Date: 19990713
Docket: 97-3394-GST-G
BETWEEN:
VINCENT CHOW WHITE CRANE MARTIAL ARTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at
Vancouver, British Columbia on July 6, 1999. Vincent Chow, the
sole shareholder and manager of the Appellant; Leo Cheng, C.A.,
the senior partner of the Appellant's accounting firm at that
time; Sharon MacGougan; and Margaretta Suarez testified for
the Appellant. Rowena Chow, C.G.A., the auditor on the file,
testified for the Respondent.
[2] The Appellant has appealed an assessment for GST of
$30,925.36 respecting supplies sold that the Respondent alleges
were medicines. The Appellant states that the supplies were
zero-rated under subsection 165(1) of Part IX of the
Excise Tax Act ("Act") in that they were
"Supplies of food or beverages for human
consumption..." pursuant to Schedule VI, Part III under the
Act. It should be noted that Part III is titled
"Basic Groceries".
[3] Paragraph 11 of the Reply contains the assumptions of the
Respondent. Paragraph 12 describes the issue as seen by the
Respondent. They read:
11. In so assessing the Appellant, the Minister relied on,
inter alia, the following assumptions:
a) the facts stated and admitted above;
b) the Appellant is a GST registrant with GST Registration No.
120373915;
c) the Appellant was a corporation involved in teaching
martial arts, selling Chinese herbs, massage therapy and selling
ready made medicines in powder or liquid form;
d) the Appellant is required by the Excise Tax Act,
R.S.C. 1985, c. E-15, as amended (the "Act") to file
its GST returns on a quarterly basis;
e) the Appellant claimed input tax credits
("I.T.C.'s") of $9,531.17 during the period in
question;
f) The reassessment of July 19, 1996 adjusted the ITC's by
$5400.00 and the GST owing by $35,056.10;
g) Vincent Chow ("Chow") is the sole shareholder of
the Appellant;
h) Chow carried on the activities of the business on behalf of
the Appellant;
i) Chow has a herbalist business licence and is a White Crane
martial arts instructor;
j) Chow, on behalf of the Appellant, prescribes, prepares and
sells herbs for internal consumption or external application to
the clients and customers of the Appellant;
k) these herbs are bought in bulk from countries in Asia by
the Appellant;
l) Chow and the Appellant represented to customers that the
Chinese herbs would improve bodily strength and help with
injuries;
m) the Chinese herbs were prescribed, prepared and sold for
the purpose of actual or perceived medicinal properties;
n) the mixture of herbs prescribed and prepared differed
according to the sickness or injury of the customer;
o) the Appellant does not do a walk-in retail business of
selling these Chinese herbs;
p) the Chinese herbs are not food, beverage or groceries;
q) the Chinese herbs are not consumed as a basic grocery item
for nourishment but for the actual or perceived medicinal
properties;
r) 90% of the sales of the Appellant were Chinese herbs for
external use, 5% were Chinese herbs for internal use, 2% was
massage therapy and 1% was for martial arts lessons;
s) the Appellant did not collect GST on the sale of the
Chinese herbs whether for external or internal use;
t) the Appellant does not charge a fee for Chow's service
in prescribing the Chinese herbs but charges for the Chinese
herbs; and
u) the records kept by the Appellant were inadequate.
12. The issue is whether the Appellant is liable for GST as
assessed on the basis that the goods in question were not
zero-rated basic groceries.
[4] Assumptions (b), (d), (e), (f), (g), (h), (i), (j), (o),
(s), (t), and (u) were not rebutted by the evidence. Assumption
(c) is correct except for the last portion "... and selling
ready made medicines in powder or liquid form;" which is the
subject in dispute. Assumption (k) is incorrect: the great
majority, or all, of the supplies in question were bought by the
Appellant from Canadian wholesalers. In particular, the
Appellant's major supplier was Kiu Shun Trading Co. Ltd. of
Vancouver. Assumption (l) is correct, but some customers were
referred by their friends and did not rely on Mr. Chow or the
Appellant's representations.
