Kandawala v. The Queen

Kandawala v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-09-28 Neutral citation 2004 TCC 659 File numbers 2004-1078(GST)I Judges and Taxing Officers Gerald J. Rip Subjects Part IX of the Excise Tax Act (GST) Decision Content Docket: 2004-1078(GST)I BETWEEN: NAZREEN BEGUM KANDAWALA, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeal heard on August 4, 2004 at Vancouver, British Columbia Before: The Honourable Justice Gerald J. Rip Appearances: Agent for the appellant: S. Rhumtulla Counsel for the Respondent: Lisa Riddle JUDGMENT The appeal from the assessment made under Part IX of the Excise Tax Act for the period from January 1, 2000 to December 31, 2000, dated July 30, 2002 and bearing number 11G0000394 is dismissed. Signed at Ottawa, Canada, this 28th day of September 2004. "Gerald J. Rip" Rip J. Citation: 2004TCC659 Date: 20040928 Docket: 2004-1078(GST)I BETWEEN: NAZREEN BEGUM KANDAWALA, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Rip J. [1] Nazreen Begum Kandawala has appealed an assessment under Part IX of the Excise Tax Act ("Act") by which the Minister of National Revenue imposed a goods and service tax of seven per cent on the sale of paan leaves ("paan") by the appellant[1]. The question before me is whether or not paan is a basic grocery in which case it is taxed at the rate of zero per cent, the position of the appellant. If paan is not a basic grocery, the position of the respondent, it is taxed at the rate of seven per cent. [2] Paan leaves are from trees grown in India; the leaves are picked in India and shipped to Canada. There are two uses for paan: it is often eaten after meals and it is also used in prayers in the Hindu religion. Paan is believed to have the effect of aiding in digestion and of freshening breath. As described by Mr. S. Rhemtulla, the appellant's agent, and the appellant, condiments are placed on the leaf and both the leaf and condiments are eaten; frequently the solids are spat out and the juices of the leaves only are ingested. [3] The appellant operates a business that sells paan in a form such that it may be sold for immediate consumption or taken home by the purchasers to be consumed at a later time. The appellant sells single leaves but generally sells packages of six, 10, 12, 30 and 50; for a wedding, packages of 100 leaves and more are sold. For the religious ceremony only the leaf with a betal nut on the leaf is used. Once the leaf has been used for the ceremony, it is discarded. Approximately 20 per cent of sales are for religious purposes. [4] Sub-section 165(1) of the Act provides that every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply. [5] Sub-section 165(3) states that "the tax rate in respect of a taxable supply that is a zero-rated supply is 0%". [6] "Zero-rated supply" is defined by sub-section 123(1) of the Act as a "supply included in Schedule VI". In the present case, the relevant part of Schedule VI is Part III-Basic Groceries. Part III lists "supplies of food or beverages for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of such food or beverages)..." However, Part III itemizes specific exclusions, thus limiting the scope of the phrase "supplies of food... for human consumption". The question, then, is whether paan is a "supply of food... for human consumption"; and, if it is, whether it is excluded by any of the listed exceptions. [7] The Minister states that paan falls within at least two of the exceptions, which are: (e) candies, confectionery that may be classed as candy, and all goods sold as candies, such as candy floss, chewing gum and chocolate, whether naturally or artificially sweetened, and including fruits, seeds, nuts and popcorn when coated or treated with candy, chocolate, honey, molasses, sugar, syrup or artificial sweeteners; or (i) snack mixtures containing cereals, nuts, seeds, dried fruit or any other edible product, but not including any mixture sold primarily as a breakfast cereal or any mixture manufactured or produced in a retail outlet for sale in that outlet exclusively and directly to consumers; [8] Several cases have considered the meaning of the phrase "supplies of food... for human consumption". Miller J. considered the phrase in 1146491 Ontario Ltd. v. R, 2002 G.T.C. 235. At issue in the case was whether salad kits, which contained all the ingredients to prepare a certain type of salad, were basic grocery items. In interpreting what constituted "supplies of food... for human consumption", Judge Miller (as he then was) looked to "ensuring the Government's Policy of exempting basic groceries from tax is implemented sensibly and appropriately". He stated that, [R]ather than attempting to define what is included in basic groceries, subsection 1(0.1) of Part III of Schedule VI sets out a list of exceptions from basic groceries. In reviewing the list, two themes become evident as to what types of foods are not to be considered basic groceries: snacks or junk food, including anything most people would find not particularly healthy; and foods intended to be eaten immediately after opening or removing the packaging... Specifically, looking at the foods contained in subsections 1(0.1), (0.2), (0.3), (0.4) and (0.5), the common thread can perhaps more aptly be described as a total convenience food. These are foods that require no preparation-it is all done for you.