Date: 20011011
Docket: 2000-4080-GST-I
BETWEEN:
AVENUE BUSINESS CAMPUSES LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Campbell, J.
[1]
The Appellant is the operator of a vocational school which
provides various courses in business and computer training,
leading to several different diplomas. It is a franchisee of
CompuCollege, a subsidiary of International Business Schools Inc.
It was registered for Goods and Services Tax/Harmonized Sales Tax
(hereinafter GST/HST) purposes during the period under appeal,
being September 1, 1994 to August 31, 1998. GST/HST was collected
on textbooks and materials sold to students enrolled with the
Appellant. Input tax credits were claimed by the Appellant for
the period under appeal for the amount of GST/HST paid to the
suppliers of textbooks and materials. These credits were
disallowed by the Minister on the basis that the supply of texts
and materials was part of a single supply of tax exempt
tuition.
[2]
According to Mr. Joseph Ellsworth Brinton, the President and
Chief Executive Officer of Avenue Business Campuses, the
Appellant was incorporated in 1990 under the Trade Schools
Act, with Mr. Brinton owning approximately 60% of the shares
and his associate Ian MacGillivray owning 40%. Mr. Brinton was
responsible for the corporate financial administrative functions
and the campus operation. During the period under appeal, the
Appellant operated two campuses, one in Halifax and one in
Dartmouth, Nova Scotia.
[3]
Courses offered by the Appellant included both classroom
instruction and lab work. Job placement activity occurred at the
end of each course. Diploma courses included accounting, business
administration, travel and tourism, computer business
applications, and hotel/restaurant operations. Courses ranged in
duration from six months to a year and a half. Courses were
taught in modules, meaning one subject was taught at any given
time, generally in four-week periods for four hours per day. This
was unique and allowed students to attend courses and yet work
part time.
[4]
The curriculum was established by the franchisor, although the
Appellant was not obligated to offer every existing course.
Courses offered depended on the needs of the local community. The
franchisor, according to Mr. Brinton's evidence,
provided a list of texts to be used in conjunction with each
course but how the texts were used was left up to the course
instructors. Textbooks were purchased by the Appellant from
various publishers on the recommendation of the franchisor as to
suitability. Mr. Brinton in his evidence went on to explain that
he was aware of only one text that was purchased directly from
the CompuCollege franchisor. One of the components of every
course included a job search and pre-employment readiness
portion, for which the franchisor developed a workbook. Mr.
Brinton testified that this was the only text purchased from the
franchisor and sold to the students. Examples of invoices from
various publishers to the Appellant were introduced as an
exhibit. Mr. Brinton reviewed one course outline for the business
and computer application diploma course offered at the school
where the pre-employment component which utilized the
franchisor's workbook comprised 4% of the total hours
necessary to complete the course.
[5]
Brochures were used to attract students to the school and these
were provided to anyone requesting information. They were also
distributed to high school students during "career
days". A brochure, entered into evidence as an exhibit,
contained no reference to tuition or textbook costs. Mr. Brinton
stated that the school relied heavily on newspaper advertising,
together with television and radio ads, and that none of the
advertising mechanisms included any references to costs except to
state that tuition costs could be claimed as a credit on an
individual's tax return.
[6]
The school offered several payment options and a form accompanied
each course explaining these options to a student enrolling in
the course. The form set out the financial investment for the
student enrolling in the course and included a cost breakdown by
tuition and books/supplies. The amount for books/supplies
included a GST/HST breakdown. Mr. Brinton did not know whether
CompuCollege campuses, other than his own, were using this
financial form. He stated that the total cost of a course was
broken down to show a student what they were "committing to
over time". The tuition was shown separately from
books/supplies "... because that was the service that we
were providing". Mr. Brinton explained that the school
took considerable time to point out to each student that the
books/supplies were marked up but that they were less expensive
than if the students purchased them directly from the publishers.
