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.
|
"Diane Campbell" |
J.T.C.C.