In a decision released on May 20, 2021, the Federal Court of Appeal (“FCA”) upheld the Tax Court of Canada’s decision that the supply of Aeroplan Miles to a 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 arguments on appeal were that the supply that was made by Aeroplan was the provision of Aeroplan Miles to the Bank’s customers, that the Aeroplan Miles must therefore have been the predominant supply made by Aeroplan under the agreement, and that Aeroplan Miles are “gift certificates” for the purpose of the Excise Tax Act (the “Act”).
- The FCA dismissed the Bank’s appeal and found that the Tax Court judge did not err in his interpretation that the predominant supply was a single supply of promotional and marketing services. However, the FCA decided not to pronounce on whether the Aeroplan Miles are “gift certificates” for the purpose of the Act.
Background and judicial history
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.
The Bank then filed an appeal to the Tax Court of Canada, arguing that the supplies made by Aeroplan pursuant to the Aeroplan Mile Program should be characterized as a supply of “gift certificates” pursuant to section 181.2 of the Act, which would not be subject to GST/HST. The Tax Court dismissed the Bank's appeal, stating instead that the supply of Aeroplan Miles to the Bank was in fact part of a single supply of promotional and marketing services by Aeroplan to the Bank and thus subject to GST/HST. The Tax Court added in obiter that the Aeroplan Miles are not “gift certificates” as they do not have attributes similar to money.
Issues and standard of review
The issue on appeal was whether the Tax Court judge erred in finding that the Bank acquired promotional and marketing services from Aeroplan and not Aeroplan Miles (para. 16). If the Tax Court judge erred in his interpretation, the next issue was whether he also erred in finding that Aeroplan Miles are not “gift certificates” for the purposes of the Act (para. 16). The FCA determined that the standard of review was palpable and overriding error for the determination of what was supplied by Aeroplan to the Bank (para. 25), and correctness for the interpretation of “gift certificate” under the Act (paras. 17 and 27).
The Ruling
Predominant supply
The Bank’s main submission focused on the value of the Aeroplan Miles to the Bank’s customers. Essentially, the Bank argued that the supply that was made to the Bank by Aeroplan was the provision of Aeroplan Miles to the Bank’s customers (para. 31). Justice Webb dismissed this argument, stating that the Bank’s customers were not the persons who were liable to pay the consideration to Aeroplan under the agreement between the Bank and Aeroplan and as such, they were not legally liable to pay the GST/HST in relation to the supplies made under this agreement (para. 33). Instead, the Bank is the person who was liable to pay the consideration and hence was liable to pay the GST/HST (para. 33).
Moreover, the FCA found that the agreement explicitly identifies the predominant supply and the supplies that were incidental thereto (para. 39). In particular, both section 9 of the agreement and Appendix “D” provide that the obligation to pay the consideration was linked to the promotional and marketing services to be provided by Aeroplan (para. 42). They also state that the other obligations of Aeroplan (which would include issuing Aeroplan Miles to the Bank’s customers) are incidental to the promotional and marketing services (para. 42).
The Bank used the statements made by a witness at the Tax Court hearing to support the Bank’s position that it was purchasing Aeroplan Miles and that this was the predominant element of the supply (para. 48). The FCA noted that any statements made by this witness that could be interpreted as changing the basis for the payment of the consideration by the Bank to Aeroplan could not override the statements relating to such consideration that were set out in the agreement (para. 54). When asked by the Bank to assign less weight to the agreement, the FCA stated that the weight to be given to any evidence is a matter for the trial judge (para. 56) and that it is logical that the agreement under which such consideration is payable will play a dominant role in determining the tax implications arising under the Act (para. 57).
