periods
from April 1, 2004 to December 31, 2004 and April 1, 2005 to March 31, 2009 on
the basis that Caithkin’s supplies to the Children’s Aid Societies were not
exempt supplies. Despite believing that the supplies were taxable supplies, the
Minister nonetheless denied the input tax credits claimed by Caithkin.
CONCESSIONS
[3]
The Respondent concedes
that Caithkin’s reporting period from April 1 to June 30, 2004 is statute
barred and consents to Caithkin’s appeal in respect of that period. This
concession means that the reporting periods remaining in issue are July 1,
2004 to December 31, 2004 and April 1, 2005 to March 31, 2009 (the “Reporting
Periods”) and that Caithkin’s net tax for its reporting period from April 1
to June 30, 2004 will be reduced by $25,563.40.
[4]
The Respondent also concedes
that if the supplies that Caithkin made to the Children’s Aid Societies are
taxable, then Caithkin is entitled to an additional $77,496.73 in input tax
credits in respect of the Reporting Periods. Correspondingly, Caithkin concedes
that if the supplies are exempt, then Caithkin is not entitled to any input tax
credits in respect of the Reporting Periods.
WITNESSES
[5]
The Respondent did not
call any witnesses. Caithkin called 11 witnesses: the 2 owners of
Caithkin; a representative from the Ontario Residential Care Association (an
industry organization representing companies like Caithkin); a representative
from a Children’s Aid Society; a representative from the Ontario Association of
Residences Treating Youth; a representative from the Ontario Ministry of Children
and Youth Services; 4 foster parents who work with Caithkin; and a Canada Revenue
Agency official.
[6]
I found all of the
witnesses to be credible. That said, the 2 owners of Caithkin and the 4 foster
parents all tended to describe what appear to be rare or infrequent events as
if they were the norm. While I accept that the events in question did occur, I
am not prepared to accept the implication that they were common. I am also not,
in all cases, prepared to accept that they actually took place in the Reporting
Periods as cross-examination revealed that not to have been the case. While I
have given less weight to this type of evidence from these witnesses, the fact
that I have done so has not affected my overall decision on this matter.
THE FOSTER CARE SYSTEM IN ONTARIO
[7]
There are 4 key players
involved in the foster care system in Ontario: the Ontario Ministry of Children
and Youth Services, Children’s Aid Societies, Outside Payment Resources and
foster parents.
(a)
Ontario Ministry of Children
and Youth Services: The
Ministry of Children and Youth Services (the “Provincial Ministry”) is in charge
of the foster care system and provides funding to each Children’s Aid Society. The
Provincial Ministry also licences Outside Payment Resources.
(b)
Children’s Aid
Societies: There are
approximately 54 different Children’s Aid Societies in Ontario. The Children’s
Aid Societies (the “Societies”) in essence administer the foster care system
for the Provincial Ministry. The Societies are the legal guardians of the
foster children in their care. Some Societies also act as Outside Payment
Resources.
(c)
Outside Payment
Resources: Outside Payment Resources are intermediaries who sit between the
Societies and the foster parents. Caithkin is an Outside Payment Resource. In very
simple terms, Outside Payment Resources find qualified foster parents, train those
foster parents, place the foster children that are assigned to the Outside
Payment Resource by a Society with those foster parents and supervise those
foster parents on an ongoing basis. A given Outside Payment Resource may
provide an array of other important services. I will discuss the specific
services provided by Caithkin in more detail below. There are approximately 167
Outside Payment Resources in Ontario. Outside Payment Resources are required to
be licensed by the Provincial Ministry. In some areas of Ontario there are no
Outside Payment Resources. In those cases, the Societies themselves fulfill the
role of Outside Payment Resources in which case they are required to have the
same license from the Provincial Ministry.
(d)
Foster Parents: The foster parents are the individuals
who take foster children into their homes. They are not employees of the
Outside Payment Resources. The testimony and legislation regarding whether
foster parents require licenses were, at best, confusing and, at worst, conflicting.
