Date:
20020911
Docket:
2002-1314-GST-I
BETWEEN:
RONALD GARY
COLEMAN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Miller,
J.
[1]
Mr. Coleman has a long history of working with horses. For the
last many years, he has operated a business of boarding horses,
as many as 50 at any one time. Mr. Coleman charges his customers
separately for the feed supplied to the horses and the services
supplied. He charges goods and services tax (GST) on the service
element but not on the feed element. The Minister of National
Revenue (the Minister) assessed Mr. Coleman for the period
January 1, 1998 through June 30, 2000 increasing GST owing
by Mr. Coleman by $14,836.68 representing the GST on the feed
supplied during that period. The Minister also assessed interest
of $938.42 and penalties of $1,155.25. Mr. Coleman is appealing
that assessment.
[2]
The issue is whether the feed is zero-rated. The parties agreed
that the feed will only be eligible for consideration as
zero-rated under section 2 of Part IV of Schedule VI of the
Excises Tax Act if either: (i) it is a separate supply of
multiple supplies or (ii) the provision of feed and services is a
single supply of feed.
[3]
If the Appellant gets over this hurdle, then I must examine
section 2 of Part IV of Schedule VI to determine if the feed
falls within the definition of feed and is supplied in sufficient
quantities to qualify. I find Mr. Coleman was making a single
supply but it was a single supply of boarding horses not of
providing feed. He has, therefore, not met the two conditions and
for that reason, it is unnecessary for me to consider the
application of section 2 of Part IV of Schedule VI to the
feed in this case.
Facts
[4]
Mr. Coleman has an extensive background in the horse industry,
having worked for others in horse operations in California, Texas
and Southern Alberta throughout the 1980s and into the 1990s. He
started his own horse boarding operation in Alberta in the early
1990s. He is clearly dedicated to his business. He has taken
numerous courses and clinics in the field, and has also himself
conducted seminars on horse training. One of the courses he took
in late 1990 from the animal industry division of the Alberta
Agriculture Food and Development of the Alberta government dealt
specifically with the consequences of the introduction of GST. He
received advice that he could handle GST in one of two ways in a
horse boarding business: first, he could separate feed from
service and mark the feed up, claiming it was zero-rated; second,
he could bill everything together and charge GST on everything.
He opted for the former approach.
[5]
Mr. Coleman described his operation in some detail. He maintains
stalls for 35 horses and can also accommodate another 15 on his
40-acre pasture. He employs two full-time staff members from
Monday to Friday and four part-time staff on the weekend. He
described the services provided by the staff by taking me through
a typical day. The barn horses are provided their feed between
6:30 and 7:00 each morning and they eat until 8:00. They are then
taken outside for the day. In winter, they are blanketed first.
Between 9:00 and 11:00 a.m. the stalls are swept and cleaned and
new straw provided. If there is any requirement for the ferrier
or veterinarian, these visits normally occur at this time. The
ferrier would make weekly visits. Between 1:00 and 3:00 in the
afternoon, Mr. Coleman conducts training sessions. Starting
at 3:00 the horses are brought back to the barn. They are fed
again between 4:00 and 5:00. The customers can visit after 5:00
p.m. to ride their horses. Some customers store their saddles
with Mr. Coleman.
[6]
As well as the daily routine, there is the responsibility of
worming the horses four times a year. Mr. Coleman also indicated
he considered simply observing the horses as being very much part
of his responsibility.
[7]
With respect to the pasture horses, little service is required
other than observation and in the winter the provision of
feed.
[8]
Mr. Coleman described the feed (alfafa cubes, grain and hay) and
the quantities in which it was provided. It is unnecessary for me
to go into this detail, suffice it to say that he marked up his
feed costs by approximately double. This was the industry
norm.
[9]
Although a customer could supplement his horses feed, the
customer could not opt out of the provision of feed by Mr.
Coleman as part of the boarding package. Mr. Coleman described
the agreements with his customers as a month-to-month
arrangement, though there was no written agreement. The customers
were billed monthly. The bills were broken down between feed
supplied and services supplied. For barn horses, the breakdown
was feed of $190 and service of $140. Mr. Coleman stated that the
service fee was set by determining the difference between what
the market would bear and the feed. Mr. Coleman provided invoices
from 1991 and 1998. Each indicated the feed supply at $190 and
the service at $100 in 1991 and $130 in 1998. Mr. Coleman
explained that, as it was usually rising overhead costs causing
the increase, he always attributed fee increases to the service
portion. He did go on to indicate that he was concerned with the
recent drought conditions as feed prices were spiralling upward
and this would have to be reflected in his charges.
