Date: 20011115
Docket: 2001-405-GST-I
BETWEEN:
CINNAMON CITY BAKERY CAFÉ INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal from an assessment under Part IX of the Excise Tax Act (the "Act") dated November 15, 1999.
[2] Cinnamon City Café Inc. (the "Appellant") was incorporated pursuant to the laws of British Columbia and was registered under Part IX of the Act, in 1994. The Appellant was required to file its GST returns on a quarterly basis. Between 1994 and 1999, the Appellant established and operated cafés in major shopping malls in western Canada and subsequently sold the cafés as franchises. The Appellant sold a total of 13 franchises and collected a total of $260,000.00 in franchise fees. On November 15, 1999, the Minister assessed the Appellant Goods and Services Tax ("GST") of $18,200.00, not remitted on the collected franchise fees. The Appellant filed a Notice of Objection on March 6, 2000. The Minister confirmed the assessment on October 30, 2000. The Appellant filed a Notice of Appeal with the Tax Court of Canada on January 25, 2001.
[3] From Exhibit A-1 - "Franchise Agreement", the franchisee, upon payment of the franchise fee, obtained a grant of a franchise and a turnkey retail store utilizing the Appellant's format and system and obtained the benefits of the Appellant's training services, format of operation, the trademarks and the goodwill.
[4] The Appellant admitted that GST on the franchise fees was not collected. However, the Appellant argued that GST was not collected because section 167 of the Act applied to exempt the sale of the franchises from GST. The election forms for the subsection 167(1) election were filled out and signed but not filed with the Minister.
[5] The Respondent submitted that the Minister properly assessed the Appellant for underreported GST of $18,200.00 in respect of the franchise fees. The franchise fees are in respect of a taxable supply of property and as such are subject to GST. Even if the Appellant filed the requisite forms as required under section 167 of the Act, the franchise fees are exempt from the election pursuant to subparagraph 167(1.1)(a)(ii).
ISSUES
I. Is the franchise fee amount excluded from the section 167 election?
II. Did the Appellant file the requisite election forms as required under section 167 of the Excise Tax Act, in order to qualify for the section 167 election?
STATUTORY FRAMEWORK
[6] The relevant provisions of theAct[1] are:
167. (1) Supply of assets of business - Where a supplier makes a supply of a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier, and, under the agreement for the supply, the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business,
(a) for the purposes of this Part, the supplier shall be deemed to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to that part of the consideration for the supply of the business or part that can reasonably be attributed to that property or service; and
(b) except where the supplier is a registrant and the recipient is not a registrant, the supplier and the recipient may make a joint election in prescribed form containing prescribed information to have subsection (1.1) apply to those supplies.
(1.1) Effect of Election - Where a supplier and a recipient make a joint election under subsection (1) in respect of a supply of a business or part of a business and the recipient, if a registrant, files the election with the Minister not later than the day on or before which the return under Division V is required to be filed for the recipient's first reporting period in which tax would, but for this subsection, have become payable in respect of the supply of any property or service made under the agreement for the supply of the business or part, or on such later day as the Minister may determine on application of the recipient,
(a) no tax is payable in respect of a supply of any property or service made under the agreement other than
(i) a taxable supply of a service that is to be rendered by the supplier,
(ii) a taxable supply of property by way of lease, licence or similar arrangement, and
(iii) where the recipient is not a registrant, a taxable supply by way of sale of real property; and
(b) for the purposes of this Part,
(i) where, but for this subsection, tax would have been payable by the recipient in respect of a supply made under the agreement of property that was capital property of the supplier and that is being acquired by the recipient for use as capital property of the recipient, the recipient shall be deemed to have so acquired the property for use exclusively in the course of commercial activities of the recipient, and
(ii) where, notwithstanding this subsection, tax would not have been payable by the recipient in respect of a supply made under the agreement of property that was capital property of the supplier and that is being acquired by the recipient for use as capital property of the recipient, the recipient shall be deemed to have so acquired the property for use exclusively in activities of the recipient that are not commercial activities.
167.1 Goodwill - For the purposes of this Part, where a supplier makes a supply of a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier, the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business, and part of the consideration for the supply can reasonably be attributed to goodwill of the business or part, that part of the consideration shall not be included in calculating the tax payable in respect of the supply.
123. (1) Definitions - In section 121, this Part and Schedules V to X,
. . .
"supplier", in respect of a supply, means the person making the supply;
"supply" means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;
"property" means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money;
"registrant" means a person who is registered, or who is required to be registered, under Subdivision d of Division V;
"recipient" of a supply of property or a service means
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and
(c) where no consideration is payable for the supply,
(i) in the case of a supply of property by way of sale, the person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise than by way of sale, the person to whom possession or use of the property is given or made available, and
(iii) in the case of a supply of a service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply;
"taxable supply" means a supply that is made in the course of a commercial activity;
ANALYSIS
I. Is the franchise fee amount excluded from the section 167 election?
[7] Subsection 167(1) of the Act provides for a joint election such that no tax is payable on the sale by a vendor to a purchaser of all or substantially all of the property used in a commercial activity that forms all or part of a business. Essentially, the election provides relief to a purchaser by eliminating the obligation to pay tax, generally in circumstances where the purchaser would be able to claim full input tax credits. However, the election provided for in subsection 167(1) is available only if certain conditions are met. Even after these conditions are met, paragraph 167(1.1)(a) exempts certain types of property from the election.