It is clear that a foster parent does not require a licence to foster fewer
than 3 unrelated children. As there is no evidence that any of Caithkin’s
foster parents exceeded this limit, I will accept for the purposes of the
appeal that during the Reporting Periods Caithkin’s foster parents did not
require licenses.
[8]
The Provincial Ministry
funds the Societies based on the number of children that a given Society has in
its care. Outside Payment Resources negotiate with the Provincial Ministry to
determine a per diem amount that they will receive for each foster child
staying with the Outside Payment Resources’ foster parents. The Outside Payment
Resources, in turn, pay a smaller per diem amount to foster parents for each
child in the foster parents’ care. In determining the per diem amount to pay to
the Outside Payment Resources, the Provincial Ministry takes into account the
per diem amounts that the Outside Payment Resources will have to pay to the
foster parents. The payments giving rise to this appeal are the per diem
amounts paid by the Societies to Caithkin.
CAITHKIN’S OPERATIONS
[9]
Caithkin is owned and
operated by Leslie Listro and Ainslie Tomlinson. Caithkin’s staff consists of
Ms. Listro, Ms. Tomlinson, a number of resource workers, some office staff and
a number of volunteer drivers. Resource workers are employees of Caithkin who
are assigned responsibility for a given set of foster homes. Caithkin also
retains the services of a number of independent contractors who Caithkin calls
“one-to-one workers”.
[10]
Throughout the
Reporting Periods, Caithkin had a license from the Provincial Ministry that
allowed it to be the Outside Payment Resource for up to 30 foster care homes.
Caithkin was required to renew its license annually.
[11]
The easiest way to understand
what Caithkin does is to look at its interactions with others.
Provincial Ministry
(a)
The Provincial Ministry
issues a licence to Caithkin each year. The licence is subject to various detailed
terms and conditions attached thereto. Those terms and conditions include the following:
•
requirements that Caithkin
have various written policies and procedures regarding such things as access to
natural parents, the provision of health care, the foster child’s privacy,
money earned by the foster child inside or outside of the foster home,
acceptable disciplinary actions, acceptance or rejection of potential foster
parents, the criteria used for placing foster children with foster parents,
emergency relief for foster parents, development of foster parents, closing
foster homes and serious occurrences (e.g. serious injury of a foster child);
•
reporting requirements
to both the Societies and the Provincial Ministry;
•
record keeping
requirements;
•
health and safety
requirements for foster homes;
•
the requirement to
ensure that foster children have a supply of suitable clothing and that food
suitable to their dietary needs is provided;
•
policies regarding
changes in placement of a foster child;
•
requirements for
selecting foster parents;
•
requirements that a formal
complaint process be in place for foster parents to use; and
•
requirements to conduct
an annual review of each foster parent.
(b)
These terms and
conditions appear, in large part, to reflect the requirements set out for
licensees in the Child and Family Services Act Regulations, R.R.O. 1990,
Regulation 70. The requirements of licensees are also described in extensive
detail in a manual produced by the Provincial Ministry called “Foster Care
Licensing”.
Societies
(c)
Caithkin signs an annual
contract with each Society called a “Resource Service Agreement”.
(d)
When a Society has a
foster child that it needs to place, it contacts Caithkin to see if Caithkin is
able to accept that child. Caithkin considers the needs of the child and the
resources that Caithkin and its foster parents have available and decides
whether to accept the child or not.
(e)
In accordance with
Provincial Ministry requirements, within 7 days of placing a child with a
foster parent, Caithkin meets with a representative of the Society, which has placed
the child, and the foster parent to develop a treatment plan for the child.
That plan is updated after 30 days of care and is reviewed on an ongoing basis.
Caithkin is responsible for ensuring that that plan is implemented. The plan
includes such items as schooling, access to the child’s natural parents or
siblings, medical issues, psychological issues, access to the child’s friends, legal
issues (e.g. probation conditions), family court issues and extra-curricular
activities.
(f)
Caithkin files regular reports
with the Societies regarding the foster children that its foster parents are
looking after.