The Crown’s assessment of the predominant supply
At the hearing, the Bank raised an additional ground of appeal. The Bank submitted that the Tax Court judge erred in finding that the predominant supply was promotional and marketing services because the Crown had not raised this argument (para. 62). In dismissing the appeal, the FCA stated that the Tax Court judge did not err in its interpretation of the agreement between the Bank and Aeroplan and as such, there was no basis to find that the judge erred in its assessment of the predominant supply either (para. 67). The FCA also added that if the Bank was of the view that the Tax Court judge had made a decision that was not based on the submissions of the parties or contrary to any admitted facts, this should have been raised in its notice of appeal and its memorandum (para. 63). However, this new argument, which is significantly different from the other grounds raised by the Bank, was not raised in its notice of appeal and memorandum (para. 64).
Gift certificates
In addressing the issue of whether Aeroplan miles are “gift certificates”, the FCA noted that the classification of Aeroplan Miles under the Act would have an impact on the persons redeeming Aeroplan Miles and Aeroplan, who will be accepting such Miles as consideration for goods or services (para. 68). However, neither the persons redeeming Aeroplan Miles nor Aeroplan were parties to the appeal (para. 68). Moreover, the Tax Court judge stated in his decision that it was not clear how the redemption of Aeroplan Miles was treated by Aeroplan (para. 68). For these reasons, the FCA decided not to address the issue of whether the Aeroplan Miles are “gift certificates” for the purposes of the Act (para. 69). However, the FCA added that this decision should not be construed as an endorsement of the Tax Court judge's conclusion in this respect (para. 69).
Dissent
Justice Stratas disagreed with the majority’s approach to contractual interpretation. He stated that the predominant element of a single multi-element, compound or composite supply, is determined by identifying all of the elements of the supply and asking what element gives the supply its commercial efficacy or which element, in a practical or commercial sense, caused the payment of the consideration (para. 72). This question goes beyond the technical content of the legal obligations found in a contract. (para. 73). Justice Stratas stated that the majority’s decision focused exclusively on the literal contractual language and deviated from past jurisprudence that encourages courts to get to the practical, commercial substance of a supply (para. 74). He added that he feared that the majority’s decision could lead parties to add wording to their contracts not to change their contractual obligations or the practical, commercial substance of the supply, but merely to trigger favourable GST treatment (para. 74).
Based on this analysis, Justice Stratas concluded that the element that gives the supply commercial efficacy – the predominant element of the supply – was the right to allocate Aeroplan Miles (para. 77). But for the right to allocate Aeroplan Miles, there would have been no point in the parties performing their other obligations (para. 77). Moreover, he stated that in the commercial world, Aeroplan Miles function as gift certificates as they were purchased by accumulation partners of Aeroplan to be used as rewards for their customers (para. 90). He added that they are an exchange device because they may be used as consideration for property or services in the same way as money or a gift certificate (para. 90). As a result, he found that section 181.2 of the Act applied to deem the Bank’s acquisition of the Aeroplan Miles not to be a supply and that as such, the Bank paid GST in error (para. 91).
Key Takeaways
- The FCA dismissed the Bank’s appeal and determined that the Tax Court did not err when it 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.
- However, the Tax Court’s conclusion (in obiter) that the Aeroplan Miles are 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 has not been endorsed by the FCA.
- This decision now provides the current state of the law on the applicability of GST/HST to a bank’s payments for services supplied in connection with its participation in a loyalty rewards program through the issuance of credit cards.
- However, due to the vastly different position taken by the majority and dissent in interpreting the predominant supply and the interpretation of contractual language, it will not be surprising if this decision is appealed to the Supreme Court of Canada.
The Federal Court of Appeal decision is Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 96 (FCA), upholding Canadian Imperial Bank of Commerce v. The Queen, 2019 TCC 79 (TCC).
Jean-Guillaume Shooner is a partner in the Tax Group at Stikeman Elliott LLP. He specializes in commodity taxation (including Goods and Services Tax/Harmonized Sales Tax, Québec Sales Tax and provincial sales taxes), customs, import/export controls, excise taxes, fuel taxes and various international trade issues.