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Citation: 2004TCC271
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Date:20040402
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Docket: 2003-2133(GST)I
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BETWEEN:
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DON MORIN O/A MORIN AND SONS LOGBUILDING,
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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
Paris, J.
[1] The appellant, Mr. Morin, is a Yellowknife
businessman. In 1999 he purchased five log home packages for export to Japan.
The log homes were to be constructed in Canada by Digha Log Homes, then
disassembled and shipped to Japan for reassembly as part of a resort outside
Osaka.
[2] Mr. Morin claimed an input tax credit
("ITC") of $9,394.43 for GST purportedly paid on the purchase of the
packages but the Minister of National Revenue disallowed the claim. In the
Minister's view the packages were acquired for immediate export and were
zero-rated supplies falling under Schedule VI of the Excise Tax Act. The
Minister therefore assumed that the appellant was not required to pay GST on
the packages and consequently that he could not claim an ITC.
[3] The issue in this appeal is whether the
Minister was correct in determining that the supply of the log home packages to
the appellant was zero-rated.
Facts:
[4] In July 1999, the appellant entered into a
contract with Digha to purchase the log home packages. Digha agreed to provide
the packages to the appellant at the end of September 1999 for a price of
$140,000.00 inclusive of all taxes.
[5] Digha fell behind in the construction of
the homes and they were not completed until around November 1, 1999. At that
point the appellant and some of his workers travelled to Fort Smith to Digha's
worksite and took delivery of the log homes which were fully assembled. They
proceeded to disassemble the structures and number and colour-code the pieces
to permit re-assembly. They also added some materials (steel rods, nuts, bolts
and some lumber and plywood) that were necessary for the final assembly of the
homes, and wrapped the packages up nicely, since packaging and presentation
were important to Japanese customers. The appellant also included an assembly
manual in Japanese with the packages. The packages were then taken by truck to
Vancouver, and shipped overseas.
Relevant Legislation
[6] Pursuant to subsection 169(1) of the Act,
a person is only entitled to an input tax credit in respect of a supply on
which GST was payable or paid by him. No input tax credit is available in
respect of a zero-rated supply because no GST is payable on it.
[7] Schedule VI to the Act sets out what
supplies are zero-rated. Goods purchased for immediate export will be
zero-rated if they meet certain conditions, including that the goods be
tangible personal property, and that after the supply is made and before the
recipient exports the goods, they not be further processed, transformed or
altered in Canada except to the extent reasonably necessary or incidental to
their transportation.
[8] In this case, the Minister assumed that the
log home packages were tangible personal property and that they were not
further processed, altered or transformed beyond what was necessary and
incidental to their transportation after they were received from Digha.
Was the contract between the appellant and Digha for
work and materials, or for tangible personal property?
[9] The appellant submitted that the contract
it entered into with Digha was one for work and materials rather than for the
supply of tangible personal property because the value of the materials used by
Digha in the construction of the log home packages was minimal compared to the
value of the labour expended. Therefore, he suggested that the contract between
the appellant and Digha should be treated as a supply of services rather than a
supply of property.
[10] This argument is without merit. In this
case the contract between the appellant and Digha is stated to be for the
"supply and purchase of log building packages", that "Morin and
Sons Log Buildings will purchase five packages" and that "[t]his is
an agreement to purchase the products under the terms and conditions noted
herein". Digha did not perform work on goods belonging to the appellant
nor did the appellant supply any of the materials used by Digha in the
construction of the log home packages. The packages were transferred to the
appellant under a contract of sale and not under a contract for work and materials.
[11] The packages were also clearly
"tangible personal property". Although that term is not defined in
the Act, "property" and "personal property" are.
Subsection 123(1) of the Act provides that property is:
... any property, whether real or personal,
movable or immovable, tangible or intangible, corporeal or incorporeal, and
includes a right or interest of any kind, a share and a chose in action, but
does not include money;
and that personal property is:
... property that is not real property;
[12] The evidence shows that the log home
packages were property that was not real property and was tangible. I have no
difficulty in concluding that the appellant contracted for and received a
supply of tangible personal property from Digha, and that the contract was not
one for work and materials or for services.
Did the Appellant further process, transform or alter
the packages beyond what was necessary or incidental to their transportation?
[13] The appellant also submitted that, by
numbering and colour-coding the pieces and adding materials to the packages
after they were received from Digha, he further processed, transformed or
altered the log home packages beyond what was reasonably necessary or
incidental to their transportation. Therefore, the supply made by Digha to him
could not have been zero-rated under paragraph 1(d) of Part V of Schedule VI.
[14] The respondent argued that the colour
coding of and addition of the materials to the packages did not change them in
any substantial way and that those steps were part of the process of shipping
the packages. She compared this case to Bam Packaging v. R. [2001]
G.S.T.C. 76 where freight handling services that were provided by the taxpayer
were found to be incidental to the transportation of goods and not to be
further processing, transformation or alteration of the goods beyond what was
reasonably necessary for their transportation. In Bam, the taxpayer's
services included taking receipt of goods from clients; unloading and checking
them; dismantling them as necessary; packing; recording, and weighing them,
labelling the goods for approval by foreign customs agents transferring them
into shipping containers and sealing the containers.
[15] Whether or not an item of tangible personal
property has been further processed, transformed or altered beyond what is
reasonably necessary or incidental to its transportation is a question of fact.
[16] In my view, by numbering and colour coding
the pieces, and adding materials to the packages, the appellant altered them
beyond what was necessary to transport them. The changes made by the appellant
to the packages were not for the purposes of transporting or shipping them, and
can be easily distinguished from the activities undertaken by the taxpayer in Bam.
The colour coding and the additional materials were necessary for the
reassembly of the log homes. Without these things the packages were not
complete. The standing structures that the appellant received from Digha
required more work and additional parts to be finished into log home packages
before being packaged for shipment to Japan. In combination, the changes made
by the appellant here were sufficient to take the supply outside the scope of
paragraph 1(d) of Part V of Schedule VI to the Act.
[17] For these reasons, I find that the supply
of the log home packages by Digha to the appellant was not a zero-rated supply,
that GST was payable by the appellant on it and that it he is entitled to an
ITC as claimed. The appeal is allowed.
Signed at Ottawa,
Canada, this 2nd day of April 2004.
Paris,
J.
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