(g)
Since the Societies are
the legal guardians of the foster children, if the guardian’s consent is needed
for something in a given foster child’s life (e.g. for medical care or a school
trip), Caithkin looks after obtaining that consent from the Society.
(h)
Each month Caithkin
invoices each Society for the foster children that that Society has assigned to
Caithkin.
Foster Parents
(i)
Caithkin finds and
recruits suitable foster parents. Initial recruitment involves an information
session that describes what will be required of the foster parents and the
resources that will be provided by Caithkin. Caithkin then conducts an
assessment process that includes a lengthy application, criminal record checks
for anyone over 18 years of age living in the potential foster parent’s house,
medical clearance of all people in the house, personal and professional
reference checks and one or more detailed interviews. The review process also
includes an audit of the foster parent’s house to ensure that it meets all of
Caithkin’s standards. These standards include items that one would expect from
anyone who was providing accommodation such as fire safety, cleanliness and
security standards. The standards also include items that most parents would
normally attend to but that the Provincial Ministry requires Caithkin to ensure
have been looked after such as the vaccination of pets. Finally, the standards
include items that parents outside of the foster care system may not
necessarily adhere to but which the Provincial Ministry requires of all foster
homes such as requirements that all medicine in the house be stored in a locked
cabinet.
(j)
If a foster parent is
accepted by Caithkin, Caithkin then trains him or her to ensure both that he or
she is fully aware of the requirements of the Provincial Ministry, the
particular Society that Caithkin is working with and Caithkin itself and that
he or she is able to carry out his or her responsibilities. Some training is
also provided by the Societies. It was clear from the evidence that Caithkin
takes great pride in the quality of training that it provides to its foster
parents and that the foster parents feel that they truly benefit from that
training.
(k)
Caithkin has prepared an
extremely detailed foster parent policy manual (over 250 pages long) which sets
out all of its policies and procedures. For example, the manual sets out Caithkin’s
policies on disciplining foster children, reporting behavioural issues, dealing
with criminal conduct and communicating with the foster child’s natural
parents. Caithkin ensures that all potential foster parents are completely
familiar with its policy manual. The manual was created to meet the Provincial
Ministry requirement that Caithkin establish certain policies and guidelines
and communicate those policies and guidelines to its foster parents in writing.
The manual conforms to the standards set by the Provincial Ministry.
(l)
When a Society
approaches Caithkin about accepting a given foster child, Caithkin speaks to
one or more of its foster parents to see if they would be prepared to foster
that child. The decision of which foster parents to choose rests with Caithkin.
The decision whether to accept the child rests with the foster parents.
(m)
If a given foster child
has any particular religious, dietary, social, physical or mental needs,
Caithkin will require any foster parent who wishes to foster that child to
adjust their home and/or routine to accommodate those needs. For example, if a
foster child has been sexually abused in his or her own home and the bedroom where
the abuse occurred was painted beige, Caithkin may require the foster parents
to paint the child’s room a distinctly different colour in order to help the child
feel safer.
(n)
Once a child is placed
with a foster parent, Caithkin conducts annual audits of the foster parent’s home
to ensure that Caithkin’s standards are being maintained. Caithkin prepares
annual reports on each foster parent. The reports are shared with the foster parents.
They note areas that require improvement and set goals for the coming year. If
a foster parent is not meeting expectations and the problem cannot be
reasonably addressed, Caithkin removes the foster child from the foster parent’s
home.
(o)
Caithkin continues to
train the foster parents through mandatory group training sessions every second
week throughout the year. Among other things, these training sessions help the
foster parents to better understand challenges that some foster children may
face such as autism or fetal alcohol syndrome. Towards the end of the Reporting
Periods, Caithkin began accepting foster children with greater psychological or
physical challenges. The training that Caithkin conducted was essential to
enabling its foster parents to care for those children. Failure to attend
training sessions can result in a foster parent receiving a lower per diem rate.
