Date: 19990317
Docket: 96-4400-GST-G
BETWEEN:
SKYLINK VOYAGES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Archambault, J.T.C.C.
[1] During the relevant period, namely from September 1,
1991 to July 31, 1995, Skylink Voyages Inc. (Skylink)
operated a wholesale travel agency, essentially acting as an
intermediary between airlines and retail travel agencies
(retail agencies). The Quebec Minister of Revenue issued
on behalf of the Minister of National Revenue (Minister) a
notice of assessment under the Excise Tax Act (Act)
for the relevant period. The Minister determined that Skylink
should have collected the goods and services tax (GST) in
respect of collection charges (collection charges) for
amounts owed by credit card issuers (issuers) and charges
for the cancellation of airline reservations (cancellation
charges), which charges are billed to retail agencies.
[2] In its Notice of Appeal, Skylink claims that no GST is
owed in respect of the collection charges because they are for a
financial service which is not subject to the GST. It also claims
that the cancellation charges are zero-rated because they relate
to travel to destinations outside Canada and the United States.
In its argument at the hearing, Skylink abandoned this last
argument and claimed instead that it had not provided any service
and that it was therefore not required to collect the GST on
cancellation charges.
Facts
[3] Skylink is a registered supplier for the purposes of the
Act. For a better understanding of the nature of the services
provided by Skylink which are the subject of the dispute in the
instant case, it is helpful to describe the circumstances in
which they were provided. Generally speaking, when a customer
wishes to travel by air outside Canada, he contacts a retail
agency. That agency then turns to Skylink to reserve a seat with
an airline. To meet the needs of the customer in question,
Skylink consults the reservation systems of various airlines by
computer. Once it has found a flight that may suit the retail
agency's customer, Skylink reserves a seat for a 10-day
period and notifies the retail agency that it has done so.
[4] If the reservation suits the customer, the retail agency
then asks him to pay the ticket price. Payment is usually made by
credit card. In some instances, the retail agency has no
agreement with the issuer of the credit card used by its customer
and so asks Skylink to act as an intermediary by claiming the
price of the airline ticket from the issuer. Thus it is Skylink,
and not the retail agency as would normally be the case, whose
name appears as the merchant on the slip or small receipt
attesting the credit card payment.
[5] It is also Skylink that issues the airline ticket on
behalf of the airline selected. In addition to the usual
information there appears on the ticket the following:
"Skylink Voyages / Agent /
Coupon / Agency". According to the agreements
with the airlines, Skylink receives a commission from the airline
for issuing the ticket. This compensation appears under the
heading "commission" on the ticket copies that were
filed as exhibits at the hearing.[1]
[6] Skylink then sends the retail agency the ticket along with
an invoice separately showing the ticket price and the amount of
taxes and the collection charges. The collection charges were a
lump sum of $15 which, according to Skylink's estimate,
merely reimbursed it for the 2.2 to 3 percent discount which
the issuer deducted from the amount on the credit card slip.
According to Micheline Sinnett, a Skylink employee, that
company makes no profit on these collection charges. However, she
did not provide any figures or supporting documentation.
[7] Ms. Sinnett confirmed that, in certain circumstances,
Skylink had to absorb the loss resulting from non-payment of the
invoice by the issuer or, if the payment was made, from any
reimbursement of the amount to the issuer by Skylink. Such a
situation could arise if a customer ordered a ticket by
telephone, did not sign the credit card slip and refused to
acknowledge that he had used his credit card to purchase the
airline ticket. In those circumstances, issuers give the customer
the benefit of the doubt. Skylink then asks the retail agency to
repay it the amount that the issuer refused to pay or that
Skylink has had to pay back to the issuer. However, if the retail
agency has declared bankruptcy or if for some other reason it
becomes impossible to obtain reimbursement from the retail
agency, Skylink must absorb the loss.
