Date: 19980812
Docket: 96-462-GST-I
BETWEEN:
WINNIPEG LIVESTOCK SALES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk, J.T.C.C.
[1] Winnipeg Livestock Sales Ltd. appeals from an assessment of goods and services tax (GST) for the period January 1, 1991 to August 31, 1993. At all relevant times, the Appellant has been a registrant for purposes of the Excise Tax Act (the Act) under registration no. 121353619.
[2] In assessing the Appellant, the Minister assumed that (i) the Appellant provided boarding facilities in the form of pens, water and feed for livestock producers and buyers who required that their cattle be fed and stored prior to sale or shipment (cattle storage); (ii) the Appellant provided boarding facilities in the form of pens, water and feed to carriers for livestock in transit to be rested, watered and fed during stop-overs (through-loads); (iii) the Appellant collected no GST on its supplies of hay and straw sales, cattle storage and through-load services during the relevant period.[1]
[3] The Appellant also arranged for insurance coverage from the Hartford Fire Insurance Company for any livestock in the Appellant’s care, custody or control. Each farmer or purchaser was billed separately for the cost of insurance plus the Appellant’s mark-up under the category of insurance coverage on the Appellant’s form of invoice. The Appellant did not charge GST on the supply of this coverage. At the commencement of the hearing, Counsel for the Appellant advised the Court that the question whether financial services, being insurance policies, were being provided in respect of which the Appellant failed to collect and remit GST, was being abandoned.
Evidence
[4] The Appellant is a livestock marketing agency. Its primary business is to receive producers’ livestock for sale by auction. The Appellant also provides a storage and assembly facility for buyers who need that service and a food, water and rest facility for animals in transit to motor carriers as required of the latter by sections 148 and 149 of the Health of Animals Regulations (Regulations).[2] During peak periods, the Appellant handles 4500 to 5000 cattle with the largest volumes occurring on Fridays when 2500-3000 head may go through its facilities.
[5] The Appellant’s place of business consists of an office area, an auction ring and three separate pen areas (alleys). The latter, which are relevant to the issues before the Court can be described as follows:
(a) Before sales alleys: these are pens where cattle received from producers are housed prior to sale. These alleys do not have any water or feeding facilities since as a general rule the animals are kept at most overnight and are housed elsewhere following sale. The producers pay the Appellant a sales commission but no storage or other charges are levied.
Following sale, the cattle are moved to either the regular or 500 alleys. Where they go depends on the size of purchase. Generally, small purchases, i.e. less than 30-40 head, are housed in the regular alleys, whereas purchases of “semi” load size or greater, are housed in the 500 alleys.[3] [4] The latter are generally made by order buyers hired by packing plants and feed lots and can amount to 800-1000 head per week. In addition to the cattle purchased at the Appellant’s, order buyers may have purchased cattle elsewhere and brought them to the Appellant’s for assembly prior to shipment.
(b) Regular alleys: these alleys are equipped with automatic water bowls and feed racks for square hay bales (average weight 60-70 pounds). Cattle placed in these alleys are not fed unless the purchaser so directs. In that case, he must fill out a requisition specifying which cattle are to receive hay and the number of bales required. The Appellant charges the customer $4.00 per bale for the hay. If straw is required, it also must be ordered and a further charge is made.
(c) The 500 alleys are larger and more recently constructed pens. They are also equipped with automatic water bowls and feed racks, the latter holding round hay bales weighing 1500-1700 pounds. All cattle purchased at auction and placed in the 500 alleys are automatically fed and the buyer is billed $1.50 per head. There is no storage charge levied with respect to these cattle. However, with respect to the cattle purchased elsewhere and brought to the Appellant’s for assembly, the buyers are charged storage fees of $2.50 per head in addition to the $1.50 per head charged for feed.
[6] Consumption of feed always occurs on premises. There are no identifiable bales of hay in the 500 alleys which are specifically assigned to a producer/purchaser. No hay is sold by the Appellant other than in the context of storage and feeding.
[7] The through-load service provided to transporters of cattle includes the provision of feed, water and rest areas for the animals. This service is provided in the 500 alleys at a flat rate per load of $140. According to Pleuman, this rate was determined on the basis of $120 for feed and $20 for labour, i.e. loading and unloading. He maintains that there is no storage charge component in this flat rate.
[8] Two issues remain to be determined:
(a) whether the Minister correctly assessed tax for the Appellant’s provision of boarding facilities in the form of pens, water and feed to carriers for livestock in-transit to be rested, watered and fed during stop-overs (through-loads).