[2] [9] Essentially, Miller J. found that a food does not, in order to be a zero-rated supply, need to meet the definition contained in the opening statement of Part III of Schedule VI to the Act, but rather that it must not be disqualified by the list of exceptions, or by reference to the policy underlying the list of exceptions, which follow the opening statement. [10] Beaubier J. also considered the matter in Vincent Chow White Crane Martial Arts Ltd. v. R., [1996] G.S.T.C. 67 ("Vincent Chow"). The issue here was whether certain Chinese herbs sold by the taxpayer were "supplies of food ... for human consumption" pursuant to Part III of Schedule VI to the Act. Beaubier J., at paragraph 9, considered the meaning of "consumption" and found it to mean "the action or fact of consuming or destroying"[3]. He then considered the meaning of "food" and found it to be "what is taken into the system to maintain life and growth, and to supply the waste of tissue; ailment, nourishment, provisions, victuals". He concluded that, "in short, food is to maintain life, whereas medicinal products are to restore or preserve health". Finding that the herbs were medicinal products, Judge Beaubier (as he then was) dismissed the appeal. [11] The Federal Court of Appeal considered a phrase very similar to that in Part III of Schedule VI to the Act in Shaklee Canada Inc. v. Minister of National Revenue,[1996] 1 C.T.C. 180. The issue was whether certain vitamin, mineral and fibre products sold and marketed by the taxpayer were exempt from taxation as being "food and drink for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of the food and drink)..." prescribed by Part V of Schedule III to the Act. Goods prescribed by Schedule III are exempted from taxation by Section 51(1) of the Act. The opening words of Part V of Schedule III to the Act, it is noted, are similar to the opening words of Part III of Schedule VI and Parts III and V contain a similar list of exceptions. [12] Linden J. A. held that the proper approach in determining whether a particular food item is "food... for human consumption" is to determine whether a householder, asked to bring home "food" for the evening meal, would or would not bring home the item in question. Linden J. A. was careful to point out, however, that the test is not meant to connote that only that which can be eaten at a meal is to be considered "food ... for consumption".[4] [13] In addition to the above test, Linden J. A. considered factors such as the labels found on the items in question-he noted that instead of listing ingredients, as most foods do, the labels on the vitamin bottles listed references to "dosages" and representations that the products were intended for "therapeutic use". Linden J. A. also noted the following: They do not bear the common attributes usually associated with food. They do not have a pleasing taste. They have no energy value. They do not assuage hunger. They are not served on a plate not eaten with a utensil. They are manufactured products intended to offset nutritional deficiencies...[5] [14] Taken together, these cases set out a number of factors by which to measure whether particular food or beverage items are "supplies of food or beverages for human consumption": (a) Whether the item in question is specifically exempted by the enumerated list of exceptions found in Part III of Schedule VI to the Act; (b) whether the item is one which would reasonably be considered a convenience food; (c) whether the item is intended to be consumed immediately after opening or removing the packaging; (d) whether the item requires the consumer to undertake additional preparation prior to consumption; (e) whether the item is one which will be consumed (as opposed to, for instance, something that will be applied externally); (f) whether the item is one that has traditionally been thought of as a basic food item; (g) whether the item bears the attributes one normally associates with food (i.e., it is tasteful, its packaging displays a list of ingredients, it assuages hunger, etc.). [15] On the facts of the present case