The Tax Court of Canada has dismissed a Canadian bank’s appeal in connection with GST/HST rebates for tax paid in error that were claimed by the bank.1
The court found that the transaction processing services provided by Visa Canada for the credit cards issued by the bank were in respect of a taxable supply and that the GST/HST was therefore correctly charged.
Background
As part of its retail banking business, the bank issues Visa-branded credit cards to its customers. Customers are granted credit by the bank so as to facilitate the payment system managed and operated by Visa.
Visa develops, operates, manages, and promotes a proprietary global retail electronic payments network. Its participants, including the bank, use its Visa-branded payment instruments and are charged fees by Visa pursuant to a services agreement. Indeed, it was precisely the fees charged to the bank by Visa, in exchange for the bundle of rights and services supplied to the bank by Visa, that formed the subject of this case.
Between Sept. 1 and Nov. 30, 2013, the bank paid to Visa amounts as GST/HST calculated on the fees invoiced for the rights and services supplied by Visa. The bank then filed tax rebate claims under section 261 of the Excise Tax Act on the basis that these rights and services constituted a GST/HST exempt supply for a “financial service,” as defined in subsection 123(1) of the ETA. In other words, the bank argued that it paid taxes in error and was entitled to a rebate. All of its rebate claims were denied by the Canada Revenue Agency, whose decision prompted the bank’s appeal.
The issue
The issue in this case was whether the Visa supply constituted a taxable or an exempt supply for the purposes of the ETA, specifically whether the Visa supply meets the definition of “financial service” under subsection 123(1) of the ETA without being subject to the exclusionary paragraphs in such definition.
Generally, under the ETA, a supply is a financial service (and is therefore exempt) if it is described within any of paragraphs (a) to (m) of the definition (the inclusions). However, if such supply also falls within any of the exclusions in paragraphs (n) to (t) of the definition (the exclusions) it is not a financial service (and is therefore taxable).
The ruling
The court first summarized the legislative landscape relating to the foregoing question. Under the ETA, GST/HST is imposed on the recipient of a “taxable supply”, which is defined under subsection 123(1) as “the provision of a property or service” (para. 51). However, this provision is narrowed by the “exempt supply” exception, which redirects certain supplies (in this case, those relating to the procurement of financial services) to Schedule V of the ETA as “exempt supplies” (para. 51).
Once the legislative landscape was clear, the bourt boiled the analysis down to two questions:
1. What supply does Visa provide to the bank?; and
2. Does that supply constitute a “financial service” for GST/HST purposes under the ETA?
What supply does Visa provide to the bank?
Turning to the first question, it was obvious based on the witness testimony that Visa provides various services, including transaction processing, licensing of the Visa brand, payment network management, and brand management promotion (para. 54). The court was nevertheless satisfied that those services constituted a “single compound supply” because they were “intertwined, interdependent and integral to one another” (para. 55). As per the predominance test in the Great West Life decision2, Visa's “essential or predominant” supply, which is found by objectively looking at what the supply was perceived as being from the purchaser’s perspective, is to provide real-time, electronic transactions to go along with verification and adjudication in accordance with the applicable guidelines (para. 69).
Does that supply constitute a ‘financial service’ for GST/HST purposes?
(a) Step 1 of the analysis: does it fall under the Inclusions?
Next, the court was tasked with determining whether the Visa supply constituted a “financial service” as defined under subsection 123(1) of the ETA. Considering that the service provided by Visa does not involve any direct handling of the funds that are in its possession, the court had to examine the application of paragraph (l) of the statutory definition of “financial service” as part of the inclusions. This paragraph refers to an agreement to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i) definition of “financial service” (para. 88). Paragraph (a) of the statutory definition covers “the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise.”
