Date: 20020911
Docket: 2002-1314-GST-I
BETWEEN:
RONALD GARY COLEMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller, J.
[1] Mr. Coleman has a long history of working with horses. For the last many years, he has operated a business of boarding horses, as many as 50 at any one time. Mr. Coleman charges his customers separately for the feed supplied to the horses and the services supplied. He charges goods and services tax (GST) on the service element but not on the feed element. The Minister of National Revenue (the Minister) assessed Mr. Coleman for the period January 1, 1998 through June 30, 2000 increasing GST owing by Mr. Coleman by $14,836.68 representing the GST on the feed supplied during that period. The Minister also assessed interest of $938.42 and penalties of $1,155.25. Mr. Coleman is appealing that assessment.
[2] The issue is whether the feed is zero-rated. The parties agreed that the feed will only be eligible for consideration as zero-rated under section 2 of Part IV of Schedule VI of the Excises Tax Act if either: (i) it is a separate supply of multiple supplies or (ii) the provision of feed and services is a single supply of feed.
[3] If the Appellant gets over this hurdle, then I must examine section 2 of Part IV of Schedule VI to determine if the feed falls within the definition of feed and is supplied in sufficient quantities to qualify. I find Mr. Coleman was making a single supply but it was a single supply of boarding horses not of providing feed. He has, therefore, not met the two conditions and for that reason, it is unnecessary for me to consider the application of section 2 of Part IV of Schedule VI to the feed in this case.
Facts
[4] Mr. Coleman has an extensive background in the horse industry, having worked for others in horse operations in California, Texas and Southern Alberta throughout the 1980s and into the 1990s. He started his own horse boarding operation in Alberta in the early 1990s. He is clearly dedicated to his business. He has taken numerous courses and clinics in the field, and has also himself conducted seminars on horse training. One of the courses he took in late 1990 from the animal industry division of the Alberta Agriculture Food and Development of the Alberta government dealt specifically with the consequences of the introduction of GST. He received advice that he could handle GST in one of two ways in a horse boarding business: first, he could separate feed from service and mark the feed up, claiming it was zero-rated; second, he could bill everything together and charge GST on everything. He opted for the former approach.
[5] Mr. Coleman described his operation in some detail. He maintains stalls for 35 horses and can also accommodate another 15 on his 40-acre pasture. He employs two full-time staff members from Monday to Friday and four part-time staff on the weekend. He described the services provided by the staff by taking me through a typical day. The barn horses are provided their feed between 6:30 and 7:00 each morning and they eat until 8:00. They are then taken outside for the day. In winter, they are blanketed first. Between 9:00 and 11:00 a.m. the stalls are swept and cleaned and new straw provided. If there is any requirement for the ferrier or veterinarian, these visits normally occur at this time. The ferrier would make weekly visits. Between 1:00 and 3:00 in the afternoon, Mr. Coleman conducts training sessions. Starting at 3:00 the horses are brought back to the barn. They are fed again between 4:00 and 5:00. The customers can visit after 5:00 p.m. to ride their horses. Some customers store their saddles with Mr. Coleman.
[6] As well as the daily routine, there is the responsibility of worming the horses four times a year. Mr. Coleman also indicated he considered simply observing the horses as being very much part of his responsibility.
[7] With respect to the pasture horses, little service is required other than observation and in the winter the provision of feed.
[8] Mr. Coleman described the feed (alfafa cubes, grain and hay) and the quantities in which it was provided. It is unnecessary for me to go into this detail, suffice it to say that he marked up his feed costs by approximately double. This was the industry norm.