(b) whether the Minister correctly assessed tax for the provision of boarding facilities in the form of pens, water and feed for livestock buyers who required that their cattle be fed and stored prior to sale or shipment. The parties have advised the Court that this issue now relates only to cattle held in the 500 alleys.[5]
[9] The Appellant’s overall position with respect to both issues is that irrespective of the supply of any other services its main provision to those who use its facility is the supply of hay. The Appellant further contends that in its operation, feed, specifically hay, is supplied in such quantities that under the Excise Tax Act it can only be regarded as a zero-rated supply.
Through-Loads
[10] The Appellant contends that the $140 through-load charge is based on an estimate of the amount of feed which would be consumed by an average “semi” load of cattle, the value of which was $120. The Appellant argues that the balance of $20 representing labour costs forms but a small portion of the overall cost and would not exist separate and apart from the provision of feed to the cattle. Since the greatest portion of the charge is for the hay consumed, the fact that other elements of “service” (water, a place to rest, etc.) are provided should not change what is in essence being provided, that being the sale of hay for feed.
[11] Counsel for the Appellant further argues that in considering the substance and form of the activity, it is necessary to look at the quantum or scale of what is being provided in the context of the entire transaction.[6] In this case, an analysis of the true commercial and practical nature of the Appellant’s transactions can only lead to a conclusion that to the extent there is a provision by the Appellant of “services”, they are ancillary to the sale of hay.
Conclusion
[12] In assessing the nature of the through-load service, it is essential to determine whether we are dealing with the supply of goods, in this case, feed, or whether we are dealing with the supply of a service in which goods are consumed. I agree with Counsel for the Appellant that to properly interpret the Act and the Regulations, the factual situation must be approached with a view to understanding the substance and reality of the underlying transactions. However, I disagree with him as to the conclusion to be reached thereby on the facts before this Court.
[13] The appropriate test to determine whether there were separate taxable supplies or a single supply is whether the alleged separate supply was an integral part or component of the overall supply. As Rip J. observed in O.A. Brown:[7]
One factor to be considered is whether or not the alleged separate supply can be realistically omitted from the overall supply. This is not conclusive but is a factor that assists in determining the substance of the transaction. ...
The fact that a separate charge is made for one constituent part of a compound supply does not alter the tax consequences of that element. Whether the tax is charged or not charged is governed by the nature of the supply. In each case it is useful to consider whether it would be possible to purchase each of the various elements separately and still end up with a useful article or service. For if it is not possible then it is a necessary conclusion that the supply is a compound supply which cannot be split up for tax purposes.
Emphasis added
[14] The service specifically sought by the Appellant’s customers is that mandated by the provisions of the Regulations, the relevant portions of which read:
Food and Water for Animals in Transit
148(1) Subject to subsections (2), (3) and (7), no person shall confine in a railway car, motor vehicle, aircraft or vessel
...
(b) cattle, sheep, goats or other ruminants for longer than 48 hours.
148(4) Livestock that is unloaded from a railway car, motor vehicle, aircraft or vessel to be fed, watered and rested before the livestock is re-loaded, shall be unloaded into a pen, rested for not less than five hours, provided with an ample quantity of suitable food and potable ice-free water, and before the livestock is re-loaded, the floor of the railway car, motor vehicle, aircraft or vessel shall be littered with straw, wood shavings or other bedding material.
148(5) A pen in which livestock is unloaded pursuant to subsection (4) shall provide
(a) sufficient space for all the livestock to lie down at the same time;
(b) properly designed racks and troughs for feeding and watering the livestock;
(c) well-drained and clean floors of concrete or gravel that provide safe footing;
(d) an adequate amount of straw or other litter to bed the livestock; and
(e) protection from inclement weather.
Emphasis added
[15] I am unable to accept the submission that whatever other services may be provided by the Appellant are merely part and parcel of the supply of hay. The users of the through-load service are concerned not just with feeding their cargo but with storing, securing and ensuring the safety of their animals while obtaining access to water and feed, coupled with an adequate place to rest. Furthermore, a through-load customer does not have the option of acquiring any of the particular elements of the service provided by the Appellant separately, rather the provision of a particular element is entirely contingent on the provision of all the other required elements. As was observed by Rip J. in O.A. Brown:[8]
... Only if taken together do they form a useful service ... The alleged separate supplies cannot be realistically omitted from the overall supply and in fact are the essence of the overall supply. ...