(p)
The foster parents regard
Caithkin as an expert in all matters relating to foster care. They frequently
seek Caithkin’s input and guidance and defer to its expertise. Caithkin
provides that input and guidance through its resource workers. The resource
workers provide their assistance either at the foster home or over the phone
depending on the circumstances. If issues develop with a foster child, the
resource workers will provide support for the foster parents. That support can
range from providing strategies to address the problem, to acting as an
intermediary to help de-escalate the problem to the point where the foster
parent can manage, to stepping in and taking care of the problem in place of
the foster parents, to removing the foster child from the home for a few days. When
difficult decisions have to be made in the foster home, the decision will often
be presented to the foster child as coming from the resource worker. This
allows any frustration that the child may have regarding the decision to be
directed to the resource worker or Caithkin rather than to his or her foster
parents and thus avoids unnecessarily straining the relationship between the
child and the foster parents.
(q)
Caithkin’s offices are
open during regular business hours but it maintains a 24 hour on-call service
to assist foster parents with any problems that may arise.
(r)
Caithkin recognizes that,
like any parent, foster parents can benefit from a break from the children that
they are looking after. Caithkin refers to this type of break as “respite”. To
facilitate respite, Caithkin arranges, when possible, for foster children from
one of its foster parents to be placed with a different foster parent while the
first foster parent takes a short break. It is understood that foster parents
in the Caithkin group will be expected to provide respite for each other when
their homes are not otherwise full. New foster parents often provide respite
services before they receive foster children of their own as a means of testing
whether they are ready for the challenges of foster parenting.
(s)
Caithkin and each
foster parent sign a contract each year called a Residential Treatment Foster
Care Agreement. The contract is mandated by Regulation 120 of the Child and
Family Services Act Regulations. Among other things, the contract sets out
the per diem rate that Caithkin will pay the foster parent for each foster child,
the per diem rate for any respite care and the support and training that will
be provided by Caithkin.
Foster Children
(t)
Caithkin’s interaction
with the foster children primarily occurs through its resource workers and
one-to-one workers.
(u)
Resource workers attend
medical specialist appointments, court appearances and therapist appointments
with the foster child. In the event of a serious incident involving a foster
child (e.g. serious injury or absence without leave), the foster parents inform
the resource worker who then prepares a serious incident report to give to the
Society and conducts any follow up with the child.
(v)
One-to-one workers are
independent contractors who work directly with individual foster children. Caithkin
had one one-to-one worker from 2004 to 2006, two one-to-one workers in 2007 and
three one‑to‑one workers in 2008 and 2009. Each foster child is
assigned a certain number of hours of contact with a one-to-one worker each
week. The number of hours varies based on the individual needs of the child.
Although some foster children receive as much as 40 hours per week of
one-to-one support, the per diem rate that Caithkin charges to the Societies is
based on each foster child receiving 17 hours of one‑to‑one
support each month. The work that the one‑to-one workers do varies with
the needs of each child. With older children, the work is focused on developing
the life skills that will be necessary to have when the child leaves the foster
care system upon becoming an adult. The following are examples of the types of
work that one-to-one workers do with the foster children:
•
take them to a movie;
•
play sports with them;
•
transport them to
activities that the foster parents are unable to take them to;
•
help them with their homework;
•
help them to prepare a
resume;
•
help them to prepare
for a job interview;
•
teach them how to do
laundry either in the foster parents’ house or at a laundry mat;
•
teach them how to
budget;
•
teach them how to shop
for clothing and food;
•
teach them how to cook
either in the foster parents’ house or at the cooking facilities at Caithkin’s
offices.
(w)
Caithkin maintains a
residence file for each foster child made up of his or her medical file, dental
file, school file, assessments file (e.g. psychological assessments),
correspondence file and serious occurrences file. The foster parents have
access to only a portion of this residence file.
ISSUES
[12]
There are 3 primary
issues on this appeal:
(a)
Was Caithkin carrying
on a business during the Reporting Periods?
(b)
If Caithkin was
carrying on a business during the Reporting Periods, were the supplies that
Caithkin made to the various Societies taxable supplies or exempt supplies
under Schedule V, Part IV, section 2 of the Act?
(c)
If Caithkin was
carrying on a business during the Reporting Periods and its supplies were
taxable supplies, did Caithkin exercise due diligence such that a penalty under
former paragraph 280(1)(a) of the Act should not be applied?
