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Citation: 2004TCC659
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Date: 20040928
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Docket: 2004-1078(GST)I
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BETWEEN:
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NAZREEN BEGUM KANDAWALA,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip J.
[1] Nazreen Begum Kandawala has
appealed an assessment under Part IX of the Excise Tax Act
("Act") by which the Minister of National
Revenue imposed a goods and service tax of seven per cent on the
sale of paan leaves ("paan") by the appellant[1]. The question before me
is whether or not paan is a basic grocery in which case it is
taxed at the rate of zero per cent, the position of the
appellant. If paan is not a basic grocery, the position of the
respondent, it is taxed at the rate of
seven per cent.
[2] Paan leaves are from trees grown
in India; the leaves are picked in India and shipped to Canada.
There are two uses for paan: it is often eaten after meals and it
is also used in prayers in the Hindu religion. Paan is believed
to have the effect of aiding in digestion and of freshening
breath. As described by Mr. S. Rhemtulla, the appellant's
agent, and the appellant, condiments are placed on the leaf and
both the leaf and condiments are eaten; frequently the solids are
spat out and the juices of the leaves only are ingested.
[3] The appellant operates a business
that sells paan in a form such that it may be sold for immediate
consumption or taken home by the purchasers to be consumed at a
later time. The appellant sells single leaves but generally sells
packages of six, 10, 12, 30 and 50; for a wedding, packages of
100 leaves and more are sold. For the religious ceremony only the
leaf with a betal nut on the leaf is used. Once the leaf has been
used for the ceremony, it is discarded. Approximately 20 per cent
of sales are for religious purposes.
[4] Sub-section 165(1) of the
Act provides that
every recipient of a taxable supply made in Canada shall pay
to Her Majesty in right of Canada tax in respect of the
supply calculated at the rate of 7% on the value of the
consideration for the supply.
[5] Sub-section 165(3) states that
"the tax rate in respect of a taxable supply that is a
zero-rated supply is 0%".
[6] "Zero-rated supply" is
defined by sub-section 123(1) of the Act as a "supply
included in Schedule VI". In the present case, the relevant
part of Schedule VI is Part III-Basic Groceries. Part III lists
"supplies of food or beverages for human consumption
(including sweetening agents, seasonings and other ingredients to
be mixed with or used in the preparation of such food or
beverages)..." However, Part III itemizes specific
exclusions, thus limiting the scope of the phrase "supplies
of food... for human consumption". The question, then, is
whether paan is a "supply of food... for human
consumption"; and, if it is, whether it is excluded by any
of the listed exceptions.
[7] The Minister states that paan
falls within at least two of the exceptions, which are:
(e) candies,
confectionery that may be classed as candy, and all goods sold as
candies, such as candy floss, chewing gum and chocolate, whether
naturally or artificially sweetened, and including fruits, seeds,
nuts and popcorn when coated or treated with candy, chocolate,
honey, molasses, sugar, syrup or artificial sweeteners;
or
(i)
snack mixtures containing cereals, nuts, seeds, dried fruit or
any other edible product, but not including any mixture sold
primarily as a breakfast cereal or any mixture manufactured or
produced in a retail outlet for sale in that outlet exclusively
and directly to consumers;
[8] Several cases have considered the
meaning of the phrase "supplies of food... for human
consumption". Miller J. considered the phrase in 1146491
Ontario Ltd. v. R, 2002 G.T.C. 235. At issue in the
case was whether salad kits, which contained all the ingredients
to prepare a certain type of salad, were basic grocery items. In
interpreting what constituted "supplies of food... for human
consumption", Judge Miller (as he then was) looked to
"ensuring the Government's Policy of exempting basic
groceries from tax is implemented sensibly and
appropriately". He stated that,
[R]ather than attempting to define what is included in basic
groceries, subsection 1(0.1) of Part III of Schedule VI sets out
a list of exceptions from basic groceries. In reviewing the list,
two themes become evident as to what types of foods are not to be
considered basic groceries: snacks or junk food, including
anything most people would find not particularly healthy; and
foods intended to be eaten immediately after opening or removing
the packaging... Specifically, looking at the foods contained in
subsections 1(0.1), (0.2), (0.3), (0.4) and (0.5), the common
thread can perhaps more aptly be described as a total convenience
food. These are foods that require no preparation-it is all done
for you.[2]
[9] Essentially, Miller J. found that
a food does not, in order to be a zero-rated supply, need to meet
the definition contained in the opening statement of Part III of
Schedule VI to the Act, but rather that it must not be
disqualified by the list of exceptions, or by reference to the
policy underlying the list of exceptions, which follow the
opening statement.
[10] Beaubier J. also considered the matter
in Vincent Chow White Crane Martial Arts Ltd. v.
R., [1996] G.S.T.C. 67 ("Vincent Chow"). The
issue here was whether certain Chinese herbs sold by the taxpayer
were "supplies of food ... for human consumption"
pursuant to Part III of Schedule VI to the Act.
Beaubier J., at paragraph 9, considered the meaning of
"consumption" and found it to mean
"the action or fact of consuming or destroying"[3]. He then
considered the meaning of "food" and found it to be
"what is taken into the system to maintain life and growth,
and to supply the waste of tissue; ailment, nourishment,
provisions, victuals". He concluded that, "in short,
food is to maintain life, whereas medicinal products are to
restore or preserve health". Finding that the herbs were
medicinal products, Judge Beaubier (as he then was) dismissed the
appeal.