[8] If a passenger decides to cancel shortly¾generally
less than one week¾ after making a reservation, the
retail agency must pay Skylink certain charges, which also appear
separately on the invoice forwarded to the retail agency by
Skylink. These charges may be indicated as a penalty, as
cancellation charges or, when the cancelled ticket is replaced by
another, as replacement charges. The amount of the charges is
generally agreed upon in advance between the retail agency and
Skylink, that is, when the ticket is ordered by the retail
agency. When a seat reservation is cancelled in such
circumstances, Skylink receives no commission from the airlines
since no ticket has yet been issued. If the cancellation occurs
after the ticket has been issued, cancellation charges are owed
solely to the airline. In that instance, the retail agency is not
required to pay Skylink a penalty.
Analysis
Cancellation charges
[9] First I would like to address what I believe is the
easiest question, that of the cancellation charges. Counsel for
Skylink claimed that cancellation charges are not subject to any
GST because there has been no taxable supply and the existence of
such a supply is the essential condition for the application of
the tax provided for under section 165 of the Act.
[10] It is perfectly clear that no GST is payable if no
taxable supply was made by Skylink. Consequently, it must be
determined here whether such a supply was made. In
section 123 of the Act, "taxable supply" is
defined as "a supply that is made in the course of a
commercial activity". In that same section, a
"supply" is defined as follows: "subject to
sections 133 and 134, the provision of property or a service
in any manner, including the sale, transfer, barter, exchange,
licence, rental, lease, gift or disposition."
[11] We will now analyze the legal framework in which Skylink
provides its services. Skylink's business is to act as an
intermediary between retail agencies and the airlines. At the
retail agencies' request, Skylink consults the reservation
systems of various airlines and reserves a seat for the retail
agency's customer. If the reservation suits the customer, the
ticket is issued by Skylink as the airline's mandatary and
Skylink is paid by the airline.
[12] However, if no ticket is issued by the airline, Skylink
is not entitled to a commission. And yet Skylink has provided
services: it has done the necessary searches in the airlines'
reservation systems and made a reservation. Services have been
provided, but it receives no remuneration from an airline. It is
therefore not surprising that Skylink has agreed with the retail
agencies that, in such circumstances, those agencies should pay
Skylink for its services. Regardless of whether that payment be
characterized as cancellation charges, a penalty or replacement
charges, its true nature is remuneration for services which
Skylink has provided to the retail agencies.
[13] Counsel for Skylink attempted to liken these cancellation
charges to a fine for a violation of the Highway Safety
Code, relying in particular on the decision rendered in
152633 Canada Inc. (Sako Auto Leasing) v. The
Queen, [1997] G.S.T.C. 50. In that case, my colleague
Judge Lamarre held that a fine paid for such a violation
does not constitute a service contemplated by the Act. In my
opinion, the penalty charged to the retail agencies by Skylink
cannot be equated with a fine paid for a violation of the
Highway Safety Code. The true nature of the penalty is
that it is a fee for the provision of services. Sako Auto
Leasing is thus not applicable in the instant case.
[14] Consequently, I believe that Skylink's arguments are
without foundation. In this case, Skylink provided services to
travel agencies. These services were provided in Canada and were
not tax-exempt. Skylink should have collected the GST in respect
of the cancellation charges, penalty charges and replacement
charges.
Collection charges
[15] There remains the question of the collection charges
which Skylink billed to the retail agencies. Counsel for Skylink
advanced three arguments in support of its claims. The first
is based on the premise that the collection charges are in the
nature of fees for services rather than an expense. These fees
were paid for financial services within the meaning of either
paragraphs (i) and (l) of the definition of
"financial service" in section 123 of the Act or
paragraphs (m) and (t) of that same definition. I
reproduce hereunder the most relevant parts of that
definition:
"financial service" means
(a) the exchange, payment, issue,
receipt or transfer of money, whether effected
by the exchange of currency, by crediting or debiting
accounts or otherwise,
. . .
(d) the issue, granting, allotment,
acceptance, endorsement, renewal, processing, variation,
transfer of ownership or repayment of a financial
instrument,
. . .
