The Tax Court of Canada recently dismissed a large Canadian bank’s appeal, ruling that it is not eligible to claim a rebate for GST/HST that it was charged in connection with payments it had made in connection with its participation in a credit-card loyalty rewards program. The bank subsequently took the view that GST/HST should not have applied and sought to recover it.
- In a decision released on April 16, 2019, the Tax Court of Canada (the “Court”) ruled that the supply of Aeroplan miles to a large Canadian bank (the “Bank”) pursuant to the Aeroplan Mile loyalty program (“Aeroplan Mile Program”) was in fact part of a single supply of promotional and marketing services by Aeroplan Limited Partnership (“Aeroplan”) to the Bank and thus subject to GST/HST.
- The Bank’s main argument was that the supplies made by Aeroplan pursuant to the Aeroplan Mile Program should in fact be characterized as a supply of “gift certificates”. As such, they would not qualify as a “supply” for the purpose of section 181.2 of the Excise Tax Act (the “Act”) and would therefore not be subject to GST/HST.
- In obiter, the Court, to the contrary, stated that the Aeroplan miles issued by Aeroplan to the Bank (as well as all other supplies made by Aeroplan) were not “gift certificates” pursuant to section 181.2 of the Act – essentially because they do not have attributes similar to money, such as a stated monetary value.
In 2003, Air Canada and the Bank entered into a credit card agreement which governed the Bank’s participation in the Aeroplan Mile Program (the “Credit Card Agreement”). The Credit Card Agreement was the basis of the supplies made by Aeroplan to the Bank and the subsequent payments made by the Bank to Aeroplan for its participation in the Aeroplan Mile Program (the “Aeroplan Payments”).
Under the Credit Card Agreement, Aeroplan essentially provided all the Bank’s cardholders with membership in the Aeroplan Mile Program. It credited Aeroplan miles to those members when they made credit card purchases, whereupon it would invoice the Bank for the credited miles. Moreover, Aeroplan also undertook to provide the Bank with various referral activities or services and marketing related to the Bank’s credit cards (all these supplies to the Bank by Aeroplan, including the Aeroplan miles, are defined as the “Aeroplan Supplies”).
Aeroplan collected the applicable GST/HST on the Aeroplan Payments on the basis that the Aeroplan Supplies were taxable supplies for the purposes of the Act. While the Bank did pay the GST/HST as charged by Aeroplan, the matter likely became a source of contention between the parties, as the Bank took the position that the Aeroplan Supplies were in fact supplies of financial services and, as such, should be exempt from GST/HST under the Act.
In accordance with this view, the Bank subsequently filed a general application with the Canada Revenue Agency (“CRA”) for rebate of GST/HST pursuant to section 261 of the Act, arguing that it had paid GST/HST in error on the Aeroplan Supplies. However, the CRA denied the Bank’s rebate application on the basis that the Aeroplan Supplies were indeed taxable supplies. A notice of assessment pursuant to section 297 of the Act was therefore issued.
In appealing the CRA decision to the Court, the Bank also argued that the Aeroplan Supplies should be characterized as a supply of “gift certificates” pursuant to section 181.2 of the Act.
The primary issue in the case was summarized as follows by the Court (para. 7):
Should the Aeroplan Supplies be characterized for GST/HST purposes as a taxable supply of promotional and marketing services or should they be characterized as a supply of “gift certificates” which are deemed by section 181.2 of the Act not to be a supply?
Single vs. multiple supplies
Justice Visser first had to decide whether the Aeroplan Supplies constituted a single supply or multiple supplies. If they were multiple supplies, the Court would then have had to determine if any of the multiple supplies were incidental to another supply. Had that been the case, section 138 of the Act would have deemed the incidental supply to be part of the other supply (para. 15).
However, the Court concluded that the Aeroplan Supplies were all constituent elements of a single compound supply. In arriving at this conclusion, Justice Visser analyzed the supplies that were offered by Aeroplan to the Bank and determined that the Aeroplan Supplies included, inter alia, the provision of Aeroplan Mile Program memberships to all of the Bank’s cardholders, together with Aeroplan miles in accordance with the Credit Card Agreement (para. 29) In addition to providing the Bank’s cardholders with memberships and miles, Aeroplan also undertook specified referral and marketing activities in respect of the Bank’s cards (para. 29). Justice Visser’s analysis that the Aeroplan Supplies were all part of a single compound supply was strongly supported, in his view, by the fact that the Bank would not have paid Aeroplan for any of the separate elements of the Aeroplan Services on their own (para. 30).