CARRYING ON BUSINESS
[13]
The first issue in this
Appeal is whether Caithkin was carrying on business. In my view, there is no
question that this was the case. Caithkin was clearly engaged in the
undertaking of supplying Societies with foster care services. Although the
presence of a reasonable expectation of profit is not a requirement under the Act
for a corporation to be carrying on a business, I note that Caithkin had net
income before tax from 2004 to 2008 and that its cumulative net income before
tax from 2004 to 2009 exceeded $225,000. While Caithkin may have reinvested
those profits in its operations rather than paying them out to its shareholders
as dividends, that does not change the fact that it earned profits. I accept
that the work that Caithkin does is very important to society and has
immeasurable benefits for the foster children in question, but this does not change
the fact that it is carrying on a business.
TAXABLE OR EXEMPT SUPPLIES
[14]
Having concluded that
Caithkin is carrying on a business, it therefore follows that Caithkin was
carrying on a commercial activity and was thus required to charge GST on its
supplies unless those supplies were exempt supplies. The second issue in this
Appeal is therefore whether Caithkin’s supplies to the Societies that it dealt
with were exempt supplies.
[15]
Schedule V, Part IV,
section 2 (“section 2”) of the Act makes the following supplies exempt:
A
supply of a service of providing care, supervision and a place of residence to
children, under-privileged individuals or individuals with a disability in an
establishment operated by the supplier for the purpose of providing such
service.
[16]
Section 2 contains a
number of components. For Caithkin’s supplies to be exempt it has to meet the
following 3 tests. First, Caithkin must be supplying a service of providing
care, supervision and a place of residence. Second, the care, supervision and a
place of residence must be provided to children. Finally, the service must be being
supplied in an establishment that Caithkin operates for the purpose of
providing such a service.
[17]
The Respondent submits
that none of these components was met. Caithkin submits that all of them were.
Supply of Care, Supervision and a Place of Residence
[18]
In order to determine
whether Caithkin meets this test, I must first determine what Caithkin is
supplying. Both parties agree that Caithkin makes a single supply as opposed to
multiple supplies and I agree with them. However, the parties each characterize
that single supply differently.
[19]
The Respondent takes
the position that the foster parents are the ones who supply care, supervision
and a place of residence. The Respondent is unable to specifically describe the
service that Caithkin provides but she is certain that it is not care, supervision
and a place of residence but rather something far more administrative in
nature.
[20]
Caithkin agrees that
the foster parents supply care, supervision and a place of residence but takes
the position that it made those supplies too through all of the things that it
does above and beyond what the foster parents do and through managing the care,
supervision and a place of residence supplied by the foster parents. Caithkin
cites the work that the one-to-one workers and resource workers do as examples
of the care and supervision that it personally provides. It is not entirely
clear to me under this theory on what basis Caithkin believes it is directly supplying
places of residence.
[21]
In my view, neither
parties’ characterizations is correct. I conclude that Caithkin is making
supplies of care, supervision and a place of residence but not for the reasons
advanced by Caithkin. Foster care is the core service that Caithkin is
supplying. It is just supplying it in a more organized and professional manner
and on a larger scale than would be possible for individual foster parents.
[22]
The Resource Service
Agreements entered into between Caithkin and the Societies do not make it easy
to interpret what services Caithkin is providing. Oddly, while the sample Resource
Service Agreements entered into evidence cover such topics as medical care,
clothing, court attendances and school, only one of them actually says anything
about who is responsible for feeding and housing the foster children. The remaining
agreements speak about the foster children being “placed” but are silent as to
whom they are being placed with. They set out that Caithkin will be paid a per
diem rate for each day that a child is in “care” but do not specify who is
providing the care.
[23]
What I am left with is
the following clear facts:
•
The Societies need
someone to provide care, supervision and a place of residence to their foster
children.
•
The foster parents are
able to supply care, supervision and a place of residence but they do not have
a contract with the Societies and are not paid by the Societies.