Because the price was quoted to the students at the time of
enrolment, any price change before actual course commencement was
borne by the school. Mr. Brinton explained that his campuses used
a financial form which broke the total cost into the two
components of tuition and books/supplies because "...it
wasn't one lump sum. It was in fact two things that we
provided them, and on some occasions ... a student might already
have the book" (because as he explained, students had
completed other university courses or purchased/borrowed from a
friend or someone who had formerly taken the course). The tuition
component was the only amount eligible for a tax credit on a
student's tax return. One of the payment options outlined to
a student in the financial form was a 10% discount on tuition if
full payment was made within seven days of enrolment. This
discount option was not offered on the books/supplies cost. Mr.
Brinton explained that, under Provincial regulations governing
trade schools, up to an overall 10% mark-up over landed
cost was permitted on books/supplies. With this mark-up,
the books/supplies would still be less costly than books/supplies
obtained by students elsewhere. Mr. Brinton made it clear in his
evidence that the books/supplies were not sold at cost and in
fact were sold, as he put, at "a not insignificant
profit". In some cases, he pointed out that this profit on
books/supplies would have amounted to $25,000.00 to $30,000.00,
which he stated was not insignificant for the school.
[7]
Each student was provided a form of "terms and
conditions" in respect to course attendance at the time of
enrolment and also on the first day of class. This form was
signed by each student. One of the terms stated at paragraph
10:
Tuition fees are eligible for income tax credits. Tax
certificates will be issued for the amount paid applicable to
each calendar year. The cost of books and materials
supplied with the course are not eligible.
(emphasis added)
[8]
Mr. Brinton explained that the purpose of the last sentence of
paragraph 10 above was to make it clear to each student that it
was only tuition that was eligible for income tax credits and
that books and materials were not eligible.
[9]
Another form, entitled "Rules and Regulations",
provided to each student at the time of enrolment, specifically
stated again that:
Textbooks are not included in tuition fees. Textbooks and
supplies are subject to GST/HST.
[10] This
paragraph was included under a sub-title called "Financial
Obligations". The opening paragraph under this sub-title
commences:
Students are financially responsible for all charges ....
Mr. Brinton explained that the school had the right to
withhold a diploma if a student still owed the school for
"...either the tuition or the books that they have
purchased".
[11] For each
course offered, the school also prepared a fee schedule, largely
for use by the admissions advisor, which itemized separately the
hours, weeks, tuition costs, books/materials costs, GST/HST costs
on books and materials. If a course was offered over a two-year
period there would be the same itemization for each year. This
fee schedule was made available to each student upon enrolment
and assisted in a student's application for a student loan.
Students were able to obtain greater government financial
assistance because of the splitting of courses into two
components, that is, year one and year two. In addition to
this fee schedule, there was a separate fee schedule for books
and materials for each course together with the applicable
GST/HST. Mr. Brinton explained that this schedule would be
provided to the Department of Education at the time the school
registered with the Province each year so that the department
would be aware of the books being used and the prices assigned to
the texts. This fee schedule gave a book cost that was greater
that the invoice cost of a book to the school. This increased
cost represented the school's mark-up over their 20% to 25%
discounted price from the publisher. Mr. Brinton pointed out that
in some cases by the time the school bought the books, the
publishers' price could have increased but the student who
had been quoted a price would pay the quoted price. But on the
average he testified that the school maintained a significant
profit for mark-up on books/supplies.
[12] From the
evidence Mr. Brinton provided, a student saw a financial
breakdown at several stages including seeing an admission's
advisor, doing an interview and again in making the actual
application. The total price was always shown as an aggregate of
several amounts because according to Mr. Brinton:
...they're two different things from our point of view.
There's the tuition that they're paying for the
instruction, and the books and materials ...
[13] The
Appellant did not operate a bookstore but did have a "book
room" for the convenience of students so that they would not
have to travel to an outside bookstore. Books were distributed in
the classroom at the beginning of a course. According to the
evidence of Mr. Brinton, virtually every book used in the
school's courses could be purchased at outside bookstores,
such as Chapters or Coles, with the exception of the workbook
offered in the pre-employment module and prepared by the
franchisor. In one example cited by Mr. Brinton, the cost of
this workbook for one course represented only $20.00 out of a
total cost of $680.00 before GST in respect to book costs for
this course.
