A recent GST/HST Federal Court of Appeal decision will benefit financial institutions
In Canadian Imperial Bank of Commerce v Canada, 2021 FCA 10, CIBC (the appellant) which issues Visa credit cards, was seeking GST/HST rebates on fees charged by Visa for the supply the bank received as a participant via the Visa payment system. Subsection 123(1) of the Excise Tax Act, defines a supply as “the provision of property or a service in any manner.” A supply is any good or service provided by a business, in other words sales. By operating, your business is making supplies (sales) to clients and customers. Transfers, barters, exchanges, licences, rentals, leases, gifts and dispositions are also explicitly captured under the definition of a supply. CIBC argued the tax paid on inputs incurred for purposes of supplying the Visa transaction processing services was in error because the Visa supply was exempt as a financial service. The Canada Revenue Agency, on the other hand, rejected those rebate claims. The Federal Court of Appeal ruled that banks and credit unions can no longer collect GST/HST on credit card transaction processing services, which will benefit financial institutions greatly.
The Tax Court of Canada ruled that Visa supply was subject to GST/HST
Under Canada’s GST/HST statutory regime, the supply of a financial service is an exempt supply, on which no GST/HST is payable. The statutory scheme contains a lengthy and complex definition of the term “financial service,” a definition that states both what the term means and what it does not include. One of the exclusions is “any administrative service,” unless the supplier of the service is a “person at risk,” as defined.
Before the case went to the Federal Court of Appeal, CIBC first appealed to the Tax Court of Canada which ruled that Visa’s services met the conditions of the inclusions in Paragraphs (a) and (i) of s.123(1) of the Excise Tax Act, which meant that the services are taxable The Tax Court of Canada also delved into paragraph (l) of the inclusions provisions and found that Visa’s services were for the purposes of “arranging for” the bank’s credit services because it involved the facilitation of payments transfer among issuers, acquirers and merchants. The Tax Court of Canada characterized the Visa supplys “quintessentially administrative in nature because “the benefit that Visa offered CIBC was cost saving and logistical simplification.” In conclusion, the Tax Court determined the Visa supply was excluded by paragraph(t) of the Excise Tax Act of the definition of “financial service” and was therefore taxable.
Federal Court of Appeal overturned Tax Court’s ruling
CIBC then appealed to the Federal Court of Appeal and submitted that the Tax Court committed reversible errors in concluding that 1) the service Visa supplied to CIBC was an administrative service and 2) Visa was not a person at risk. The Federal Court of Appeal examined the Tax Court’s decision and allowed CIBC’s appeal and referred the assessments back to the CRA for reconsideration. While the Federal Court disagreed with CIBC’s submission that the Tax Court erred in law regarding the meaning of administrative service, it did find that the Tax Court made a reversible error by making contradictory and irreconcilable findings concerning the nature and impact of the Visa supply.
The Court also distinguished an earlier case, Great West Life, based on the fact that the service provided by Visa had altered the nature of CIBC’s business in a way that the serviced provided in Great West Life had not. The Court rejected Canada Revenue Agency’s submission that there is nothing unique about a credit card. In the Court’s view, a credit card is fundamentally different from a line of credit because it permits the cardholder to obtain virtually instantaneous access to credit, and to use that credit at the point of sale to purchase goods and services.
The Court also found that once the Tax Court’s finding regarding the Visa supply’s nature and effects were reversed, there would be no longer any basis to conclude that the supply made by Visa was an administrative service. Therefore, it was no longer necessary to consider whether Visa was a person at risk either.
Pro tax tips – Input Tax Credits are a means to recoup the GST/HST paid on purchases and expenses related to your business activities
Input Tax Credits (ITCs) refer to the GST/HST paid on the purchases and expenses used in a corporation’s commercial activities. For a business to claim ITCs, it is generally crucial to keep all receipts, invoices, etc. to keep track of all GST/HST paid on business-related purchases or expenses. If your business was denied ITCs by the CRA, contact our office to speak with an experienced Canadian tax lawyer for tax guidance.