•
Caithkin is not, by
itself, able to supply care, supervision and a place of residence.
•
Yet Caithkin does have
a contract with the Societies and is paid by the Societies for each day of care
that a foster child receives and that pay explicitly takes into account the per
diem rate that will be paid to the foster parents.
•
The foster parents do
have a contract with Caithkin and are paid a per diem rate by Caithkin for each
foster child in their care.
•
Caithkin has no need to
be supplied with the foster parents’ services unless its intention is to
re-supply those services to the Societies.
•
There is no evidence
whatsoever that would indicate that Caithkin is in any way acting as an agent
of the Societies by entering into contracts with the foster parents and paying
them on the Societies’ behalf.
[24]
Based on the foregoing,
the only conclusion that I can reach is that, despite the omission of this term
from all but one of the Resource Service Agreements, Caithkin has agreed to
re-supply the Societies with the care, supervision and a place of residence
services that it acquires from the foster parents. There is no other
characterization that can explain why Caithkin has contracted with the foster
parents, how the Societies acquire the services that they need and why the
money flows from the Societies to Caithkin and then to the foster parents.
[25]
The Respondent takes
the position that the majority of the activities that Caithkin engages in do
not involve the provision of care, supervision and a place of residence. I have
already concluded that Caithkin is re-supplying the services of care,
supervision and a place of residence that it receives from the foster parents.
However, it is still worthwhile to review the activities that Caithkin engages
in above and beyond re-supplying those services.
Recruiting and Screening Foster Parents: Caithkin recruits and screens foster
parents in order to ensure both that it has a pool of available foster parents
and that those foster parents are suitable for the job. However, this
recruitment and screening is not a supply that Caithkin makes to the Societies.
It is an activity that Caithkin does itself in order to ensure that it has the
resources available to fulfill its obligations to supply care, supervision and
a place of residence to the Societies.
Training Foster Parents: Caithkin clearly spends time training
its foster parents. However, this is not a supply that it is making to either
the Societies or the foster parents. It is something that Caithkin is doing
internally in order to ensure that its foster parents have the skills necessary
to fulfill Caithkin’s obligations to supply care, supervision and a place of
residence to the Societies in accordance with the standards set by the
Societies. Caithkin receives a higher per diem rate from the Societies because
of this training but the higher per diem rate comes not because the Societies
are paying Caithkin to train the foster parents but rather because, through the
training, Caithkin is able to re-supply the Societies with the services of more
qualified foster parents.
Inspecting Foster Care Homes; Caithkin inspects the foster parents’
homes both before they are accepted as part of the Caithkin group and on an
annual basis thereafter. However, these inspections are not a supply that
Caithkin is making to the Societies. They are an activity that Caithkin does
itself in order to ensure that the residences that it is supplying to the
Societies meet the standards required by the Provincial Ministry for Caithkin
to maintain its licence.
Establishing and Enforcing Guidelines: There is no doubt that Caithkin devotes
a lot of time and resources to establishing and enforcing operational
guidelines for its foster parents. However, the establishment and enforcement
of these guidelines is not something that Caithkin is supplying to the
Societies but rather something that Caithkin is doing to ensure that the care,
supervision and a place of residence that it is supplying meet the standards
required by the Societies and that Caithkin meets the standards set by the
Provincial Ministry necessary to maintain its license. There is no doubt that
the Societies benefit from Caithkin’s enforcement of the standards, but the
Societies have not retained Caithkin to enforce standards on foster parents but
rather to provide care, supervision and places of residence in accordance with the
Provincial Ministry’s standards.
Reporting and Attending Meetings: Caithkin provides detailed reports to
the Societies about each foster child and about Caithkin’s overall activities
and attends numerous meetings with the Societies. However, the Societies have
not contracted with Caithkin to supply them with reports or attend meetings.
The reports and meetings are merely the means by which Caithkin communicates
with the Societies its progress on its core supply of care, supervision and a place
of residence.