Each of the required elements is an integral part or component of a composite whole and thus, constitute a single supply. That single supply is not the supply of hay since in the context of this particular transaction, feed, as a single stand-alone element, cannot be of any use to the customer. The fact that there may be a substantial disparity in the value or cost of the separate elements does not alter that fact.
[16] A realistic examination of the through-load service establishes that the Appellant does not merely provide property, i.e. hay, straw, water, etc. to its through-load customers, but rather enters into a contract to perform the specialized services required of it by them. These specialized services constitute a composite whole and were, for the purposes of this Act, correctly considered by the Minister to be a single supply. With respect to this issue, the appeal is dismissed.
Supply of hay - 500 alleys
[17] The issue to be determined is whether the provision of hay to animals following their sale at auction, as well as to animals purchased elsewhere and brought to the Appellant’s for assembly, is a separate supply for the purposes of the Act.
[18] It is the Respondent’s position that the provisions of the Act and, in particular, of Schedule VI with respect to zero-rated supply, contemplate a situation where there is a direct sale of feed and not a sale of service, a part of which might reflect the provision of feed. Since the subsequent services provided by the Appellant to purchasers of cattle at its auction include hay, water, straw, as well as storage and assembly, it is readily apparent that this constitutes a sale of services (a form of boarding) and cannot be considered the purchase of feed as a single supply of goods. Thus, while pursuant to the Act the provision of hay may be a zero-rated supply, that is not synonymous with the activity of providing that feed.
[19] The Respondent contends that the issue is the supply of service, that it is a taxable service, and that the provision of feed is but part of that service. It was not a separate and distinct supply and, therefore, as the service itself is taxable, so is the feed and straw.
[20] Although the Appellant acknowledges that there are other considerations involved in the use of its facilities, it contends that its main provision to the purchasers who use its facilities and in particular, the 500 alleys, is that of hay which based on the quantity sold, should be a zero-rated supply. Counsel further argues that the Minister has accepted the Appellant’s position with respect to the supply of hay to cattle held in the regular alleys, and distinguishing that transaction from the supply of hay to cattle held in the 500 alleys is inconsistent and ignores the commercial and practical nature of the transactions in issue.
[21] I have concluded, not without some concern, that the position advanced by the Appellant is correct. It is appropriate at this point to revisit the manner in which cattle are dealt with following sale. As a general rule, small orders (no larger than approximately 30 head) are transferred to the regular alleys to be held until the purchaser ships them out. In these alleys, hay is provided in small bales, at a set price, but only upon request of the purchaser. Water is provided automatically. The same protocol applies with respect to the provision of straw. Although large purchase orders in the normal course are allocated to the 500 pens, there are a number of options available to the purchaser. First, he may accept storage of those cattle in the 500 pens and pay $1.50 per day per head for feed. On the other hand, if cattle can be shipped expeditiously, the purchaser may opt to have them placed in the regular alleys and not be fed. In other circumstances, an order buyer may wish to segregate calves from the rest of his assembly and request that they be placed in the regular alleys and be fed at a cost of $4.00 per bale. As contrasted to the through-load services provided by the Appellant, the purchaser of cattle does have an option as to what supplies are necessary for his particular purposes.
[22] The Respondent argues that although the Appellant maintains that the $1.50 per head charge is ostensibly for feed, it is realistic to conclude that part of that charge is for the use of the actual facility itself. The evidence suggests otherwise. The Appellant is not in the business of purchasing and reselling livestock. Rather, it provides an auction facility for producers and purchasers and, as Pleuman testified, its main revenue source is the sales commissions arising therefrom. To do so, it requires a large facility to store the cattle from the time of delivery for the auction sale to the time they are shipped out. As a matter of practice, the Appellant does not charge storage fees to the producers or purchasers with respect to cattle sold through the auction on its premises, and this is the case whether the cattle are placed in the 500 or the regular alleys.[9] I accept Pleuman’s testimony that the per day per head charge for feed is based solely on the Appellant’s cost plus a mark-up and does not include or incorporate any charge for storage. On balance, it is clear that as consideration for the $1.50 per day per head payment, the purchaser received feed and no other consideration.
[23] Pleuman’s testimony is to some extent confirmed by the fact that if storage was required for cattle not purchased at the Appellant’s facility, such storage was supplied as consideration for the payment of $2.50 per day per head. On the evidence, it would appear that each supply, i.e. the supply of storage and of feed are separate and do not form part of any overall supply. I add that it would appear that the Minister has recognized this by his reassessment with respect to the provision of hay in the regular alleys.
