Date: 19981217

Docket: 97-588-GST-G

BETWEEN:

STERLING BUSINESS ACADEMY INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

RIP, J.T.C.C.

[1] The issue in this appeal from an assessment of tax issued under Part IX of the Excise Tax Act ("Act") is whether the appellant Sterling Business Academy Inc. ("Sterling") is entitled to input tax credits on property or services it acquired for use or supply in the course of operating a private vocational school during the period December 1, 1991 to November 30, 1995.

[2] Sterling was incorporated and commenced business in 1987 as a private vocational school and is registered as such with the Ontario Ministry of Colleges and Universities. After much hesitation and confusion, Sterling registered under Part IX of the Act. Apparently in 1990, the organization representing the private vocational schools in Ontario, the Ontario Association of Career Colleges ("OACC"), made representations to the federal government asking if its members should register under the proposed Goods and Services Tax ("GST") legislation. According to Ms. Mary-Anne Bonello, President of Sterling, OACC never got a response and each school had to make its own decision. Sterling registered. However, she complained, universities and colleges are not registered and do not charge GST.

[3] Sterling provides a variety of training courses for people who wish to be computer literate and work as medical assistants. Courses generally consist of seven months duration and are given to students on a full-time basis during the day. At any one time, the school has between 75 and 100 students attending its courses.

[4] Literature sent to prospective students offers a brief description of the aims and objectives of courses, the topics taught, the length of the course, prerequisites for the course and the graduation requirements.

[5] The literature also describes the course fees, which include the amount of tuition, the GST and the aggregate of these two items. Included on pages setting out the tuition fees for the particular course is a note that the total fees include books, supplies, tuition, GST and, for certain courses, tools. The school administrators estimated that the costs of books and other supplies generally average $550. for a course. The GST is $38.50, or 7 per cent of the $550. charge. The specific cost of $550. for books and supplies is nowhere described in the school's literature.[1] A registration fee of $100. is also included in the tuition fee and it, too, is merged with the the tuition fee.

[6] Ms. Bonello stated that the tuition fee for each course is not broken down to its elements for the students, but is an aggregate amount since this "helps the students realize the fee when they read the material". She said the school has applied the aggregate amount as the tuition fee for a course since it first started in operation on the advice of a former superintendent of the Ministry of Colleges and Universities.

[7] However, when Sterling prepares a course for the approval by the Ministry of Colleges and Universities, the form required to be forwarded to the Ministry breaks down the amount of the tuition fees into its components: tuition, cost of books and supplies and the registration fee.

[8] Similarly, when a student applies for a loan with the Ministry of Education and Training, the confirmation of program information forwarded to the Ontario Government by the appellant sets out the student's tuition and compulsory fees for the course as well as the student's costs for books and supplies for the year. A copy of the form containing the tuition fee breakdown is given to the student.

[9] When a student withdraws from a course, the student is refunded his or her tuition fees for the time he or she will not attend courses; the student is not reimbursed for books and supplies he or she has purchased or for the administration fee.

[10] Ms. Bonello explained that the school endeavours to ensure that all students have the same books for a given course. Sterling is granted a discount on the books it purchases for sale to its students and the students get the benefit of the discount. While it is compulsory to have the books for the course, it is not compulsory to purchase the books from Sterling, stated Ms. Bonello. However, she reiterated that a recommended textbook is important for studying the course: a student cannot succeed in a course without the recommended texts.

[11] Sterling does not have a bookstore from which a student or the general public may purchase books and supplies. A limited number of each recommended book is ordered by the school for resale to students registered for the particular course. From time to time, Ms. Bonello stated, a student may ask for a book not required for a particular course or may wish to purchase a book before commencing a course. In such cases, Sterling would charge a student the school's cost price, which would include shipping and GST.

[12] Gregory John Vickars, who at the relevant times worked as an instructor and internal accountant for Sterling, confirmed that for internal purposes the administrators of this school broke down the tuition fees for a course into its components. He said that this information was required to complete the Revenue Canada T2202 tax form which is sent to students who may claim a tax deduction for tuition fees. No deduction is permitted for books and supplies. Mr. Vickars stated that if, by chance, a student already had a book for the course he or she would be refunded the cost of the book.