Establishing Treatment Plans: While Caithkin is a key participant in
establishing treatment plans, it is not supplying the Societies with the
service of preparing those plans. Caithkin is simply sitting down with the
foster parents and the Societies to agree on the means by which the supply of
care, supervision and a place of residence is to be carried out in respect of a
given child.
Providing One-To-One Workers: Caithkin has agreed that, as part of its
supply of care, supervision and a place of residence to the Societies, it will
make a one-to-one worker available for each child for a certain number of hours
per week. These services are an extension of the care and supervision that
Caithkin is already providing.
Resource Workers: Caithkin has agreed that, as part of its
supply of care, supervision and a place of residence to the Societies, it will
have a certain number of resource workers available. The resource workers work
with the Societies, the foster children and the foster parents. The work with
the Societies is largely related to the reporting and treatment plan functions
described above. The work with the foster children relates directly to their
care. The work with the foster parents involves supporting the foster parents to
allow them to better provide the care and supervision that they are already providing.
All of these activities are either part of or ancillary to Caithkin’s supply of
care and supervision.
Respite: Caithkin negotiates the terms of respite services with
its foster parents. It is part of the supplies that the foster parents make to
Caithkin. It is a necessary supply for Caithkin to receive in order for
Caithkin to ensure that it can supply care, supervision and a place of
residence to the Societies on an ongoing basis.
Summer Camp: Caithkin sends the foster children in its care to
summer camps for 2 weeks each year. This is a service that Caithkin is
supplying to the Societies and for which it is compensated in its per diem rate.
The summer camps supply the service of care, supervision and a place of
residence at the summer camp to Caithkin who, in turn, re-supplies it to the
Societies.
Social Activities: Caithkin offers a number of social
activities for the foster parents, foster children and natural children that
are part of the Caithkin group. This is not a supply that Caithkin is making to
the Societies but rather something that it is doing internally in order to
support and reward the foster parents and promote a sense of unity within the
Caithkin group.
[26]
Based on all of the
above, I am satisfied that the supply that Caithkin is making to the Societies
is the service of providing care, supervision and a place of residence.
To Children
[27]
The second test that
must be met for section 2 to apply is that Caithkin’s supply of care,
supervision and a place of residence must be being provided to children. The
Respondent submits that section 2 only applies to a supplier who makes a supply
directly to children and therefore cannot apply to Caithkin since its services
are largely supplied indirectly through the foster parents. Caithkin submits
that section 2 applies to both direct and indirect supplies and that Caithkin makes
both such supplies. In my view, neither party has correctly interpreted this
aspect of section 2. Their interpretations are driven, in large part, by
the fact that neither of them characterized Caithkin as re-supplying the care,
supervision and a place of residence services of the foster parents.
[28]
Section 2 does not require
the supply to be made to children, it requires the supply to be a service of providing
care, supervision and a place of residence to children. The words “to children”
specify to whom the care, supervision and place of residence are provided not
to whom the supply is made. In other words, the supply can be made to anyone
but the supply that is made must be the provision of care, supervision and a
place of residence to children.
[29]
If I were to interpret
the phrase “to children” in section 2 as modifying the word “supply” then it
would therefore not modify the word “providing”. As a result, so long as the
supply were made to children, there would be no qualification as to whom the
care, supervision and place was provided. That would result in the absurd
situation where a child who paid for care, supervision and a place of residence
for his father would not be charged GST but a father who paid for care,
supervision and a place of residence for his child would be.
[30]
My interpretation of
section 2 is supported by looking at the context of Part IV of the Act.
Schedule V, Part IV, section 1 reads as follows:
A
supply of child care services, the primary purpose of which is to provide care
and supervision to children 14 years of age or under for periods normally less
than 24 hours per day, but not including a supply of a service of supervising
an unaccompanied child made by a person in connection with a taxable supply by
that person of a passenger transportation service.