[24] The Respondent also argued that in the 500 alleys, the purchaser does not acquire a fixed amount of feed as is the case in the regular alleys, but merely entitles his cattle to share in a communal bale of hay. This submission ignores the fact that there is virtually no difference as between the regular alleys and the 500 alleys with respect to the amount of feed supplied per animal and the cost of that feed to a purchaser. The evidence was that on average, a 1000 lb. animal consumes one-third to one-half of a square bale of hay per day. It is logical to infer that this is the basis upon which a purchaser would calculate his feed requirement for cattle held in the regular alleys. According to Pleuman, the actual cost for feed per animal per day in the regular alley ranges from $1.35 to $2.00 which amount is virtually the same as the cost of feed consumed by an animal placed in the 500 alley from the round bales, at a price of $1.50.[10]
[25] Under section 1(2) of the Regulations feed must be sold at bulk quantities of at least 20 kilograms, or 40 lbs., or in bags that contain at least 20 kilograms of feed. The Appellant contends that in the 500 alleys the quantity of feed, specifically that of hay, is supplied in such quantities that under the Act it can properly be regarded as a zero-rated supply. That position was not challenged.
[26] The Respondent also submitted that section 178 of the Act is applicable. This section reads:
178 For the purposes of this Part, where in making a supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as an agent of the recipient.
This section appears to deal with reimbursement of expenses without any real element of profit. While there was limited evidence as to the cost of the supply of hay to the Appellant, Pleuman did testify that all hay that was sold to its customers was the subject of a mark-up and that the Appellant did earn a profit on such sales. Such hay, therefore, is not sold at cost and section 178 would appear to have no application.
[27] I conclude that the provision of hay to cattle held in the 500 alleys is a separate supply for the purposes of the Act. In result, the appeal with resepct to this issue is allowed.
Signed at Ottawa, Canada, this 12th day of August, 1998.
"A.A. Sarchuk"
J.T.C.C.
[1] The Minister initially assessed $82,067.66 in net tax and interest and penalty in the amounts of $10,568.41 and $10,843.91, respectively. Subsequently, the Minister allowed an objection to the assessment in part by Notice of Decision CEN13117 dated December 8, 1995, by reducing the assessment by the amount of $26,363.90 (GST) on supplies recorded as ‘hay’ and ‘straw’ sales to purchasers of auction cattle and on several other items which are not in issue.
[2] C.R.C., c. 296 (SOR/91-525).
[3] In his testimony Desmond Pleuman (Pleuman), the Appellant’s sales manager, qualified the foregoing by observing that space constraints might require animals which would otherwise be in the 500 alleys to be placed in the regular alleys (and vice versa). Furthermore, purchasers for reasons of their own on occasion direct that animals of a certain type (e.g. calves) be grouped together. Thus, their assembly might be split between the regular and 500 alleys. Pleuman also testified that any purchaser who did not wish to have his cattle fed could make specific arrangements to that effect with the Appellant in which case these animals would be stored in the regular alleys.
[4] A transport generally hauls 54,000-55,000 lbs. of live cargo, thus depending on the size of the cattle a load could consist of as few as 40 and as many as 100 or more head.
[5] See footnote 1, supra. By virtue of that reassessment, it has been conceded by the Minister that the supply of straw and hay (i.e. square bales at $4.00 per bale) at the purchaser’s request to cattle held in the regular alleys is a zero-rated supply.
[6] Club Med Sales Inc. v. The Queen, [1997] G.S.T.C. 28; O.A. Brown Ltd. v. The Queen, [1995] G.S.T.C. 40.
[7] supra, @ p. 40-6, 40-7; see also Oxford Frozen Foods Limited v. The Queen [1996] G.S.T.C. 76 (T.C.C.); and Club Med Sales Inc., supra.
[8] supra at p. 40-8.
[9] Pleuman was not examined as to the factors considered by the Appellant in its determination of an appropriate commission and in particular, whether overhead costs formed part of that calculation.
[10] Pleuman explained that the different charging scheme between the alleys only existed because of the nature of the alleys themselves. The regular alleys are older, the numbers of cattle they can hold are smaller, and the method of providing hay was based on square bales. The 500 alleys were designed to hold larger numbers of cattle and to accommodate the currently popular method of baling hay, i.e. round bales which weigh between 1000 and 1500 lbs.