[11] The Federal Court of Appeal considered
a phrase very similar to that in Part III of Schedule VI to the
Act in Shaklee Canada Inc. v. Minister of National
Revenue,[1996] 1 C.T.C. 180. The issue was whether certain
vitamin, mineral and fibre products sold and marketed by the
taxpayer were exempt from taxation as being "food and drink
for human consumption (including sweetening agents, seasonings
and other ingredients to be mixed with or used in the preparation
of the food and drink)..." prescribed by Part V of Schedule
III to the Act. Goods prescribed by Schedule III are
exempted from taxation by Section 51(1) of the Act. The
opening words of Part V of Schedule III to the Act, it is
noted, are similar to the opening words of Part III of Schedule
VI and Parts III and V contain a similar list of exceptions.
[12] Linden J. A. held that the proper
approach in determining whether a particular food item is
"food... for human consumption" is to determine whether
a householder, asked to bring home "food" for the
evening meal, would or would not bring home the item in question.
Linden J. A. was careful to point out, however, that the
test is not meant to connote that only that which can be eaten at
a meal is to be considered "food ... for
consumption".[4]
[13] In addition to the above test, Linden
J. A. considered factors such as the labels found on the
items in question-he noted that instead of listing ingredients,
as most foods do, the labels on the vitamin bottles listed
references to "dosages" and representations that the
products were intended for "therapeutic use".
Linden J. A. also noted the following:
They do not bear the common attributes usually associated with
food. They do not have a pleasing taste. They have no energy
value. They do not assuage hunger. They are not served on a plate
not eaten with a utensil. They are manufactured products intended
to offset nutritional deficiencies...[5]
[14] Taken together, these cases set out a
number of factors by which to measure whether particular food or
beverage items are "supplies of food or beverages for human
consumption":
(a) Whether the item in question
is specifically exempted by the enumerated list of exceptions
found in Part III of Schedule VI to the Act;
(b) whether the item is one which
would reasonably be considered a convenience food;
(c) whether the item is intended to be
consumed immediately after opening or removing the packaging;
(d) whether the item requires the
consumer to undertake additional preparation prior to
consumption;
(e) whether the item is one
which will be consumed (as opposed to, for instance, something
that will be applied externally);
(f) whether the item is one that
has traditionally been thought of as a basic food item;
(g) whether the item bears the
attributes one normally associates with food (i.e., it is
tasteful, its packaging displays a list of ingredients, it
assuages hunger, etc.).
[15] On the facts of the present case it is
clear that paan is not a basic grocery item. Paan is sold in
ready-to-consume form and is often used to help the digestion of
food and to help freshen breath. As well, it is often used as a
non-food item, such as in religious ceremonies. Furthermore, even
where paan is "eaten", it is usually chewed after a
meal and only the secretions of the leaf are ingested while the
leaf itself is spit out after chewing. This action does not
result in the paan being consumed or destroyed.
[16] Paan bears a number of qualities which
case law has identified as those of a non-basic grocery item.
Therefore, it does not qualify as a zero-rated supply and is
taxable at a rate of 7 per cent pursuant to section
165(1).
[17] The Canadian Revenue Agency has issued
a memorandum with respect to Part III of Schedule VI to the Act.
Memorandum 4.3, published November 1997, revised September
5, 2003 ("Memorandum 4.3") states:
"products consumed as food or beverages by specific
cultural groups, which are not normally identified as food or
beverages in Canada, are considered zero-rated basic groceries if
the food or beverages are consumed as basic grocery items for
nourishment (as opposed to food or beverages consumed for actual
or perceived medicinal properties), unless the food or beverages
are specifically excluded from zero-rating under the provisions
of paragraphs 1(a) through 1(r)..."
[18] With respect to the question of whether
paan is a zero-rated supply, Memorandum 4.3 does not, in
any case, affect the foregoing analysis. For, given the manner in
which it is used, it is evident that paan is not used as a
"basic food item for nourishment". Paan is normally
used to freshen breath and to aid in digestion; moreover, it is
primarily eaten after a meal and only the juice is ingested while
the remainder is spit out after being chewed.
[19] The assessment in appeal also levied
interest pursuant to section 280 of the Act. Section 280
provides that:
"...where a person fails to remit or pay an amount to the
Receiver General when required... the person shall pay on the
amount not remitted or paid (a) a penalty of 6% per year, and (b)
interest at the prescribed rate..."
[20] The leading case concerning the
imposition of interest under section 280 is Pillar Oilfield
Projects v. Canada, [1993] G.S.T.C. 49. Although the
case was heard under the informal procedure, it has been followed
in several decisions.[6] Pillar stands for the proposition that section
280 of the Act creates a strict liability offence and that
as such the only available defence is one of due diligence.[7] In Pillar
the taxpayer made a number of errors on its GST returns and was
consequently assessed interest and penalties under section 280.
The taxpayer appealed the penalties on the basis that its errors
were made in good faith and that they were understandable given
the novelty of the GST. Judge Bowman (as he was then) held that
innocent good faith does not amount to due diligence and
dismissed the appeal. He stated that due diligence requires
"affirmative proof that all reasonable care was exercised to
ensure that errors not be made"[8]. He further held that the defence
will be available if the taxpayer reasonably believed in a
mistaken set of facts which, if true, would render the act or
omission innocent, or if he or she took all reasonable steps to
avoid the particular event[9].
[21] On the facts of the present case, the
appellant did not make out the defence of due diligence. There is
no evidence that the appellant exercised any reasonable care to
ensure that errors not be made. Furthermore, the appellant did
not take all reasonable steps to avoid under-paying GST.
[22] The appeal is dismissed.
Signed at Ottawa, Canada, this 28th day of
September 2004.
Rip J.
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