[10] The feed
charged to the pasture horses was $80 a month throughout the
year, notwithstanding they were only actually provided feed in
the winter.
Analysis
[11]
...
I think it would be a great pity if
we allowed this subject to become over-legalistic and
over-dressed with legal authorities when, to my mind, once one
has got the question posed, the answer should be supplied by a
little common sense and concern for what is done in real life.
...
I agree
wholeheartedly with Lord Widgery's approach. The question of
course is - What has been supplied by Mr. Coleman for the
consideration received? The common sense answer is the boarding
of the horse.
[12] The
Appellant first raised the tests set out in O.A. Brown v. The
Queen (cited with
approval by the Federal Court of Appeal in Hidden Valley Golf
Resort Association v. The Queen), being
whether in substance and reality the alleged separate supply is
an integral part, integrant or component of the overall supply.
This requires a review of the real character of the arrangement.
The Appellant suggests that because the feed was billed
separately, and because the costing of the overall supply was
based on a determination of market less the feed price, that the
real character of the supply of feed is as a separate supply, not
part of any overall horse boarding operation. I do not see it
that way.
[13] Is feeding
the horses an integral component of caring for the horses?
Absolutely. Separating an invoice into feed and services does not
alter the basic character of the arrangement. A customer does not
phone Mr. Coleman asking him to feed his horse. He asks for the
whole boarding package. Indeed, the customer cannot board the
horse and supply his own feed; neither can he simply bring his
horse to be fed during the day without being boarded. It would
not make any commercial sense to separate the
functions.
[14] Attempting
to put the arrangement in human terms, the horse is provided room
and board. It does not get one without the other. As well it
receives the watchful gaze of a horse expert and certain personal
care services that go along with it.
[15] The
Appellant sought case support from Wainwright Double
"R" Feedlot Ltd. v. M.N.R.That case did not
deal with the GST issue of single versus multiple supplies; it
offers little support in addressing the issue directly. More
relevant to the case before me is Customs and Excise
Commissioners v. Scott, which was
referred to in the O.A. Brown case (and by reference to
O.A. Brown in the Federal Court of Appeal Hidden
Valley). The facts in Scott are remarkably similar to
the case before me, the only difference of significance being
that the horses in Scott were mares kept to be serviced by
two stallions at stud. Justice Cumming-Bruce recognized there
were a bundle of six services provided, including feeding and
observing the horses. Although each could be identified
separately, he found they were all necessary components of the
entire transaction of keeping the mare on the farm.
[16] The
Appellant suggested that because there was the additional purpose
of servicing the mares in the Scott case, this
distinguishes it from the case before me. I do not agree. Yes,
there is an additional purpose in Scott, but the judgment
emphasized that it was the keeping of the horse, not the
servicing of the horse, which was a single supply. So too in Mr.
Coleman's case, it is the overall activity of boarding the
horses which is supplied, not separate supplies of feed, shelter,
observation and care.
[17] The
Appellant's alternative argument was a 180-degree shift. If I
should find there is a single supply then it is not a single
supply of boarding horses, but a single supply of feeding horses.
The Appellant sought support for this position in the
legislation, in case law, and based on the evidence.
[18] In
legislation, he referred me to section 138 of the Excise Tax
Act which reads:
138
For the purposes of this Part, where
(a) a
particular property or service is supplied together with any
other property or service for a single consideration,
and
(b) it
may reasonably be regarded that the provision of the other
property or service is incidental to the provision of the
particular property or service,
the other
property or service shall be deemed to form part of the
particular property or service so supplied.
A careful
reading of this section suggests to me that for it to come into
play, there must necessarily be more than a single supply; that
is, there must be one supply incidental to the other. It does not
follow then that this section can be relied upon to support a
single supply. If I accept the Appellant's first argument
that there are multiple supplies and that all the supplies other
than the feed are simply incidental to the feed, then section 138
can be considered. However, I do not view the services other than
the feeding as incidental to the feed; neither do I view the feed
as incidental to the other services. As I have concluded, they
are all part and parcel of one single supply.