[13] Mr. Vickars stated OACC confirmed in April 1991 "or so" that vocational schools were not GST exempt, i.e., the courses offered were exempt, but the schools themsleves were not tax exempt. OACC suggested the schools not register for GST.

[14] Sterling had registered for GST purposes in January 1991. Mr. Vickars stated that earlier he had various discussions with officials at Revenue Canada with respect to GST. He said he had telephoned the GST office and could not get an answer if a private vocational school had to register. In January 1991, he went to the GST office to make inquiries. Classes start four times a year at Sterling and January is one of the months in which new classes start. Thus, Mr. Vickars felt he "had to know if we had to collect GST". He was told by the GST office to register "because you could always de-register". The GST office advised him that no GST is payable for tuition but was payable for books. Sterling paid GST for the facilities it rented to operate the school and for the supplies it purchased. Thus, when it filed its first GST quarterly return at the end of February 1991, it claimed input tax credits on the GST it paid.

[15] Revenue Canada allowed the credits claimed by the appellant in its quarterly GST return for February 1991. The input tax credits were greater than the amount of GST collected and Revenue Canada reimbursed Sterling with respect to the input tax credits. Sterling continued to file quarterly reports in this manner until 1995.

[16] Some time during the winter of 1992, the GST office at Revenue Canada asked Mr. Vickars why Sterling always had a credit and never paid GST. He told them that his school collected GST only for books but claimed input tax credits on all its supplies. He testified that the "lady at GST was not sure the school was correct and said she would call back if there was a change". Revenue Canada did not call back. A second telephone inquiry was made by Revenue Canada in January or February 1993 to the same effect and with the same results. Revenue Canada did not telephone further in 1992 or 1993 to advise Sterling that it may have erred in claiming input tax credits.

[17] It was only in January or February 1996 when a Revenue Canada auditor advised that the school "split" the fee between tuition and books that Sterling realized there may be a problem. The Revenue Canada auditor, Mr. Geoff Frobel, advised Sterling and Mr. Vickars, that Sterling should not have been registered for GST because it had no right to receive input tax credits. After Mr. Frobel's visit, Sterling ceased filing GST quarterly returns. Revenue Canada then assessed by disallowing earlier input tax credit claims.[2]

[18] The appellant's position is quite simple: it was registered, it carried on a commercial activity, that of selling books and supplies to students, and is therefore entitled to input tax credits. The respondent, however, denies that Sterling carried on a commercial activity since Sterling's business, that of a vocational school, involved the making of exempt supplies. The respondent relied on the definitions of "commercial activity" and "exempt supply" in subsection 123(1) of the Act and section l of Part III of Schedule V of the Act[3] and section 138, which provides that for the purposes of GST

where,

(a) a particular property or service is supplied together with any other property of 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 services,

the other property or service shall be deemed to form part of the particular property or service so supplied.

[19] In the respondent's view Sterling supplied the instruction or tuition, books, supplies and tools for a single consideration and the provision of the books, supplies and tools were incidental to the supply of the instruction. Accordingly, the books, supplies and tools are deemed to form part of the instruction, in accordance with section 138. Instruction is an exempt supply provided by Sterling: section 8 of Part III of Schedule V.

[20] Respondent's counsel submitted that the true character of the supplies the appellant provides to its students is a course of study in which tuition and the books, supplies and tools are the components. The case at bar, therefore, is no different from that in Oxford Frozen Foods v. The Queen, [1996] 2881, ETC, where it was held that the storage of a frozen product was a necessary component to enable the appellant to sell the product.[4]

[21] Appellant's counsel, as I understood him, submitted that in effect the tuition is a service and the books and supplies are properties supplied to the student and each is of significant importance in the course of study undertaken by the student. The books and supplies are not incidental to the tuition and therefore are not deemed by section 138 to form part of the tuition.

[22] Counsel is correct: the books and supplies are not incidental to the tuition. The meaning of the word "incidental" and "incident" are discussed in M.N.R. v. Estate of Cunnuparathu Abraham Zachariah, 70 DTC 6326, 6331-6332. The word "incidental" generally applies to something that is fortuitous or not essential or, as Fowler[5]states

...to side occurrences with stress on their independence of the main action.