(f) the payment or receipt of money as dividends
(other than patronage dividends), interest, principal, benefits
or any similar payment or receipt of money in respect of a
financial instrument,
. . .
(i) any service provided pursuant to the terms
and conditions of any agreement relating to payments of amounts
for which a credit card voucher or charge card voucher has
been issued,
. . .
(l) the agreeing to provide, or the arranging
for, a service referred to in any of paragraphs (a)
to (i), or
(m) a prescribed service,
but does not include
(n) the payment or receipt of money as
consideration for the supply of property other than a financial
instrument or of a service other than a financial service,
. . .
(t) a prescribed service.
[My emphasis.]
[16] Counsel's second argument was that the collection
charges were incurred by Skylink as the mandatary of the retail
agencies. This argument is based on the premise that the
collection charges are in the nature of a disbursement made in
supplying a service (for example, an airline reservation). The
final argument was that these charges were not billed for
"supplies" within the meaning of the Act.
[17] Generally speaking, financial services are exempt
supplies not subject to the GST.[2] Hence the importance of determining whether the
service provided by Skylink constitutes a "financial
service" under the definition of that expression in the Act.
This definition is also important for an understanding of the
second part of Skylink's argument, that is to say that
Skylink was acting as the travel agencies' mandatary. I
intend to decide this question first.
[18] The services that constitute a "financial
service" within the meaning of section 123 of the Act
include those provided by an issuer pursuant to an agreement
respecting the payment of the amount of a credit card slip. It is
therefore clear that no GST is payable in respect of the discount
which the issuer takes in paying Skylink the amount indicated on
the slip signed by a customer. If this service provided by the
issuer had been provided directly to the retail agency, the
result would have been the same: the supply would also have been
exempt.
[19] The Minister claims that, if the discount taken by the
issuer on payment of the amount of the credit card slip to
Skylink is in the nature of a disbursement which Skylink collects
from the retail agencies, the amount so collected is subject to
the GST. One can understand why this might trouble Skylink since,
in such instances, it would not be permitted to do indirectly
what it can do directly. However, section 178 of the Act[3] supports the
Minister's position. Generally speaking, the amount which the
recipient of a service repays to the supplier for costs incurred
in making the supply is deemed to be part of the consideration
for the supply. However, there is an exception, namely where the
supplier has incurred these charges as the recipient's
mandatary.
[20] In the case at bar, Skylink wishes to invoke this
exception, arguing that it claimed payment of the amount of the
credit card slip as the retail agency's agent.
[21] As Judge Kempo stated at the end of her judgment in
Parkland Crane Service Ltd., [1994] GTC 1067, the
burden of proving that there was a mandator-mandatary
relationship is on the taxpayer who alleges it. Under the
Civil Code of Quebec (C.C.Q.), such a relationship
clearly exists under a contract of mandate. Articles 2130
ff. of the C.C.Q. deal with this type of contract. Mandate
is defined in article 2130 as "a contract by which a
person, the mandator, empowers another person, the mandatary, to
represent him in the performance of a juridical act with a third
person, and the mandatary, by his acceptance, binds himself to
exercise the power".
[22] No evidence was adduced in this case to establish the
existence of such a contractual relationship between the retail
agencies and Skylink. It was not established that Skylink had
agreed with the retail agencies that it would act as their
mandatary by requesting payment from the issuers. Nor is there
any evidence that Skylink informed the issuers that it was acting
as the retail agencies' mandatary.[4]
[23] In addition, the fact that Skylink did not ask the retail
agency for reimbursement of the exact amount of the expense it
incurred on the retail agency's behalf raises a serious doubt
as to whether such a mandate existed. The $15 billed for each
collection of an amount owed to a retail agency more closely
resembles a fee for services than a disbursement made in the
supply of a service. Consequently, I do not believe that this
argument can be accepted.
