President’s Choice Bank v Canada : Credit Card Loyalty Point Programs Can Claim Input Tax Credits

by Kyle Smyth · November 16, 2024

Loyalty point programs demonstrate that, for GST/HST purposes, a payment can be received in its entirety as both a commercial and exempt amount. The Federal Court of Appeal (“FCA”) recently allowed an appeal brought by President’s Choice Bank (“PC Bank”) in President’s Choice Bank v Canada, 2024 FCA 135 [President’s Choice]. The decision permitted PC Bank to claim notional input tax credits (“NITCs”) on the redemption expense incurred when customers used points for purchases at an affiliated entity.

Background

Part IX of the Excise Tax Act (RSC 1985, c E-15) [ETA] imposes goods and services tax / harmonized sales tax (“GST/HST”) on a “taxable supply” as defined under s 123(1). GST/HST is a consumption based tax which is intended to be borne by the final consumer of a product or service. To promote efficiency and avoid double taxation, the ETA permits registered taxpayers to claim input tax credits (“ITCs”). ITCs reduce the amount of GST/HST a registered taxpayer must remit to the government by the amount of GST/HST paid on inputs used in producing the supply, as outlined in s. 169(1).

Loyalty point redemptions and the use of coupons both reduce the amount paid by the final consumer, but s 181(2)(a) and (b) of the ETA deem the seller to have collected GST/HST equal to the amount that would have been collected if the consumer paid the full amount of the purchase price. The operation of s. 181(2)(a) and (b) create a potential overpayment problem — the seller only charges the consumer GST/HST on the post-redemption amount, meaning the seller collected less GST/HST than required by the ETA.

The ETA provides relief from the overpayment problem by operation of two notable provisions First, s 181(2)(c) reduces the amount of GST/HST otherwise collectible by the tax fraction of the coupon value. Second, s 181(5) provides a NITC equal to the tax fraction of the coupon value, ensuring that the correct amount of net tax is remitted by the seller in connection with the transaction. It is important to note that the NITC provided under s 181(5) is only available where the coupon/redemption amount is made in the course of the commercial activity of the NITC claimant.

Facts

PC Bank was a wholly-owned subsidiary of Loblaw Companies Limited. The corporate group also wholly-owned Loblaws Inc. (“Loblaws”) and President’s Choice Services Inc. (“PCSI”). PC Bank was both a Registrant and a financial institution for the purposes of the ETA. PC Bank issued President’s Choice branded MasterCard credit cards which provided revenue from each purchase via interchange fees. Customers who make purchases with a PC Bank MaterCard collect credit card points. (President’s Choice, paras 14-16)

PC Bank and affiliates were party to three agreements which made up the PC “Loyalty Program”:

A license agreement between PC Bank and PCSI (PCSI acquired the point program from PC Bank and granted PC Bank license to issue points to PC Bank’s customers. BC Bank remained liable for the redemption of the points);
A Loyalty Services Agreement between PC Bank and PCSI; and
A Loyalty Expense Agreement between PC Bank, PCSI, and Loblaws.

The Loyalty Program is designed to create more retail traffic for Loblaws, being the main source of revenue for the corporate group. PC Bank would issue customers more credit card points when purchases were made at a Loblaws store, and points could only be redeemed at Loblaws affiliated stores. For every $1.00 spent at Loblaws retailers using a PC Bank MasterCard, Loblaws would pay PC Bank 0.75¢. When PC Bank customers redeemed points at a Loblaws retailer—PC Bank would reimburse Loblaws for the full dollar value of points used (the “Redemption Payment”). In exchange for the increased traffic from the Loyalty Program, Loblaws paid PC Bank $0.35 per $1.00 of points redeemed. (President’s Choice, paras 17-18]

Issue on Appeal

The issue brought before the Federal Court of Appeal was whether the Redemption Payment made by PC Bank to Loblaws upon redemption of the credit card points qualified for NITCs under s 181(5). The dispute solely rested on whether the Redemption Payment was made “in the course of a commercial activity” (President’s Choice, para 19).

Tax Court of Canada Decision

Hogan J. held that the Redemption Payment was made in the course of its MasterCard activity, which is an exempt supply of financial services rather than a commercial activity. Hogan J. found that the core business of PC Bank was the provision of financial services to its customers and that the revenue earned from Loblaws was insignificant compared to the revenue received from interchange fees. Hogan J. determined that the arrangement where PC Bank received $0.35 from Loblaws for every $1.00 paid to Loblaws upon point redemption was not an ordinary commercial practice.

Federal Court of Appeal Decision

The Majority

The majority set aside the Tax Court of Canada’s judgment and referred the reassessments back to the CRA for reconsideration on the basis that PC Bank was entitled to NITCs on the Redemption Payments. Goyette J.A. (Laskin J.A. concurring) writing for the majority held that the Tax Court of Canada made two extricable errors of law. The first error was in considering “in the course of a commercial activity” to be a binary either/or test. The second error was the consideration of profitability in determining whether there was a commercial activity. (President’s Choice, para 24)

Goyette J.A. determined that the Tax Court of Canada based its analysis on whether the Redemption Payment was made in the course of an exempt financial services activity or in the course of a commercial activity. The textual, contextual, and purposive analysis of s 181(5) revealed to Goyette J.A. that it is not an binary test—a payment can be made in the course of a commercial activity and in a non-commercial activity. (President’s Choice, para 25)