[14]
Occasionally students did not purchase texts and would not
complete the book/material portion of the enrolment form. They
may have purchased the books elsewhere or from a friend. It was
also possible for a student to request books when enrolling and
then not require them when the course was actually taken. In this
case, the school issued a credit to reverse the cost of the books
on the student's application. Students who already had books
for a course from whatever source were never refused admission to
the school. Mr. Brinton stated that the student's success at
the school was in no way related to whether the books were
purchased from the school or from another source. According to
Mr. Brinton, "If they had it (books), they could use
it. It's a reference material."
[15] He also
stated that the general public purchased texts without enrolling
in courses at the school although this was not a common practice.
Although the school did not advertise to the public, there was no
ban on selling to the general public if they came to purchase a
book. Selling a text to a non-student was sold at a price
that included a margin for profit and had no connection to
enrolment in a course.
[16] If a
student requested a list of books for a course at the interview
or enrolment stage, one was provided. Unless there was a request,
this list was not provided, as there was the potential for a text
being updated or going out of print before the student actually
took the course. Mr. Brinton therefore emphatically pointed out
that the Respondent's assumption contained in paragraph 14(i)
of the Reply:
(i) none of the components of a course, including manuals and
instruction, were available to a student until the entire course
fee was paid;
was not correct.
[17] He also
stated that the assumption contained in paragraph 14(j) of the
Reply:
(i) neither the books and materials nor the instruction were
offered for purchase separately;
was not correct and he cited numerous occasions when in fact
they were purchased separately by students.
[18] After the
Minister's audit and assessment, Mr. Brinton testified that
although the Appellant was still required to pay GST/HST on any
textbooks purchased from suppliers, it could not charge the
student this tax. And so no input tax credits were available, as
explained by Mr. Brinton. They were however permitted to file for
refunds of tax "...related to credits given for works that
we had already remitted during that period, but we could only go
back for two years ... and so we had filed for a refund for any
tax that we had paid — that we had effectively refunded to
the student during that two year period". When asked what
the Appellant did in respect to having to pay the GST/HST when it
could not collect, he responded: "...we just simply had to
increase the price of our books to our students to cover because
again it was based on our cost, and if our cost, is now gone up
by 7%, then in effect we ... our cost was no longer pre-tax, it
was now post-tax, so we did mark them — we did include that
and mark it up from that point".
[19] The
Respondent's position was that the Appellant was selling a
course of study with the sale of books/materials intertwined.
Based on this, the Respondent argued that there was a single
supply and at the root of this transaction was a supply of
vocational services which involved teaching, together with books,
supplies and materials, which would be exempt supplies under
subsection 123(1) of the Excise Tax Act (the
"Act"). This supply was exempt under section 8
of Part III of Schedule V to the Act. The Respondent
argued that the relationship between the parties was not altered
merely because there was a mark-up on the texts and supplies.
Because the Appellant was involved in making only exempt
supplies, it followed that it was not engaged in a
"commercial activity" under subsection 123(1) of the
Act and therefore the application of the formula set out
in subsection 169(1) of the Act for calculating input tax
credits resulted in a product of nil.
[20] The
Appellant argued that the supply of texts and materials is a
separate supply, separate and apart from the supply of tuition.
The Appellant submitted that it did engage in providing a service
of instructing individuals but that in addition it also sells
property. The Appellant also argued that the statutory exemption
for services, that is services of instruction, should not be
applied to the supply of tangible property or goods.
[21] The
general rule with respect to input tax credits is stated in
subsection 169(1) of the Act. Part of the formula for
determining input tax credits provides that it is only to the
extent that the supplies are consumed or used in the course of a
commercial activity that input tax credits may be claimed.