it is clear that paan is not a basic grocery item. Paan is sold in ready-to-consume form and is often used to help the digestion of food and to help freshen breath. As well, it is often used as a non-food item, such as in religious ceremonies. Furthermore, even where paan is "eaten", it is usually chewed after a meal and only the secretions of the leaf are ingested while the leaf itself is spit out after chewing. This action does not result in the paan being consumed or destroyed. [16] Paan bears a number of qualities which case law has identified as those of a non-basic grocery item. Therefore, it does not qualify as a zero-rated supply and is taxable at a rate of 7 per cent pursuant to section 165(1). [17] The Canadian Revenue Agency has issued a memorandum with respect to Part III of Schedule VI to the Act. Memorandum 4.3, published November 1997, revised September 5, 2003 ("Memorandum 4.3") states: "products consumed as food or beverages by specific cultural groups, which are not normally identified as food or beverages in Canada, are considered zero-rated basic groceries if the food or beverages are consumed as basic grocery items for nourishment (as opposed to food or beverages consumed for actual or perceived medicinal properties), unless the food or beverages are specifically excluded from zero-rating under the provisions of paragraphs 1(a) through 1(r)..." [18] With respect to the question of whether paan is a zero-rated supply, Memorandum 4.3 does not, in any case, affect the foregoing analysis. For, given the manner in which it is used, it is evident that paan is not used as a "basic food item for nourishment". Paan is normally used to freshen breath and to aid in digestion; moreover, it is primarily eaten after a meal and only the juice is ingested while the remainder is spit out after being chewed. [19] The assessment in appeal also levied interest pursuant to section 280 of the Act. Section 280 provides that: "...where a person fails to remit or pay an amount to the Receiver General when required... the person shall pay on the amount not remitted or paid (a) a penalty of 6% per year, and (b) interest at the prescribed rate..." [20] The leading case concerning the imposition of interest under section 280 is Pillar Oilfield Projects v. Canada, [1993] G.S.T.C. 49. Although the case was heard under the informal procedure, it has been followed in several decisions.[6] Pillar stands for the proposition that section 280 of the Act creates a strict liability offence and that as such the only available defence is one of due diligence.[7] In Pillar the taxpayer made a number of errors on its GST returns and was consequently assessed interest and penalties under section 280. The taxpayer appealed the penalties on the basis that its errors were made in good faith and that they were understandable given the novelty of the GST. Judge Bowman (as he was then) held that innocent good faith does not amount to due diligence and dismissed the appeal. He stated that due diligence requires "affirmative proof that all reasonable care was exercised to ensure that errors not be made"[8]. He further held that the defence will be available if the taxpayer reasonably believed in a mistaken set of facts which, if true, would render the act or omission innocent, or if he or she took all reasonable steps to avoid the particular event[9]. [21] On the facts of the present case, the appellant did not make out the defence of due diligence. There is no evidence that the appellant exercised any reasonable care to ensure that errors not be made. Furthermore, the appellant did not take all reasonable steps to avoid under-paying GST. [22] The appeal is dismissed. Signed at Ottawa, Canada, this 28th day of September 2004. "Gerald J. Rip" Rip J. CITATION: 2004TCC659 COURT FILE NO.: 2004-1078(GST)I STYLE OF CAUSE: Nazreen Begum Kandawala v. Her Majesty the Queen PLACE OF HEARING: Vancouver, British Columbia DATE OF HEARING: August 4, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice Gerald J. Rip DATE OF JUDGMENT: September 28, 2004 APPEARANCES: Agent or the Appellant: S. Rhumtulla Counsel for the Respondent: Lisa Riddle COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] The Minister also assessed the appellant for interest and penalties pursuant to section 280 of the Act since the appellant has failed to remit tax to the Receiver General for Canada as required. [2] Paragraphs 11 and 12. [3] Vincent Chow at paragraph 9. [4] Shaklee at paragraphs 22 - 23. [5] Ibid. at paragraph 26. [6] See Willis v. Canada, [2000] G.S.T.C. 110; Roberts v. Canada, [1997] G.S.T.C. 58; Ross v. Canada, [1996] G.S.T.C. 33. [7] Pillar at paragraph 11. [8] Ibid. at paragraph 27. [9] Ibid. at paragraphs 10 - 11.