17 April 2003 GST/HST Ruling 37410 - Eligibility for Exemption Under Section 8 of Part III of Schedule V to the Excise Tax Act

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5

XXXXX XXXXX XXXXXXXXXX

Case Number: 37410April 17, 2003

Subject:

GST/HST APPLICATION RULING Eligibility for exemption under section 8 of Part III of Schedule V to the Excise Tax Act

Dear XXXXX:

Thank you for your letter XXXXX (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the provision of training courses by a client of yours. We apologize for the delay in our response.

Statement of Facts

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

1. XXXXX (the Company) was incorporated XXXXX as a numbered company. The Company changed its name to XXXXX, and commenced operations in XXXXX.

2. For the fiscal year ending XXXXX, the Company's revenues were derived solely from tuition fees. For the year ending XXXXX, XXXXX % of the revenues came from tuition, the remainder from consulting fees. For the year ending XXXXX, XXXXX % of the revenues were derived from tuition fees.

3. Courses were advertised under the Company's name in newspapers and on the Company's website. Students registered for the Company's courses through XXXXX (the Associate), an associated company. The Associate held a licence from XXXXX to provide vocational classes. The Company obtained its own licence in XXXXX.

4. Courses offered by the Company are:

An intensive XXXXX program. This program includes all XXXXX courses and exams. Also included is the XXXXX program. Students take XXXXX courses and write the XXXXX exam. Students who successfully complete the program and pass their exams receive the official XXXXX designations from XXXXX respectively.

An intensive XXXXX program that has been offered since XXXXX. The Company developed the courses for this program. Diplomas are issued to successful students.

Starting in XXXXX, XXXXX, a XXXXX program. The Company issues diplomas to successful students.

The above programs are full-time and are offered on a pass/fail basis.

5. The Company is currently licensed by XXXXX to provide the authorized programs described above.

6. Although its invoices were silent as to whether or not GST was charged, the Company reported and remitted GST on all training revenues from XXXXX (effective date of registration) through October 4, 2000. Quarterly returns were filed regularly reporting GST and also claiming input tax credits (ITCs) for all GST paid on purchases.

7. Outstanding amounts for "GST Receivable" and "GST Payable" (which would include GST on tuition and ITCs on related purchases) were reported on the audited XXXXX and XXXXX financial statements.

8. XXXXX, the Chief Financial Officer for the Company, has stated that GST was charged on tuition.

Ruling Requested

The courses provided by the Company are exempt from GST/HST under section 8 of Part III of Schedule V to the Excise Tax Act (the ETA).

Ruling Given

Based on the facts set out above, we rule that:

1. Courses provided by the Company for which consideration became due or was paid on or before October 4, 2000, were taxable for GST purposes.

2. Courses provided by the Company for which all of the consideration became due after October 4, 2000, or was paid after that day without having become due, up to XXXXX, were exempt.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Pursuant to section 8 of Part III of Schedule V to the ETA, certain supplies of vocational courses are exempt from GST/HST when made by a government, a school authority, a vocational school, a public college or a university. Since the Company is none of the other organizations mentioned, we must determine whether it meets the definition of a "vocational school" and, if so, whether the courses qualify for exemption.

Vocational School

Section 1 of Part III of Schedule V to the ETA sets out three principle criteria that an organization must meet in order to be considered a vocational school:

1. The organization must be established primarily to provide correspondence courses or instruction in courses, that develop or enhance students' occupational skills;

2. The organization must be operated primarily to provide correspondence courses, or instruction in courses that develop or enhance students' occupational skills; and,

3. The correspondence courses or instruction in courses must develop or enhance students' occupational skills.

(1) "... established primarily ..."

To determine whether an organization is "established primarily" to provide courses that develop or enhance students' occupational skills, we normally review the organization's governing documents. Where these documents are not determinative, we look to the activities of the organization for evidence of the purpose for its establishment.

Also, although not conclusive evidence of its primary purpose, where an organization is governed by provincial legislation respecting vocational schools, this will be considered an indication that one of the main purposes of the organization is to provide vocational training.

In this case, the governing documents give no indication as to the nature of the Company's objectives. The activities of the Company, however, have been primarily to provide the courses described above. The Company's website clearly indicates that one of its main purposes is to provide these programs. In addition, since XXXXX the Company has held a licence under the applicable provincial legislation.

Given these factors, it is reasonable to conclude that the Company was "established primarily" to provide courses that develop or enhance a student's occupational skills.

(2) "... operated primarily ..."

We consider an organization to be "operated primarily" to provide courses that develop or enhance students' occupational skills if more than 50% of its total annual revenues are derived from tuition for courses, or may be attributed to the provision of instruction in courses, that develop or enhance students' occupational skills.