[24] Counsel for Skylink argued that, even if Skylink was not
acting as a mandatary, it provided a "financial
service" to the retail agencies by agreeing to act as an
intermediary to obtain payment of the amount of the credit card
slip. For a clearer understanding of the legal framework of the
relationship between a customer and the issuer on the one hand
and the issuer and a merchant on the other, it would be
appropriate to cite Nicole L'Heureux, Droit de la
consommation, 4e édition, Les
Éditions Yvon Blais Ltée, Cowansville, who
describes these relationships, which she characterizes as
triangular, as follows at pages 141 and 142:
[TRANSLATION]
Credit cards enable merchants to receive the price of goods or
services provided, not from the purchaser cardholder, but from
the issuer. How can this involvement of the issuer be explained?
The payment by the issuer has the appearance of a prepayment
resulting from an advance of funds to the customer which the
issuer must then recover from its customer for the vendor or
the supplier of goods and services. The issuer plays the role
of intermediary between the merchant and the cardholder, who,
by virtue of the contract between the issuer and the merchant,
does not immediately pay for his purchase. He receives credit
from the issuer, and also from the merchant who participates in
the transaction.
This is a sui generis contract, called a variable
credit contract, a kind of framework agreement enabling the
issuer to advance credit to a specific person and to become the
assignee of the claims of the vendor or of the supplier of
services to that person.
[My emphasis.]
[25] In this passage, the issuer is described as the
"assignee of the claims of the vendor or of the supplier of
services". The mini-bill thus becomes a debt instrument
which the supplier transfers to the issuer in exchange for
payment of the amount of money owed it.
[26] In the instant case, an intermediary, Skylink, was added
to this triangular relationship. Skylink came between the
merchant (the retail agency), which made the sale to its
customer, and the issuer. Skylink did not seek payment of the
credit card slip amount for its own benefit, but rather for the
benefit of the retail agency. Skylink moreover passed on to the
agency the cost represented by the issuer's discount.[5]
[27] When Skylink obtains from the issuer payment of an amount
owed by the customer to the retail agency for the price of the
airline ticket, this service appears to me to be in the nature of
a collection service. In consideration of this service, Skylink
charges the amount of $15, which roughly corresponds to the
discount deducted when the credit card slip is submitted to the
issuer. It seems to me that this service is provided here more to
oblige the retail agency than to make a profit. Skylink's
remuneration consists of the commissions it receives from the
airlines for issuing airline tickets.
[28] In thus acting as an intermediary in the collection of
the amount of the credit card slip, does Skylink provide a
"financial service" within the meaning of
section 123 of the Act? First of all, I must note that the
wording of the definition of that term is far from clear. Even
after a number of readings, it is difficult to understand its
entire scope. How then can ordinary taxpayers grasp the extent of
their tax liabilities?[6] Tax provisions should be drafted so that ordinary
people can readily understand them without having to expend
excessive amounts of time or money.
[29] In the instant case, I believe that the service provided
by Skylink is that described in paragraph (l) of the
definition of "financial service". Skylink did indeed
arrange for one of the services described in
paragraphs (a) to (i) of that
definition. More specifically, paragraph (l) could be
combined with paragraphs (a), (d) or
(i) of the definition, and the service provided by Skylink
could thus be described as "arranging for the receipt of
money [by the retail agent] by crediting accounts [of
the banking company]" (paragraphs (l) and
(a)).
[30] The service provided by Skylink could also be described
as "arranging for the transfer of ownership or repayment
of a financial instrument"
(paragraphs (l) and (d)). According to
section 123 of the Act, a "financial instrument"
includes a "debt security", which means a
"right to be paid ". In the instant case, the
credit card slip is that financial instrument and it gave
Skylink, which submitted it to the issuer, the right to receive
the amount indicated thereon.
[31] However, the most apposite combination appears to me to
be that of paragraphs (l) and (i): Skylink was
"arranging for a service provided pursuant to the terms
and conditions of an agreement relating to payments of amounts
for which a credit card voucher was issued".