[9] Although a customer could supplement his horses feed, the customer could not opt out of the provision of feed by Mr. Coleman as part of the boarding package. Mr. Coleman described the agreements with his customers as a month-to-month arrangement, though there was no written agreement. The customers were billed monthly. The bills were broken down between feed supplied and services supplied. For barn horses, the breakdown was feed of $190 and service of $140. Mr. Coleman stated that the service fee was set by determining the difference between what the market would bear and the feed. Mr. Coleman provided invoices from 1991 and 1998. Each indicated the feed supply at $190 and the service at $100 in 1991 and $130 in 1998. Mr. Coleman explained that, as it was usually rising overhead costs causing the increase, he always attributed fee increases to the service portion. He did go on to indicate that he was concerned with the recent drought conditions as feed prices were spiralling upward and this would have to be reflected in his charges.
[10] The feed charged to the pasture horses was $80 a month throughout the year, notwithstanding they were only actually provided feed in the winter.
Analysis
[11]
... I think it would be a great pity if we allowed this subject to become over-legalistic and over-dressed with legal authorities when, to my mind, once one has got the question posed, the answer should be supplied by a little common sense and concern for what is done in real life. ...[1]
I agree wholeheartedly with Lord Widgery's approach. The question of course is - What has been supplied by Mr. Coleman for the consideration received? The common sense answer is the boarding of the horse.
[12] The Appellant first raised the tests set out in O.A. Brown v. The Queen[2] (cited with approval by the Federal Court of Appeal in Hidden Valley Golf Resort Association v. The Queen[3]), being whether in substance and reality the alleged separate supply is an integral part, integrant or component of the overall supply. This requires a review of the real character of the arrangement. The Appellant suggests that because the feed was billed separately, and because the costing of the overall supply was based on a determination of market less the feed price, that the real character of the supply of feed is as a separate supply, not part of any overall horse boarding operation. I do not see it that way.
[13] Is feeding the horses an integral component of caring for the horses? Absolutely. Separating an invoice into feed and services does not alter the basic character of the arrangement. A customer does not phone Mr. Coleman asking him to feed his horse. He asks for the whole boarding package. Indeed, the customer cannot board the horse and supply his own feed; neither can he simply bring his horse to be fed during the day without being boarded. It would not make any commercial sense to separate the functions.
[14] Attempting to put the arrangement in human terms, the horse is provided room and board. It does not get one without the other. As well it receives the watchful gaze of a horse expert and certain personal care services that go along with it.
[15] The Appellant sought case support from Wainwright Double "R" Feedlot Ltd. v. M.N.R.[4]That case did not deal with the GST issue of single versus multiple supplies; it offers little support in addressing the issue directly. More relevant to the case before me is Customs and Excise Commissioners v. Scott,[5] which was referred to in the O.A. Brown case (and by reference to O.A. Brown in the Federal Court of Appeal Hidden Valley). The facts in Scott are remarkably similar to the case before me, the only difference of significance being that the horses in Scott were mares kept to be serviced by two stallions at stud. Justice Cumming-Bruce recognized there were a bundle of six services provided, including feeding and observing the horses. Although each could be identified separately, he found they were all necessary components of the entire transaction of keeping the mare on the farm.
[16] The Appellant suggested that because there was the additional purpose of servicing the mares in the Scott case, this distinguishes it from the case before me. I do not agree. Yes, there is an additional purpose in Scott, but the judgment emphasized that it was the keeping of the horse, not the servicing of the horse, which was a single supply. So too in Mr. Coleman's case, it is the overall activity of boarding the horses which is supplied, not separate supplies of feed, shelter, observation and care.
[17] The Appellant's alternative argument was a 180-degree shift. If I should find there is a single supply then it is not a single supply of boarding horses, but a single supply of feeding horses. The Appellant sought support for this position in the legislation, in case law, and based on the evidence.
[18] In legislation, he referred me to section 138 of the Excise Tax Act which reads:
138 For the purposes of this Part, where
(a) a particular property or service is supplied together with any other property or 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 service,
the other property or service shall be deemed to form part of the particular property or service so supplied.
A careful reading of this section suggests to me that for it to come into play, there must necessarily be more than a single supply; that is, there must be one supply incidental to the other. It does not follow then that this section can be relied upon to support a single supply. If I accept the Appellant's first argument that there are multiple supplies and that all the supplies other than the feed are simply incidental to the feed, then section 138 can be considered. However, I do not view the services other than the feeding as incidental to the feed; neither do I view the feed as incidental to the other services. As I have concluded, they are all part and parcel of one single supply.
[19] The Appellant referred me to the case of Winnipeg Livestock Sales Ltd. v. The Queen[6] to support his position that the single supply is a single supply of feed. That case dealt with the livestock marketing operation which supplied boarding services to two sets of livestock. One set was livestock simply in transit. Judge Sarchuk found there was a single supply of boarding that livestock. The second set was livestock awaiting auction who were only held to be fed prior to auction. Judge Sarchuk again found a single supply, but in this case, a single supply of feeding.
[20] I distinguish the above two scenarios on the basis that in the one case the livestock were there to be kept (housed, cared for, fed) while in the other they were there simply to be fattened up for auction. In the case before me, Mr. Coleman did not operate a feedlot. He cared for horses with everything that entailed. He was not in the business of offering the single supply of feeding for purposes of fattening livestock for slaughter. This case does not support the Appellant's position that the single supply is feeding.
[21] Finally, the Appellant contends that based on the evidence, 95% of staff time was spent on the operation of feeding; consequently, feeding must be the single supply. Mr. Coleman did not testify to any percentage, but gave a thorough description of the day's activities. And yes, feeding consumes staff time for one hour or so in the morning and afternoon. Counsel suggested that the cleaning of the stalls was a direct result of the output from feeding and, therefore, such time should also be considered as part of the feeding process. An ingenious approach, but contrary to my common sense understanding of the production of manure.
[22] What the Appellant's argument based on time spent downplays is the fact that a major component of the arrangement is not just staff time, but also the very provision of secure accommodation for the horses. Even if one does just consider time, it fails to appreciate that the observation of the horses on an ongoing basis is likewise a critical component of the service being offered. Certainly, staff spent time feeding the horses, but I do not find that this constituted such a significant amount of time to justify finding that the single supply was feed.
[23] With respect to the penalties assessed pursuant to section 280, I refer to the Federal Court of Appeal decision in Consolidated Canadian Contractors Inc. v. The Queen[7] that found section 280 imposes a strict liability and not an absolute liability on the taxpayer. This leaves open a defence of due diligence. Is that available to Mr. Coleman? I believe it is. When GST was first introduced Mr. Coleman attended an Alberta government sponsored presentation where he was advised that he could do exactly what he then proceeded to do - separate the feed component and not charge GST. He acted consistently until Canada Customs and Revenue Agency advised him otherwise, when he changed his practice. Mr. Coleman is a straightforward, honest, reputable owner of a small business, who educated himself in both the operational and business side of the horse boarding business. He has acted responsibly in every respect. He should not be penalized for this behaviour.
[24] I refer this matter back to the Minister on the basis that Mr. Coleman is not to be subjected to any penalty. In all other respects, the appeal is dismissed.
Signed at Ottawa, Ontario, this 11th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2002-1314(GST)I
STYLE OF CAUSE: Ronald Gary Coleman and
Her Majesty the Queen
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: August 16, 2002
REASONS FOR ORDER BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: September 11, 2002
APPEARANCES:
Counsel for the Appellant: Gregory J. Gartner
Counsel for the Respondent: Margaret McCabe
COUNSEL OF RECORD:
For the Appellant:
Name: Gregory J. Gartner
Firm: Felesky Flynn
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-1314(GST)I
BETWEEN:
RONALD GARY COLEMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 16, 2002 at Edmonton, Alberta, by
the Honourable Judge Campbell J. Miller
Appearances
Counsel for the Appellant: Gregory J. Gartner
Counsel for the Respondent: Margaret McCabe
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated May 4, 2001, and bears number 10B0003108, for the period January 1, 1998 to June 30, 2000, is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is not to be subjected to any penalty.
In all other respects, the appeal is dismissed.
Signed at Ottawa, Canada, this 11th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.