For Goyette J.A., the absence of qualifying language in s 181(5) showed that the application should be interpreted beyond a binary test. The legislature used “in the course of” rather than “primarily” or “exclusively” as an indication that the provision should be interpreted broadly. Goyette J.A. stated that “in the course of” should instead be interpreted as “incidental” or “connected to”, directly or indirectly. To assert that a person can only pay an amount in the course of one activity would be to add words to the ETA. (President’s Choice, paras 26-27)

When placing s 181(5) in context with the broader scheme of the ETA, there are several other provisions which contemplate that a payment can be made in the course of doing one thing and simultaneously in the course of another. Goyette J.A. pointed to s 169(1), which permits ITCs on inputs to the extent that they are used in the course of a commercial activity. Further, provisions such as s 202(2) and s 199(2)(a) use qualifiers such as “exclusively” or “primarily” to denote that a payment can be made in the course of both commercial and non-commercial activities but must be primarily or exclusively commercial to be captured by the relevant provision. (President’s Choice, paras 30-40)

Goyette J.A. went on to find that, although s 169(1)—which lies in Subdivision B of the ETA—only permits an ITC to the extent which the payment was made in the course of a commercial activity, s 181(5) should not be interpreted in the same fashion. Instead, s 181(5)—being in Subdivision C—should be interpreted as a “special” case where the general rules in Subdivision B are not intended to be applied. Consequently, Goyette J.A. concluded that the inclusion of s 181(5) under Subdivision C suggested that Parliament intended to give separate treatment to ITCs for the redemption of coupons. (President’s Choice, para 41)

Within the majority’s purpose analysis, Goyette J.A. identified the purpose of s 181(5) as a mechanism which ensures that the correct overall net amount of tax is remitted to the government. The provision accomplishes its purpose by providing relief for the overpayment of GST/HST to the government which arises when a coupon is redeemed. The application broadly applies to payments connected to a commercial activity—constraint to a binary test contravenes Parliament’s purpose. If Parliament intended to restrict financial institutions from claiming NITCs it would have done so expressly, as seen in other provisions of the ETA. (President’s Choice, paras 42-47)

The Dissent

Webb J.A., writing in dissent, dismissed the appeal, as he agreed with the findings of the Tax Court of Canada. Webb J.A. noted that the question of whether “in the course of” was an either/or test incorrectly characterized the nature of this case. Instead, the question that mattered was whether the specific payment of money could be made in the course of a financial services business, and the same payment of money could also be made in the course of a commercial activity (President’s Choice, para 105)

Webb J.A. opined that Parliament did not intend for the entirety of a particular payment to be considered both in the course of both a commercial activity and in the course of conducting a financial services business. A particular property or service being acquired for use in more than one activity (i.e. acquired for 60% commercial use, 40% non-commercial use) does not logically lead to the conclusion that the person paid the full amount for the property in the course of both activities (100% commercial use AND 100% non-commercial use). (President’s Choice, paras 110-112)

Webb J.A. interpreted the text of s 181(5) as indicating that the payment either will satisfy the commercial activity requirement or will not. Since the payment can only be made once, to interpret the entire payment as made in the course of two activities would imply that the person paid the same amount twice. Webb J.A. concluded that Parliament intended that the test be a binary assessment conducted on a balance of probabilities of whether the payment was made in the course of a commercial activity. (President’s Choice, para 130)

Analysis

The majority interpreted the text of the provision as broadly as possible—as s 169(1) and other provisions allow ITCs to the extent the payment is made in the course of commercial activity. However, the court suddenly drops this reasoning at the next stage of the contextual analysis, since s 181(5) was “special” because Parliament contemplated it within Subdivision C—despite the court relying on Subdivision B and other provisions outside of Subdivision C in justification of dual purpose payments.

Although the structure of the ETA certainly can be interpreted as delineating a distinction between the interpretation of s 169(1) and s 181(5)—the absence of “to the extent” within s 181(5) is already an indication of, and consistent with, the separate treatment between s 181(5) and other provisions of the ETA. Parliament specifically dropping the language in s 181(5) which contemplates the duality of a particular payment (which as noted by the majority as situated within Subdivision C “Special Cases”) could arguably militate towards a finding that there can only be one purpose per payment as found by the dissent.

The majority feared that characterizing the activity in a binary way (being commercial or non-commercial), would be to add words to the provision. However, the binary standard for s 181(5) would acknowledge the consideration contained within the ETA highlighted by Hogan J. in President’s Choice Bank v. The Queen, 2022 TCC 84, at para 22, that an exempt portion of a business must be notionally severed for GST/HST purposes. The majority attempted to demonstrate that the test cannot be binary given that a variety of provisions within the ETA provide for multiple partial purposes, but the majority falls short by failing to provide analysis explaining why the entire payment can be considered both fully commercial and fully exempt.

The failure of the majority to specifically analyze whether there can be more than one purpose for an activity in an exempt context is contrary to the default language seen throughout the ETA where ITCs are only available “to the extent” that the payment relates to a commercial activity. In particular, the definition of commercial activity expressly excludes an exempt activity from a commercial activity—it would be contradictory to this definition to characterize an activity as being both 100% commercial and 100% exempt (President’s Choice, para 119). Webb J.A. in affirming the Tax Court of Canada does not conclude that a payment cannot be made for multiple purposes—but that the entirety of a payment cannot be made for multiple purposes.

Overall, the decision in President’s Choice provides an expanded interpretation of “in the course of commercial activity” for ETA purposes and absent legislative reform may invite taxpayers to restructure loyalty programs to maximize NITC realization on activities that were previously regarded as primarily non-commercial in nature.