As stated by the court, Visa acts as a financial intermediary by facilitating the transfer of payments between issuers, acquirers and merchants. However, the services provided by the bank and the services provided by Visa are linked in their purpose to a degree where it can be said that Visa is “arranging for” the credit services offered by the bank, through acting as an intermediary in the transfer of money. The court concluded that the conditions in both paragraphs (a) and (l) of the definition of “financial service” were satisfied (para. 92). Based on the decision in Costco Wholesale3, the court also concluded that paragraph (i) of the definition of financial service (which refers to any service provided pursuant to the terms of any agreement relating to payments of amounts for which credit card vouchers have been issued) applied with respect to Visa’s services (para. 100).
(b) Step 2 of the analysis: is it excluded by the Exclusions?
The finding that the Visa Supply fell under one or more of the Inclusions did not settle the matter, however. The ETA required the court to consider whether any of the exclusions applied – if so, the Visa supply would not qualify as a “financial service” after all.
The exclusions that the court considered were those set out in paragraphs (q.1), (r.3), (r.4), (r.5) and (t) of the definition. After finding that the first four of these did not apply in the case at hand, the court focused on the fifth possibility: paragraph (t), also known as the “prescribed service exclusion.”
Pursuant to the Financial Services and Financial Institutions (GST/HST) Regulations subsection 4(2), the following services are prescribed for the purposes of the Exclusion under paragraph (t) (unless the “saving provision” discussed below applies):
(a) the transfer, collection or processing of information; and
(b) any administrative service, including an administrative service in relation to the payment or receipt of dividends, interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt.
The court recognized that the Visa supply was “quintessentially administrative in nature” (para. 116) and was therefore prescribed under subsection 4(2) (and thus excluded under paragraph (t)) – unless the saving provision under subsection 4(3) of the Regulations applied.
Pursuant to the saving provision, a service is not a prescribed service (and therefore not subject to the exclusion under paragraph (t)) where the service is supplied with respect to an instrument by:
- a “person at risk”4,
- a person that is a member of the same closely related group as a person at risk, if the recipient of the service is not the person at risk or another person that is a member of the same closely related group as the person at risk, or
- an agent, salesperson or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument for a person at risk or a person that is a member of the same closely related group as the person at risk. (our emphasis)
The two main arguments advanced by the bank were to the effect that:
- Visa acted as a “broker” pursuant to paragraph 4(3)(c); and
- Visa was in fact a “person at risk” under paragraph 4(3)(a).
With respect to the first argument, the court decided that Visa’s activities were generally more passive in nature. It did not negotiate, buy, or sell, as a broker would typically do. Visa therefore did not meet the definition of “broker” (para. 128).
As for the argument that Visa was a “person at risk”, the court found that Visa was subject only to a risk that had a remote chance of materializing. Moreover, the “person at risk” definition specifically refers to a person providing a clearing or settlement service – as Visa clearly was doing – as not being a person at risk (para. 130).
Therefore, as the saving provision was not applicable, the Visa supply was indeed a “prescribed service” to which the exclusion under paragraph (t) applied. As a consequence, it was fully taxable from a GST/HST standpoint.
Conclusion
Based on the foregoing, the court was satisfied that the bank was not in a position to claim rebates for GST/HST paid in error. Its appeal was accordingly dismissed without costs.
Key Takeaways
- This landmark decision ultimately bears much importance for the clearing, settlement and payment industry involving intermediaries that only bear remote financial risks.
- Accordingly, businesses involve in this industry should ensure that GST/HST is properly collected on services as confirmed by the Tax Court.
Jean-Guillaume Shooner is a partner with Stikeman Elliott LLP
End notes
1. Canadian Imperial Bank of Commerce v Her Majesty the Queen, 2018 TCC 109.
2. Great-West Life Assurance Co. v The Queen, 2015 TCC 225.
3. Costco Wholesale Canada Ltd. v The Queen, 2009 TCC 134.
4. In the Regulations, a “person at risk” is defined as, in respect of an instrument in relation to which a service referred to in subsection (2) is provided, means a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument.