Date: 19990713
Docket: 97-3394-GST-G
BETWEEN:
VINCENT CHOW WHITE CRANE MARTIAL ARTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Vancouver, British Columbia on July 6, 1999. Vincent Chow, the sole shareholder and manager of the Appellant; Leo Cheng, C.A., the senior partner of the Appellant's accounting firm at that time; Sharon MacGougan; and Margaretta Suarez testified for the Appellant. Rowena Chow, C.G.A., the auditor on the file, testified for the Respondent.
[2] The Appellant has appealed an assessment for GST of $30,925.36 respecting supplies sold that the Respondent alleges were medicines. The Appellant states that the supplies were zero-rated under subsection 165(1) of Part IX of the Excise Tax Act ("Act") in that they were "Supplies of food or beverages for human consumption..." pursuant to Schedule VI, Part III under the Act. It should be noted that Part III is titled "Basic Groceries".
[3] Paragraph 11 of the Reply contains the assumptions of the Respondent. Paragraph 12 describes the issue as seen by the Respondent. They read:
11. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:
a) the facts stated and admitted above;
b) the Appellant is a GST registrant with GST Registration No. 120373915;
c) the Appellant was a corporation involved in teaching martial arts, selling Chinese herbs, massage therapy and selling ready made medicines in powder or liquid form;
d) the Appellant is required by the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the "Act") to file its GST returns on a quarterly basis;
e) the Appellant claimed input tax credits ("I.T.C.'s") of $9,531.17 during the period in question;
f) The reassessment of July 19, 1996 adjusted the ITC's by $5400.00 and the GST owing by $35,056.10;
g) Vincent Chow ("Chow") is the sole shareholder of the Appellant;
h) Chow carried on the activities of the business on behalf of the Appellant;
i) Chow has a herbalist business licence and is a White Crane martial arts instructor;
j) Chow, on behalf of the Appellant, prescribes, prepares and sells herbs for internal consumption or external application to the clients and customers of the Appellant;
k) these herbs are bought in bulk from countries in Asia by the Appellant;
l) Chow and the Appellant represented to customers that the Chinese herbs would improve bodily strength and help with injuries;
m) the Chinese herbs were prescribed, prepared and sold for the purpose of actual or perceived medicinal properties;
n) the mixture of herbs prescribed and prepared differed according to the sickness or injury of the customer;
o) the Appellant does not do a walk-in retail business of selling these Chinese herbs;
p) the Chinese herbs are not food, beverage or groceries;
q) the Chinese herbs are not consumed as a basic grocery item for nourishment but for the actual or perceived medicinal properties;
r) 90% of the sales of the Appellant were Chinese herbs for external use, 5% were Chinese herbs for internal use, 2% was massage therapy and 1% was for martial arts lessons;
s) the Appellant did not collect GST on the sale of the Chinese herbs whether for external or internal use;
t) the Appellant does not charge a fee for Chow's service in prescribing the Chinese herbs but charges for the Chinese herbs; and
u) the records kept by the Appellant were inadequate.
12. The issue is whether the Appellant is liable for GST as assessed on the basis that the goods in question were not zero-rated basic groceries.
[4] Assumptions (b), (d), (e), (f), (g), (h), (i), (j), (o), (s), (t), and (u) were not rebutted by the evidence. Assumption (c) is correct except for the last portion "... and selling ready made medicines in powder or liquid form;" which is the subject in dispute. Assumption (k) is incorrect: the great majority, or all, of the supplies in question were bought by the Appellant from Canadian wholesalers. In particular, the Appellant's major supplier was Kiu Shun Trading Co. Ltd. of Vancouver. Assumption (l) is correct, but some customers were referred by their friends and did not rely on Mr. Chow or the Appellant's representations.
[5] Assumption (m) is correct in the broad sense described in the Oxford Dictionary. There, "medicinal" pertains to "medicine", which in turn is defined as "The department of knowledge and practice which is concerned with the cure, alleviation, and prevention of disease in human beings, and with the restoration and preservation of health." The Appellant did not sell to the Chinese community in Vancouver. Some of its customers simply bought supplies which they ordered from the Appellant without any recommendation or prescription from the Appellant or Mr. Chow. Assumption (n) is incorrect in that neither the Appellant nor Mr. Chow prepared any of the supplies in question; they were bought pre-packaged from wholesalers or other suppliers. Some were prescribed by the Appellant or Mr. Chow and some were not. They did differ according to the sickness or injury of customers who were prescribed for by Mr. Chow. Assumptions (p) and (q) are the subject of the dispute.
[6] Assumption (r) is an estimate that Vincent Chow gave to Miss Chow, the auditor, at a meeting concerning this assessment held in the Appellant's accountant's office on May 18, 1995. Vincent Chow testified that he gave the "90% for external use figure" because he was afraid that he might lose his business licence if he said that a great deal of his herbal sales were for internal use. He then testified that 30-40% of his sales were herbs for external use and 60-70% were consumed for health purposes.
[7] The products sold by the Appellant were pre-packaged and were in solid or liquid form. Among the products were hawthorn, ginseng and chrysanthemum petals. All have medicinal qualities in Chinese herbal medicine. Mr. Chow holds himself out as a Chinese herbalist and the Appellant's business licence was specifically qualified to include the sale of herbs. Sharon MacGougan and Margaretta Suarez both purchased these herbs for health purposes on the recommendation of Mr. Chow. They purchased some as a tonic, others as an ingredient for soup and others for pain, all to be taken by consumption. Both also purchased the Appellant's herbal supplies for external application as a salve or poultice to reduce pain or to heal cuts, bruises or sore muscles. The Appellant's method of charging GST was simple: if the wholesaler charged the Appellant GST on the product, the Appellant charged its customer GST. Otherwise, it didn't charge GST.
[8] Assumption (k) assumed that the Appellant imported supplies, but Mr. Chow testified that the Appellant bought pre-packaged goods from local wholesalers of Chinese herbal products, tore the labels off the packages and sold them at retail. That way its customers (whom were not members of Vancouver's Chinese community) could not purchase directly from the wholesalers at a cheaper price. This testimony has such a ring of truth to it that the Court accepts it as true.
[9] In these circumstances, were these herbal products "food or beverages for human consumption"? Consumption is defined by the Oxford Dictionary as "The action or fact of consuming or destroying". Within the context of the phrase used in Part III, the external application of these herbs as poultices or salves would not constitute using up or destroying the herbs in the way that eating food would. For this reason, the herb products used for external application would not qualify for zero-rating. Moreover, the herb products sold in liquid form were not sold as a beverage. They were sold as a concentrate. A "food" is defined by the Oxford Dictionary to be "What is taken into the system to maintain life and growth, and to supply the waste of tissue; aliment, nourishment, provisions, victuals". In short, food is to maintain life, whereas medicinal products are to restore or preserve health.
[10] The Appellant's herbs were both sold and purchased to restore or preserve health. It may be that some of the products used in soup could be considered as for the purpose of maintaining life, but that is not why they were sold by the Appellant or bought by its customers. These latter products formed an infinitesimal portion of the Appellant's sales, and their value was never proved.
[11] Miss Chow, the auditor, assessed all of the Appellant's herbal sales as medicinal, rather than as food or beverages. On the evidence, she was correct. For this reason the appeal of the assessment of tax is dismissed.
[12] Pursuant to Section 280 of the Act the penalty appealed was assessed on the Appellant's failure to remit tax. Similarly, interest also accrued on the unpaid balance. The appeals of these assessments are also dismissed.
[13] The Respondent is awarded party and party costs.
Signed at Ottawa, Canada this 13th day of July, 1999.
"D.W. Beaubier"
J.T.C.C.