[19] The
Appellant referred me to the case of Winnipeg Livestock Sales
Ltd. v. The Queen to support his
position that the single supply is a single supply of feed. That
case dealt with the livestock marketing operation which supplied
boarding services to two sets of livestock. One set was livestock
simply in transit. Judge Sarchuk found there was a single supply
of boarding that livestock. The second set was livestock awaiting
auction who were only held to be fed prior to auction. Judge
Sarchuk again found a single supply, but in this case, a single
supply of feeding.
[20] I
distinguish the above two scenarios on the basis that in the one
case the livestock were there to be kept (housed, cared for, fed)
while in the other they were there simply to be fattened up for
auction. In the case before me, Mr. Coleman did not operate
a feedlot. He cared for horses with everything that entailed. He
was not in the business of offering the single supply of feeding
for purposes of fattening livestock for slaughter. This case does
not support the Appellant's position that the single supply
is feeding.
[21] Finally,
the Appellant contends that based on the evidence, 95% of staff
time was spent on the operation of feeding; consequently, feeding
must be the single supply. Mr. Coleman did not testify to
any percentage, but gave a thorough description of the day's
activities. And yes, feeding consumes staff time for one hour or
so in the morning and afternoon. Counsel suggested that the
cleaning of the stalls was a direct result of the output from
feeding and, therefore, such time should also be considered as
part of the feeding process. An ingenious approach, but contrary
to my common sense understanding of the production of
manure.
[22] What the
Appellant's argument based on time spent downplays is the
fact that a major component of the arrangement is not just staff
time, but also the very provision of secure accommodation for the
horses. Even if one does just consider time, it fails to
appreciate that the observation of the horses on an ongoing basis
is likewise a critical component of the service being offered.
Certainly, staff spent time feeding the horses, but I do not find
that this constituted such a significant amount of time to
justify finding that the single supply was feed.
[23] With
respect to the penalties assessed pursuant to section 280, I
refer to the Federal Court of Appeal decision in Consolidated
Canadian Contractors Inc. v. The Queen
that found section 280 imposes a strict liability and not an
absolute liability on the taxpayer. This leaves open a defence of
due diligence. Is that available to Mr. Coleman? I believe it is.
When GST was first introduced Mr. Coleman attended an
Alberta government sponsored presentation where he was advised
that he could do exactly what he then proceeded to do - separate
the feed component and not charge GST. He acted consistently
until Canada Customs and Revenue Agency advised him otherwise,
when he changed his practice. Mr. Coleman is a
straightforward, honest, reputable owner of a small business, who
educated himself in both the operational and business side of the
horse boarding business. He has acted responsibly in every
respect. He should not be penalized for this
behaviour.
[24] I refer
this matter back to the Minister on the basis that
Mr. Coleman is not to be subjected to any penalty. In all
other respects, the appeal is dismissed.
Signed at
Ottawa, Ontario, this 11th day of September, 2002.
J.T.C.C.
COURT FILE
NO.:
2002-1314(GST)I
STYLE OF
CAUSE:
Ronald Gary Coleman and
Her Majesty
the Queen
PLACE OF
HEARING:
Edmonton, Alberta
DATE OF
HEARING:
August 16, 2002
REASONS FOR
ORDER
BY:
The Honourable Judge Campbell J. Miller
DATE OF
JUDGMENT:
September 11, 2002
APPEARANCES:
Counsel
for the Appellant: Gregory J. Gartner
Counsel
for the
Respondent:
Margaret McCabe
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Gregory J. Gartner
Firm:
Felesky Flynn
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-1314(GST)I
BETWEEN:
RONALD GARY
COLEMAN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on August 16, 2002 at Edmonton, Alberta, by
the
Honourable Judge Campbell J. Miller
Appearances
Counsel
for the Appellant: Gregory J. Gartner
Counsel
for the
Respondent:
Margaret McCabe
JUDGMENT
The appeal from the assessment made under the Excise Tax
Act, notice of which is dated May 4, 2001, and bears number
10B0003108, for the period January 1, 1998 to June 30, 2000, is
allowed and the matter is referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that the Appellant is not to be subjected to any
penalty.
In all other respects, the appeal is dismissed.
Signed at
Ottawa, Canada, this 11th day of September, 2002.
J.T.C.C.
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