[8] The Appellant sold fully operating cafés to the franchisees. Such arrangements included the necessary premises, equipment and inventory to operate the cafés. I therefore conclude that the sale of the franchises was a supply of a "business that was established" pursuant to subsection 167(1).
[9] The second condition is that the recipient acquires possession or use of all or substantially all of the property required to carry out the business.[2] The franchisees acquired fully operating or ready to operate entities. I therefore conclude the franchisees acquired all or substantially all of the property necessary for the franchises to carry on the business.
[10] Subsection 167(1.1) states that where a supplier and a recipient make a joint election under subsection 167(1), so long as the election is properly filed, no tax is payable in respect of a supply of property or service made under an agreement. However, exceptions to this rule are listed under subparagraphs 167(1.1)(a)(i) to (iii).
[11] Subparagraph 167(1.1)(a)(i) states that a taxable supply of a service that is to be rendered by the supplier is exempt from the section 167 election. This includes initial training services provided by a franchisor to a franchisee. The Appellant provided initial training and procedure manuals to the franchisees, and this service was covered in the price of the franchise fee, thus this portion of the franchise fee is exempt from the section 167 election.
[12] Subparagraph 167(1.1)(a)(ii) states that a taxable supply of property by way of lease, licence or similar arrangement is excluded from the section 167 election. The franchise fee amount included the licence for the right to use a trade name. Therefore this portion of the fee is exempt from the section 167 election.
[13] Section 167.1 allows for goodwill to be transferred free of GST. Section 167.1 does not require that a prescribed form be filed with the Minister to qualify for this election. The Appellant submitted that a portion of the franchise fee was consideration for goodwill. However, the Appellant was unable to specify in any way the value of the goodwill.
II. Did the Appellant file the requisite election forms as required under section 167 of the Excise Tax Act, in order to qualify for the section 167 election?
[14] Paragraph 167(1)(b) of the Act states that a supplier (in this case the Appellant) and a recipient (in this case the franchisees), may make a joint election in prescribed form (Form GST 44), to qualify for the subsection 167(1) election. Subsection 167(1.1) states that where a supplier and a recipient make a joint election under paragraph 167(1)(b), if the recipient (who must be a registrant under the Act) files the GST 44 election form with the Minister no later than the day on or before the return under Division V is required to be filed for the recipient's first reporting period in which GST would, but for this subsection, have become payable, then the transaction can qualify for the subsection 167(1) election. Basically, to qualify for the subsection 167(1) election, the franchisee must be a registrant under the Act and must have filed the requisite form within its reporting period.
[15] In the present case the Appellant submitted that all the franchisees are registrants under the Act. Further, the Appellant submitted with its Notice of Appeal, 11 election forms that had been completed by the Appellant and the franchisees. However, none of these election forms have been filed with the Minister.
[16] In the case of Low Cost Furniture Ltd. v. Canada,[3] Judge Bowie found that:
Even if I am wrong in this, the Appellant must nevertheless fail on this aspect of the appeal. Subsection 167(1.1) requires that the election must be filed within the reporting period of the purchaser in which the tax would, but for the election, be payable. The supply took place in February 1994. The tax was therefore payable in the period that ended on March 31, 1994, more than a year before the election was signed. I have no authority to either ignore or extend a time limit which Parliament has imposed as a limitation upon those who wish to take the benefit of the exempting provision. The election was made more than a year too late, and it is therefore ineffective. The Appellant is not entitled to the claimed exemption for that reason as well.
CONCLUSION
[17] The Appellant meets the first conditions of the subsection 167(1) election. However, several portions of the franchise fee amounts are excluded from the subsection 167(1) election by paragraph 167(1.1)(a). Also, the requisite forms for the election were completed but never filed with the Minister as required.
[18] In relation to that portion of the franchise fee representing goodwill, this amount could have been excluded from GST pursuant to section 167.1 of the Act. However, because the Appellant was unable to quantify goodwill in any amount, the Appellant failed to meet the onus incumbent upon him in this appeal.
DECISION
[19] For these reasons the appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of November 2001.
"D. Hamlyn"
J.T.C.C.
COURT FILE NO.: 2001-405(GST)I
STYLE OF CAUSE: Cinnamon City Café Inc. and
Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: September 19, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D. Hamlyn
DATE OF JUDGMENT: November 15, 2001
APPEARANCES:
Agent for the Appellant: Gerard Darmon
Counsel for the Respondent: Jasmine Sidhu
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-405(GST)I
BETWEEN:
CINNAMON CITY BAKERY CAFÉ INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 19, 2001 at Vancouver, British Columbia, by
the Honourable Judge D. Hamlyn
Appearances
Agent for the Appellant: Gerard Darmon
Counsel for the Respondent: Jasmine Sidhu
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated November 15, 1999 and bears number 00000000067, is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 15th day of November 2001.
|
"D. Hamlyn" |
J.T.C.C.