[22] A
"commercial activity" is defined in subsection 123(1)
of the Act as follows:
"commercial activity" of a person means
(a) a business carried on by the person (other than a business
carried on without a reasonable expectation of profit by an
individual, a personal trust or a partnership, all of the members
of which are individual), except to the extent to which the
business involves the making of exempt supply by the person,
(b) an adventure or concern of the person in the nature of
trade (other than an adventure or concern engaged in without a
reasonable expectation of profit by an individual, a personal
trust or a partnership, all of the members of which are
individual), except to the extent to which the adventure or
concern involves the making of exempt supply by the person,
and
(c) the making of a supply (other than an exempt supply) by
the person of real property of the person, including anything
done by the person in the course of or in connection with the
making of the supply;
[23] Pursuant
to this definition a commercial activity includes "a
business carried on by a person except to the extent to which the
business involves the making of exempt supplies by the
person". An exempt supply is also defined in subsection
123(1) of the Act to mean a supply included in Schedule V.
A taxable supply is also defined in subsection 123(1) to mean a
supply that is made in the course of a commercial activity.
Exempt supply is therefore excluded from the definitions of
"commercial activity" and "taxable
supply".
[24]
Subsection 165(1) imposes the tax on recipients of a taxable
supply.
[25] Section 8
of Schedule V, Part III of the Act states that a
supply made by a vocational school of a
service of instructing individuals in courses leading to
diplomas is an exempt supply where the supplier is governed by
federal or provincial legislation regarding vocational schools
(emphasis added).
[26] It
follows that the Appellant's educational services are exempt
supplies and therefore not made in the course of a commercial
activity. The sole issue before me is how the supply of textbooks
and materials are to be treated under the Act
— and ultimately whether the supply is part of the
Appellant's educational services and therefore exempt.
[27] The
Appellant contended that it provided a service - that of
instructing individuals - and in addition it sold
property.
[28]
Subsection 123(1) defines the word "service" as:
"service"means anything other than
(a) property,
(b) money, and
(c) anything that is supplied to an employer by a person who
is or agrees to become an employee of the employer in the course
of or in relation to the office or employment of that person;
[29] The first
determination then is whether the statutory exemption can be
interpreted to include the supply of tangible property, in this
case, the textbooks and materials. Applying a strict
interpretation of this section using ordinary everyday language,
I conclude that the exemption provisions cannot be applied to the
supply of tangible property. The section refers to services only
and the reference to the supply "of a service" in
subsection 8 by its language does not contemplate the exemption
of goods. The definition of "service" specifically
excludes "property". This section goes on to refer to a
service "of instructing individuals". The legislators
did not use the broader wording of "the supply of a course
of instruction". This latter wording, if it had been chosen
by legislators certainly contemplates a combined supply comprised
of two components — instructing individuals in courses
together with the supply of textbooks and materials. This
subsection clearly restricts the supply to a service, not a
course of instruction. The word "service" in this
subsection means just that. If goods and property were to be
included, the subsection would have been drafted to read
"services and goods" or "services and
property". There is nothing in the strict interpretation of
this subsection to indicate that it is meant to include the
purchase and sale of goods.
[30] The
textbooks and materials purchased and resold by the Appellant are
tangible property. Based on the language of the exemption
provision together with the definitions provided in subsection
123(1), I conclude that the supply of tangible property or
textbooks and materials in this case are not exempt within this
subsection.