[5] Assumption (m) is correct in the broad sense described in
the Oxford Dictionary. There, "medicinal"
pertains to "medicine", which in turn is defined as
"The department of knowledge and practice which is concerned
with the cure, alleviation, and prevention of disease in human
beings, and with the restoration and preservation of
health." The Appellant did not sell to the Chinese community
in Vancouver. Some of its customers simply bought supplies which
they ordered from the Appellant without any recommendation or
prescription from the Appellant or Mr. Chow. Assumption (n) is
incorrect in that neither the Appellant nor Mr. Chow prepared any
of the supplies in question; they were bought pre-packaged from
wholesalers or other suppliers. Some were prescribed by the
Appellant or Mr. Chow and some were not. They did differ
according to the sickness or injury of customers who were
prescribed for by Mr. Chow. Assumptions (p) and (q) are the
subject of the dispute.
[6] Assumption (r) is an estimate that Vincent Chow gave to
Miss Chow, the auditor, at a meeting concerning this assessment
held in the Appellant's accountant's office on May 18,
1995. Vincent Chow testified that he gave the "90% for
external use figure" because he was afraid that he might
lose his business licence if he said that a great deal of his
herbal sales were for internal use. He then testified that 30-40%
of his sales were herbs for external use and 60-70% were consumed
for health purposes.
[7] The products sold by the Appellant were pre-packaged and
were in solid or liquid form. Among the products were hawthorn,
ginseng and chrysanthemum petals. All have medicinal qualities in
Chinese herbal medicine. Mr. Chow holds himself out as a Chinese
herbalist and the Appellant's business licence was
specifically qualified to include the sale of herbs. Sharon
MacGougan and Margaretta Suarez both purchased these herbs for
health purposes on the recommendation of Mr. Chow. They purchased
some as a tonic, others as an ingredient for soup and others for
pain, all to be taken by consumption. Both also purchased the
Appellant's herbal supplies for external application as a
salve or poultice to reduce pain or to heal cuts, bruises or sore
muscles. The Appellant's method of charging GST was simple:
if the wholesaler charged the Appellant GST on the product, the
Appellant charged its customer GST. Otherwise, it didn't
charge GST.
[8] Assumption (k) assumed that the Appellant imported
supplies, but Mr. Chow testified that the Appellant bought
pre-packaged goods from local wholesalers of Chinese herbal
products, tore the labels off the packages and sold them at
retail. That way its customers (whom were not members of
Vancouver's Chinese community) could not purchase directly
from the wholesalers at a cheaper price. This testimony has such
a ring of truth to it that the Court accepts it as true.
[9] In these circumstances, were these herbal products
"food or beverages for human consumption"? Consumption
is defined by the Oxford Dictionary as "The action or
fact of consuming or destroying". Within the context of the
phrase used in Part III, the external application of these herbs
as poultices or salves would not constitute using up or
destroying the herbs in the way that eating food would. For this
reason, the herb products used for external application would not
qualify for zero-rating. Moreover, the herb products sold in
liquid form were not sold as a beverage. They were sold as a
concentrate. A "food" is defined by the
Oxford Dictionary to be "What is taken into the
system to maintain life and growth, and to supply the waste of
tissue; aliment, nourishment, provisions, victuals". In
short, food is to maintain life, whereas medicinal products are
to restore or preserve health.
[10] The Appellant's herbs were both sold and purchased to
restore or preserve health. It may be that some of the products
used in soup could be considered as for the purpose of
maintaining life, but that is not why they were sold by the
Appellant or bought by its customers. These latter products
formed an infinitesimal portion of the Appellant's sales, and
their value was never proved.
[11] Miss Chow, the auditor, assessed all of the
Appellant's herbal sales as medicinal, rather than as food or
beverages. On the evidence, she was correct. For this reason the
appeal of the assessment of tax is dismissed.
[12] Pursuant to Section 280 of the Act the penalty
appealed was assessed on the Appellant's failure to remit
tax. Similarly, interest also accrued on the unpaid balance. The
appeals of these assessments are also dismissed.
[13] The Respondent is awarded party and party costs.
Signed at Ottawa, Canada this 13th day of July,
1999.
"D.W. Beaubier"
J.T.C.C.
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