[31]
It is clear from the
wording of section 1 that the words “to children” qualify to whom the care and
supervision are provided, not to whom the supply is made. To interpret it any
other way would require me to interpret the phrase “the primary purpose of
which is to provide care and supervision to children 14 years of age or under
for periods normally less than 24 hours per day” as if the first part of the
phrase (i.e. “the primary purpose of which is to provide care and supervision”)
modified the word “services”, the middle of the phrase (i.e. “to children 14
years of age or under”) modified the word “supply” and the end of the phrase
(i.e. “for periods normally less than 24 hours per day”) again modified the
word “services”. Such an interpretation is illogical. Furthermore it would lead
to the absurd situation that care of a 15 year old would be exempt as long as
her 13 year old brother paid for the service since the modifying phrase “to
children 14 years of age or under” would modify the word “supply” not the word
“service”.
[32]
My interpretation of
section 2 is also consistent with its overall purpose. The goal of section 2 is
presumably to exempt various basic services provided to certain potentially
vulnerable individuals (i.e. children, underprivileged individuals or
individuals with a disability) from GST. How could that purpose possibly be
achieved if section 2 required those same potentially vulnerable individuals to
pay for the services in order for the exemption to apply?
[33]
In summary, a textual,
contextual and purposive interpretation of section 2 indicates that it is the
care, supervision and a place of residence that must be provided to children,
not the supply itself. There is no question that the supply that Caithkin is
making to the Societies is a supply of providing care, supervision and a place
of residence to children. Therefore, this second test is met.
In a Establishment Operated by Caithkin
[34]
The final test under
section 2 is that the supply must be being provided in an establishment
operated by Caithkin for the purpose of providing care, supervision and a place
of residence. The establishments where the care, supervision and a place of
residence are provided are the foster parents’ homes. Both parties agree that the foster
parents’ homes are operated by the foster parents. Caithkin submits that they
are also operated by Caithkin. The Respondent submits that they are not. The
key question is what the word “operated” means in section 2.
[35]
The Canadian Oxford
Dictionary, Second Edition, defines “operate” as:
… manage,
work, control; put or keep in a functional state …
[36]
Webster’s New World
Dictionary of American English, Third College Edition, defines “operate” as:
… 2
a) to put or keep in action; work (a machine, etc.) b) to conduct
or direct the affairs of (a business, etc.); manage …
[37]
Even if I were to give
the benefit of the doubt to Caithkin and interpret the word “operate” in as
broad a way as possible, I cannot find that Caithkin is operating the foster
parents’ homes. Section 2 requires the “establishment” to be operated by
Caithkin, not the “service”. While I accept that Caithkin could be said to
manage the foster care service that is provided in the homes, I cannot accept
that it is managing the houses themselves. The houses are the foster parents’
homes. Caithkin neither owns nor leases the homes. The foster parents are the
kings and queens of their own castles. First and foremost, their homes are a
place of shelter and residence for themselves and their natural children.
Caithkin has nothing to do with those aspects of the homes. Furthermore, the
foster parents have the right at all times to refuse to care for or to
continuing caring for a given foster child in their home. At best, Caithkin can
be said to manage some of the activities that occur in the homes but not the
homes themselves.
Summary
[38]
Based on the foregoing,
I find that Caithkin’s supplies are not exempt under section 2 as they are not
provided in an establishment operated by Caithkin.
DUE DILIGENCE
[39]
The fact that Caithkin
both treated its supplies as being exempt supplies and, at the same time,
claimed input tax credits in respect of those supplies makes it impossible for
me to find that Caithkin exercised due diligence in determining its GST
obligations. In no way could this have-my-cake-and-eat-it-too approach be seen
to be duly diligent. Accordingly, the Minister was correct to apply the penalty
under former paragraph 280(1)(a) of the Act.
CONCLUSION
[40]
The Appeal from the
reassessments is allowed and the matter is referred back to the Minister for reconsideration
and reassessment on the basis that:
(c)
Caithkin’s net tax for
its reporting period from April 1 to June 30, 2004 be reduced by $25,563.40;
and
(d)
Caithkin be allowed
input tax credits of $77,496.73 in its reporting periods from July 1, 2004 to December
31, 2004 and April 1, 2005 to March 31, 2009.
Costs are awarded to the Respondent.
Signed at Victoria,
British Columbia, this 24th day of March 2014.
“David E. Graham”
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