[31] Counsel
for both Appellant and Respondent referred me to the case of
Sterling Business Academy Inc. v. The Queen, [1998]
G.S.T.C. 130. Sterling Business Academy operated a private
vocational school. In the materials sent to students, it was
stated that course fees quoted to students included tuition,
books and materials and GST. Unlike the present case however, the
total amount quoted was not broken down. Sterling
estimated average expenses for its courses and then arrived at an
average cost per course of $550.00 plus 7% G.S.T. When
Sterling reported to the Ministry of Colleges, it itemized
these amounts according to tuition, books and registration fee
but only on an average basis not on a particular course basis. In
the Sterling case, if a student applied for a government
loan, a similar breakdown would also be provided, otherwise a
breakdown was not given to a student and a student could
conceivably never have knowledge of such a breakdown unless there
was a loan application. In the present case, there was always a
breakdown provided. In addition, in Sterling, the students
who withdrew from courses were not reimbursed for the cost of
books and materials that they had paid for. Evidence in the case
before me established that students who withdrew or already had a
book got their money back. It appeared from the facts of the
Sterling case that it was compulsory for students to have
books for the course but that it was not compulsory to purchase
them from Sterling. In the present case, Mr. Brinton gave
evidence that it was not compulsory to have the books for a
course but it would be recommended. In Sterling, there is
no reference to whether students could succeed with texts other
than those purchased from the instructional provider. If a
student wished to purchase a book that was not required for a
particular course they could do so, but in Sterling the
student would be charged only the school's cost price (which
included shipping and GST). There was no mark-up and no profit in
Sterling. Again in the present case, there was most
definitely a mark-up to the extent allowed by Government and the
evidence showed there was significant profit. Marking up texts
for profit greatly distinguishes the present case from
Sterling, where the books were sold at cost. Counsel for
the Appellant rightly pointed out that there was nothing in a
reading of the facts in Sterling to suggest that the books
provided by Sterling were books that Sterling
produced, wrote or published. Nor is there anything in the
Sterling case to suggest that it ever considered the issue
of the instructional provider purchasing textbooks and materials
and selling them at a significant profit to students. The issue
in Sterling was whether the supply of books was a single
supply or whether it was incidental to the supply of exempt
instructional services. Judge Rip concluded that section 138
did not apply and that the texts and materials were definitely
not incidental to the tuition. He then followed his reasoning in
O.A. Brown Ltd. v. The Queen, [1995] G.S.T.C. 40, on the
issue of combined supply and he concluded that the single supply
of tuition, books and supplies was an exempt supply. There was no
discussion or consideration of whether the exemption provision
should be read to include the supply of books and materials when
the wording referred only to "services".
[32] In
Sterling, Judge Rip concluded that the two components,
books/materials and the tuition or instructional services were
inter-dependent and intertwined and therefore an integral part of
the whole. This would seem to be the correct conclusion when
considering the facts of that case. Sterling charged one
all-inclusive amount to its students and provided no breakdown
except for government reporting requirements. The Appellant in
the present case did not do that. At almost every step, the
Appellant provided separate costs or a breakdown for tuition,
books and GST on books. In addition, at the initial interview
stage, the student was advised that under certain payment plans,
tuition could be discounted but books/supplies never were. They
were considered a separate charge that was subject to GST/HST.
Students were sometimes enrolled in diploma and credit courses
without the books, as shown on a number of enrolment forms. These
individuals may have purchased the texts from other sources or
may have owned them in advance of the enrolling. Exhibits were
also introduced to show that some students enrolled, purchased
books and then later received a credit for the books, either due
to withdrawal from the course or purchase of the text elsewhere.
In any event a student was not excluded from continuing a course
because they do not want to purchase the books and materials from
the school. Mr. Brinton's evidence was that the majority of
books used were textbooks generally used at universities and
commonly available at bookstores. According to the fee schedule
for the various courses, the textbook costs averaged a
substantial 10% to 12% of the total cost of each course, if the
student chose to purchase the books. They comprised an integral
part of each course but they could be borrowed, shared, purchased
elsewhere or as Mr. Brinton testified, if a student was
extremely bright and attended all classes, that student could
probably complete the course without books. On the facts, there
did not appear to be evidence in the Sterling case that
students could purchase books from other vendors. The texts used
at the Appellant's school were not a private item for this
school's exclusive use. The one exception, of course, was the
workbook produced by the CompuCollege franchisor for the
pre-employment readiness module. It was clear from the evidence
that this text represented a very small portion in the overall
modules required to complete a course. Mr. Brinton's evidence
was that most of the books and materials including this
CompuCollege workbook would continue to be useful to the students
after they graduated.
[33]
Respondent counsel argued that the present case was similar to
Oxford Frozen Foods Ltd. v. The Queen, [1996] G.S.T.C.
76. That case dealt with the transport and sale of frozen
vegetables and fruit for which there were additional charges for
storage and interest if delivery was not taken on a certain date.