The financial statements provided for the XXXXX fiscal years show that the Company has derived more than 50% of its revenues in each of these years from providing these programs. It therefore meets the "operated primarily" requirement for these years.

Please note that an organization should review its operations on a yearly basis so as to ascertain whether it satisfies the "operated primarily" requirement for a "vocational school". If an organization meets the requirements as a vocational school in its previous fiscal year, and its intent continues to be primarily to offer courses that develop or enhance students' occupational skills, it will continue to be a vocational school for the following fiscal year. If, however, in that following year the organization fails to meet the "operated primarily" requirement, it will cease to be a vocational school for supplies made after that year.

(3) "... develop or enhance students' occupational skills ..."

Occupational courses must have a direct link to skills that are essential for an individual to gain or retain employment. Courses in sports, hobbies, or other recreational or cultural pursuits that are designed for personal interest are not considered to develop or enhance a student's occupational skills.

The courses offered by the Company lead to diplomas and certificates in XXXXX. Therefore, we consider that instruction in the courses is intended to develop or enhance students' occupational skills.

The Company therefore satisfied the definition of a "vocational school" up to and including the XXXXX fiscal year as it met the requirements in XXXXX and all previous years. However, as we do not have the figures for the XXXXX fiscal year, we cannot comment on whether the Company would be considered a vocational school for the current fiscal year. The Company should review its operations for the year ending XXXXX to confirm whether or not it is still a vocational school.

Qualifying Courses

To be exempt, the courses must lead to certificates, diplomas, licences or similar documents, or classes or ratings in respect of licences, that attest to the competence of individuals to practise or perform a trade or vocation.

As indicated above, successful students obtain diplomas and certificates that attest to their competence in XXXXX. The courses are therefore qualifying courses.

Exemption under V/III/8 prior to October 5, 2000

Section 8 of Part III of Schedule V to the ETA was amended in 2001. Prior to the effective date of October 5, 2000, the exemption for courses provided by vocational schools was limited to cases where the requirements were not only (as now) that the courses should lead to certificates, diplomas, licences or similar documents, or classes or ratings in respect of licences, that attested to the competence of individuals to practise or perform a trade or vocation, but it was also required that

(a) The document, class or rating be prescribed by federal or provincial regulation;

(b) The supplier be governed by federal or provincial legislation respecting vocational schools; or

(c) The supplier be a non-profit organization or a public institution.

In XXXXX, any persons providing vocational training are required to be licensed under the XXXXX. The Company did not have a licence until XXXXX. Therefore, it was not governed by the applicable provincial legislation during the period when at least one of the above conditions needed to be satisfied for the courses to be exempt. Nor was either of the other two conditions met.

There is a retroactive feature to the amendment in that it is applicable, not only to supplies for which consideration became due after October 4, 2000, or is paid after that day without having become due, but also to supplies for which consideration became due or was paid on or before that day "if no amount was charged or collected as or on account of tax under Part IX of the ETA in respect of the supply on or before that day." However, although the Company's invoices were silent as to whether GST was charged or not, the Company conducted itself in a manner consistent with collecting tax. GST returns were filed on a regular basis reporting GST on tuition fees; ITCs were claimed on purchases relating to providing the courses. The Company treated the courses as taxable. As the Company was not governed by the applicable provincial legislation, the courses were in fact taxable at the time. The retroactivity of the amendment only applies if organizations had actually treated courses as exempt supplies before the amendment date (albeit incorrectly at the time).

Exemption under V/III/8 after October 4, 2000

The Company meets all the requirements for courses for which consideration became due after October 4, 2000, or is paid after that day without having become due. Courses provided after that date are therefore exempt supplies, and will continue to be so, as long as the Company meets the definition of a vocational school.

Please note that the Company may elect, if it wishes, that courses that would otherwise be exempt under this section be taxable.

Refund, adjustment or credit of tax "collected in error"

Pursuant to section 225 of the ETA, any amounts collected as or on account of tax must be included in net tax. However, if any tax was collected in error from a person (e.g., GST collected on supplies of courses that were exempt after the Amendment date), section 232 of the ETA provides that a supplier may, within two years after the day the amount was collected, refund or credit that amount to that person. In other words, if tax was collected in error from any students within the last two years, it could be refunded or credited to the students. If the Company should provide any adjustment, refund or credit of tax, it must issue a credit note containing prescribed information. After such tax has been refunded or credited, the Company may then subtract the amount of tax adjusted, refunded or credited from net tax to the extent it was previously added to net tax.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9592.

Yours truly,

Helena Ingr
Charities, Non Profit Organizations and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

XXXXX

Legislative References:	V/III/8, V/III/1, 225, 232
NCS Subject Code(s):	R11915-7-2