[23] Revenue Canada's Policy Statement P-159 (as well as P-160) issued on June 14, 1994[6] discusses section 138. Policy Statement P-159 states that the word "incidental" is often defined as: minor role, not essential, subordinate, depending upon and appertaining to and therefore

the type of relationship that must exist between the properties and/or services provided [is] such that one might be separated as incidental. Generally, the provision of a property or service may be separated as incidental to the provision of a particular property or service where that property or service is something that is insignificant

[24] Policy Statement P-159 opines that "a supply which plays an important role by itself in the context of a particular transaction may not reasonably be regarded as incidental to a particular supply".

[25] Ms. Bonello testified that the texts and supplies are important to the course and that a student cannot reasonably expect to succeed in the course without the recommended books. On this evidence, which was not challenged in cross-examination, I must find that the books, as well as the supplies and tools, included as a component (to the extent of $550.) of the fees was not incidental to the tuition but also comprised an important part of the course. The books and supplies were not incidental to the teaching portion of the course.

[26] If, therefore, I accept the respondent's submission that Sterling is offering its students at least two supplies, the service of tuition and the goods of books and supplies, and each supply is important and neither is incidental to the other, it does not necessarily follow that I must allow the appellant's appeal. Section 138 of the Act is not necessarily relevant to this appeal. The question that must be asked is what the appellant is supplying to its students. I think we should try to answer the question by using a little common sense and concern for what is done in real life.[7]

[27] The supply offered by Sterling is instruction in courses that develop or enhance students' occupational skills.[8] A course is a program of instruction.[9] Instruction by a vocational school is a tax exempt service.*

[28] In real life when a prospective student reviews Sterling's promotional literature that describes the courses of instruction offered and quotes a price, or single consideration, for the courses, he or she, in my view, does not even think the price quoted is an aggregate of several other prices. The prospective student does not consider the course's various components: teaching, books and supplies and tools. The course is viewed by the student as a unit: the student sees a course of instruction for which he or she will pay a single consideration. The course is a program of study which may consist of several components: teaching, laboratory, supply of books and equipment, but it is nevertheless a single course. The appellant supplies, and the student purchases, a course of instruction. A single consideration is asked, and is paid, for the course. The student does not pay several considerations for each part of the course of instruction.

[29] Indeed, the instruction offered by Sterling consists of at least two parts, tuition, or classroom teaching, and books and supplies. Neither of the two parts is incidental to the other part.The two parts are interdependent and interwined and each is an integral part of the whole course of instruction.[10] And is it not the whole course of instruction that the student wishes to purchase? And is the whole course not what the appellant offers for a single consideration? The course of instruction (and all of its parts) itself is a single supply.

[30] The appeal is dismissed.[11]

[31] Since the appellant did all a reasonable person can be expected to do to comply with the GST legislation and avoid litigation, I am not awarding costs to the respondent.

[32] This does not end the matter. The Act only authorizes me to dispose of an appeal by dismissing it or allowing it and by vacating the assessment, varying the assessment or referring the assessment back to the Minister for reconsideration and reassessment: subsection 309(1). I have done the latter but, in my view, there is at least one matter arising from the appeal that is not settled: that of the students who paid GST to the appellant but were not required to do so since they purchased an exempt supply. And the GST they paid will be going to the fisc. They are out of money and, it appears, Revenue Canada may be unjustifiably enriched.

[33] To be sure, the section 261 of the Act permits persons who paid the GST to apply for a rebate, but the rebate will not be paid unless the person files the application for the rebate within two years after he paid the GST. Since the payments we are concerned with were made before 1996 and it is now December, 1998 the students are not eligible for the rebate. The same problem affects the appellant who may have been entitled to a refund or adjustment of tax pursuant to section 232. There is no procedure available in the Act to permit the students to have returned to them what is rightfully theirs. The Tax Court of Canada Act does not give a judge of the Tax Court jurisdiction to issue an order that may remedy the matter. This is a flaw in the legislation.

[34] However, the students and the appellant may apply for a remission of tax pursuant to section 23 of the Financial Administration Act. A remission is certainly justified in the circumstances. I assume that Sterling's records contain the names and addresses of the students who may be eligible for a remission. If there are costs in seeking out the students, Revenue Canada should absorb the bulk of the expenses. I leave the details to the goodwill of the parties.

Signed at Ottawa, Canada, this l7th day of December 1998.

"Gerald J. Rip"

J.T.C.C.

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