In Oxford no GST was added to the storage component and
the Minister assessed for failure to collect and remit GST on the
basis that the storage was a separate supply from the sale of
frozen product. The case held that maintaining the frozen product
was part of the supply of the product as the whole purpose was to
supply a frozen product. It was the Appellant counsel's
position in the present case that even with the reasoning in
Oxford, the Appellant here intended to provide students
with job training so they could eventually obtain entry-level
provisions. If this was accomplished by providing students with
instructional services, examinations or pre-employment readiness
without selling books to students, the objective had been
realized. In addition in the present case, the Appellant was
marking up books and making a significant profit. The books were
certainly recommended and if students purchased, the Appellant
profited. However it was clear from the evidence that a student
who would not purchase books for a course would not be denied
enrolment.
[34] The
Appellant here provided instructional services. Students who did
not purchase texts and materials from the school were not
excluded from enrolling in courses. Students and in fact members
of the general public could purchase books and materials without
taking the course. If texts and materials were purchased or
otherwise available to students, they were issued a credit if
they had already paid for the books. I agree with Appellant
counsel's position that it is pressing the issue to contend
that when the school recommends that students buy a text from the
school which it sells at a profit, this equates to the school
selling the student a compound supply with instructional services
and therefore a single exempt supply. This ignores all the
evidence introduced in the present case establishing the many
stages at which amounts were clearly broken down for the
student's benefit. The school in its literature went to great
lengths to distinguish between tuition and books. Tuition could
potentially be discounted. Books could not be. They were treated
differently in all the literature and documents produced by the
school and every effort was made to communicate these differences
to the students. To find otherwise ignores the exemption
provision wording that states it is for services.
[35] What then
was the Appellant supplying as consideration for the payment
made? This was not a single supply with a single consideration
being requested by the school and paid by a student in every
case. The cost of the books and materials were not so intertwined
with the provision of the service that it could not be separated
from it. Respondent counsel argued that itemization or breakdown
of cost on a piece of paper did not equate to separate
consideration. I conclude it does when a student has the option
of not purchasing the books from the school or having purchased,
can return them and obtain a credit.
[36] The
statutory exemption is for services not services and goods. The
service here was one of instruction. The language of this
exemption provision cannot be construed to include a supply of
tangible property. There were two separate considerations. At
every step the cost of texts and materials was sufficiently
separated from the cost of tuition that it cannot, in the facts
of this case, be considered just one component of a single
supply. The sale of texts is a separate transaction not covered
by section 8. It was carried on by the Appellant for significant
profit. It constitutes commercial activity and a taxable supply.
By definition, a taxable supply is made in the course of a
commercial activity and pursuant to section 165, based on my
finding that this is a taxable supply, the tax is to be
imposed.
[37] The
appeal is allowed and the assessment is referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis that the language of the exemption provision does
not include the supply of texts and materials.
Signed at Ottawa, Canada, this 11th day of October 2001.
"Diane Campbell"
J.T.C.C.
COURT FILE
NO.:
2000-4080(GST)I
STYLE OF
CAUSE:
Avenue Business Campuses Limited
and Her Majesty the Queen
PLACE OF
HEARING:
Halifax, Nova Scotia
DATE OF
HEARING:
April 12, 2001
REASONS FOR JUDGMENT BY: the
Honourable Judge Diane Campbell
DATE OF
JUDGMENT:
October 11, 2001
APPEARANCES:
Counsel for the Appellant: R. Dan Harasemchuk
Counsel for the
Respondent:
Diane Hawco
COUNSEL OF RECORD:
Counsel for the Appellant:
Name:
R. Dan Harasemchuk
Firm:
Stewart McKelvey Stirling Scales
Halifax, Nova Scotia
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4080(GST)I
BETWEEN:
AVENUE BUSINESS CAMPUSES LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 12, 2001, at
Halifax, Nova Scotia, by
the Honourable Judge Diane Campbell
Appearances
Counsel for the
Appellant:
R. Dan Harasemchuk
Counsel for the
Respondent:
Diane Hawco
JUDGMENT
The
appeal from the assessment made under the Excise Tax
Act,notice of which is dated April 21, 1999 and bears number
01CB0304214, is allowed, without costs, and the assessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada, this 11th day of October 2001.
J.T.C.C.
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