Property vs. services
The next question was whether the Aeroplan Supplies constituted a single compound supply of property (i.e. the Aeroplan miles) or a single compound supply of services (i.e., the marketing and promotional services). Based on the supplies offered by Aeroplan to the Bank and the Credit Card Agreement, Justice Visser concluded that the Aeroplan Mile Program was basically a marketing and promotional program because its true nature was to increase the use of the Bank’s credit cards (para. 32). He then concluded that the Aeroplan Supplies were a single compound supply of services because the marketing and promotional services were the predominant element of the Aeroplan Supplies (para. 33). Even though the Aeroplan Payments were strictly computed with reference to the number of Aeroplan miles issued to the Bank, the Court was of the view that this was just a “convenient method for calculating the value of the marketing and promotional services provided by Aeroplan to the [Bank]” (para. 33).
In obiter dicta, Justice Visser stated that, had he concluded that the individual elements of the Aeroplan Supplies were in fact multiple supplies, he would have deemed the supply of Aeroplan miles to be incidental to the services provided by Aeroplan to the Bank. In that case, such multiple supplies would be deemed by section 138 of the Act to be a supply of a service (para. 34).
Given the Court’s conclusion that this was a supply of services, the Bank’s argument that the Aeroplan Supplies were supplies of “gift certificates” could not succeed. For the purposes of section 181.2 of the Act, gift certificates must be a form of property, and since the definition of “service” in subsection 123(1) of the Act specifically excludes property, Justice Visser had to conclude that the supply of the Aeroplan Supplies cannot be characterized as a supply of gift certificates under section 181.2. Therefore, the Aeroplan Supplies were taxable supplies and the Bank had properly paid the GST/HST on the Aeroplan Payments (para. 35).
Gift certificates (obiter dicta)
Alternatively, and despite his conclusion that the Aeroplan Supplies were a single compound supply of services, Justice Visser undertook (in obiter) an analysis of whether the Aeroplan Supplies could in fact be supplies of “gift certificates” under section 181.2 if an alternative approach were taken, i.e. if the Aeroplan Supplies were characterized as a single compound supply of intangible property (i.e., to the extent the Aeroplan miles would be the predominant element of the Aeroplan Supplies) (para. 36).
Justice Visser referred to the Tax Court decision in Canasia Industries Ltd. v. R. (2003 TCC 33), which determined that there are two constituent elements of a “gift certificate” within the meaning of the Act: (i) it must be issued for consideration, and (ii) the bearer of the gift certificate must be entitled to receive, free of charge from the issuer of the certificate, a product or service (or value toward a service) when the certificate is redeemed by its issuer.
With respect to the first criterion, because the Bank paid Aeroplan for the Aeroplan Supplies, it was clear that they were issued for consideration (para. 60).
The second criterion of the test focuses on whether, at the time of redemption, the bearer can redeem the gift certificate toward the acquisition of property or services without having to satisfy a condition that involves a substantial expense for the bearer. Concluding that Parliament intended the term “gift certificate” to refer to something similar to money, Justice Visser stated that, to qualify, a certificate must have a stated monetary value physically expressed on its face or retrievable electronically and, more generally, must have attributes similar to those of money (para. 80).
Justice Visser concluded that, even though the Aeroplan miles have value to an Aeroplan member (and even though that value can be determined pursuant to a valuation), this is not the same thing as having a stated monetary value on their face or retrievable electronically. Therefore, even on this alternative approach, neither the Aeroplan miles nor the Aeroplan Supplies could be considered “gift certificates” and the Aeroplan Supplies would still have been taxable supplies under the Act (para. 84).
- The Court determined that the Aeroplan Supplies made by Aeroplan to the Bank were predominantly a taxable supply of marketing and promotional services and not a supply of Aeroplan miles. As a supply of a service cannot be a supply of a “gift certificate” under section 181.2 of the Act, the Aeroplan Supplies could not be supplies of “gift certificates”.
- Even if the Aeroplan Supplies were to include a separate supply of the Aeroplan miles, such supply would have been incidental to the supply of marketing and promotional services and would be deemed to be part of the taxable supply of marketing and promotional services pursuant to section 138 of the Act.
- In obiter, to the extent the Aeroplan Supplies could be characterized as a single compound supply of the Aeroplan miles, the Court also concluded that the miles (and by extension the Aeroplan Supplies) were not “gift certificates” because they do not have a stated (or electronically retrievable) monetary value and, more generally, do not have attributes similar to money.
On May 16, 2019, an application for leave to appeal was filed by the Bank with the Federal Court of Appeal.