On March 6, 2009, the Tax Court of Canada released its eagerly anticipated decision in Costco Wholesale Canada Ltd. v. Her Majesty the Queen dealing with the application of GST to certain payments made by AMEX (a credit card issuer) under a co-branded credit card agreement.
Costco and AMEX entered into an arrangement that was set out in two agreements that were entered into contemporaneously: a Merchant Agreement and a Co-branded Card Agreement. The essential elements of the arrangement were the exclusive acceptance of all types of AMEX cards at Costco’s warehouses and the establishment of a Co-branded Card that was both a Costco membership card and an AMEX credit card.
Under the Co-brand Agreement, Costco was responsible for, among other things, marketing and promoting the Co-branded Card, soliciting applications and forwarding all completed applications to AMEX as well as training its employees about the attributes of the Co-branded Cards.
Pursuant to the Merchant Agreement, Costco paid AMEX a merchant fee of X% of the net volume of sales charges for the right to accept AMEX cards. In order to maintain the confidentiality of the net fee paid by Costco, pursuant to the Co-brand Agreement, AMEX paid Costco a rebate of Y% to achieve a net merchant fee of X minus Y or Z%. In addition, in consideration for certain marketing related activities under the Co-brand Agreement, AMEX paid Costco a fee for every new Co-branded Card application accepted by AMEX. These payments were not at issue in the appeal.
The primary issue before the Tax Court was whether the Y% rebate was consideration for a supply by Costco to AMEX or simply a reduction in the merchant fee paid by Costco to AMEX. If Y was consideration for a supply from Costco to AMEX, then the Tax Court had to determine whether the supply was an exempt supply of a "financial service".
The Crown argued that the payment of Y from AMEX to Costco was consideration for a taxable supply by Costco to AMEX and accordingly, subject to GST.
The Tax Court disagreed with the Crown; finding that the underlying commercial deal between the parties (which was determined by reading the two agreements together) was a supply by AMEX to Costco for X minus Y or Z%. In so holding, the Tax Court noted that the Y% rebate was paid based on charges relating to all AMEX cards (not just the Co-branded Cards) and that Costco was not required to do anything to receive the payment other than accept AMEX cards. Thus, the Tax Court determined that the Y% payment was not consideration for a supply but simply a rebate to reduce the gross fee of X% paid by Costco to AMEX to Z%.
The Tax Court’s finding on the first issue was sufficient to allow the appeal. However, the Tax Court went on to address the alternative argument and considered that if the payment of Y from AMEX to Costco was consideration for a supply, what was the nature of that supply.
The Crown argued that the exclusive promotion, marketing and administrative services relating to the Co-branded Cards, provided by Costco under the Co-brand Agreement, were taxable rather than exempt supplies.
Again, the Tax Court disagreed and found that Costco’s activities were an integral part of AMEX’s business of granting and issuing credit and reached the same conclusion as the Court in Les Promotions D.N.D. Inc. v. Her Majesty the Queen, 2006 TCC 63. That is, that Costco was an intermediary "arranging for" the issuance of credit cards and the granting of credit by AMEX. The Tax Court therefore concluded that if the payment of Y% from AMEX to Costco was for a supply, such supply could only be an exempt "financial service". The Tax Court further noted that the definition of "financial service" includes any service provided pursuant to the terms of any agreement relating to payments of amounts for which credit card vouchers have been issued was also sufficiently broad to easily capture (and therefore, exempt) the services provided by Costco particularly when read in conjunction with the expression "agreeing to provide" in the "financial service" definition.
It is not known at this time if the Crown will appeal the decision to the Federal Court of Appeal.