Skylink obtained payment of the amount of the credit card slip
from the issuer pursuant to the obligation that the issuer had
toward the credit card holder.
[32] Even though it can be concluded that the service provided
by Skylink constituted one of the services described in
paragraphs (a) to (m) of the definition of
"financial service", it is important to determine
whether that service is excluded under paragraphs (n)
to (t). In my view, paragraph (n) does not
apply here since Skylink arranged not for obtaining payment of
the ticket price, but rather for obtaining payment of the amount
of the credit card slip by the issuer.
[33] The only other paragraph that could apply in the instant
case is paragraph (t), which concerns prescribed
services. The services contemplated by paragraph (t)
are set out in section 4 of the Financial Services (GST)
Regulations (Regulations), which, at the relevant
time, read as follows:[7]
4. (1) In this section,
"instrument" means money, an account, a credit
card voucher, a charge card voucher or a financial
instrument;
"person at risk", 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 of a guarantee, an acceptance or an
indemnity in respect of that instrument.
(2) Subject to subsection (3), the following
services, other than a service described in section 3,
are prescribed for the purposes of
paragraph (t) of the definition "financial
service" in subsection 123(1) of the Act:
(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.
(3) A service referred to in subsection (2) is
not a prescribed service for the purposes of
paragraph (t) of the definition "financial
service" in subsection 123(1) of the Act where the
service is supplied with respect to an instrument by
(a) a person at risk;
. . .
[My emphasis.]
[34] The wording of paragraph 4(2)(b) of the
Regulations, like that of the definition of "financial
service", does not seem to me to be very clear. Are the
services provided by Skylink in collecting the amount of a credit
card slip in the nature of an administrative service? This
expression is not defined. In a broad sense, the collection
service provided by Skylink could be recognized as constituting
such a service. However, not all administrative services are
excluded from the definition of "financial service"
under paragraph (t). First of all, "any
administrative service that is solely the making of the payment
or the taking of the receipt [...] of other
amounts"is not a prescribed service. Furthermore, an
administrative service provided by a person at risk as defined in
subsection 4(1) of the Regulations is also not excluded from
the definition of "financial service".
[35] For a better understanding of the scope of these
Regulations, it is helpful to cite the backgrounder accompanying
the draft regulations on financial services[8] which the Minister of Finance made
public in press release No. 90-141 on October 25,
1990. The Minister stated the following in section 4 of that
document:
The Financial Services (GST) Regulations will also
exclude certain services from the definition "financial
service". This exclusion will only apply to services that
would otherwise be included by virtue of paragraphs (a) to
(l) of subsection 123(1) of the amended Excise Tax Act.
The distinction between financial and other types of services
is not always straightforward -- for example, data processing
and administrative services offered in conjunction with a
financial transaction could be considered to be part of the
financial service or separate administrative services. These
Regulations will exclude from the definition
"financial service" specified administrative
services provided by certain third parties in conjunction with
financial services. Thus, where a financial institution provides
a financial service such as a loan, but debt collection services
in relation to the loan are provided by a third party, the debt
collection service will not be considered to be a financial
service and will be fully taxable. [My emphasis.]
[36] This backgrounder is consistent with the more explicit
one that the Minister of Finance had previously made public in
August 1990 in his press release no. 90-103, in which
he stated that the collection by a bank of an amount it has lent
constitutes a financial service while the debt collection
services provided by third parties are not financial services and
are therefore taxable supplies. The Minister wrote as follows in
that previous backgrounder:
B. Third-Party Administrative Services
. . .
For example, certain administrative activities -- such as
the collection of amounts by a bank in connection with a loan
which was issued by the bank and the mailing out of monthly
statements by that bank -- cannot really be separated from the
service of providing the loan itself. Such activities are
clearly exempt under paragraphs (a) to (l) of the
definition of a financial service and will remain exempt.
However, financial institutions sometimes provide data
processing or administrative services in respect of financial
services or instruments, but do not provide the underlying
financial instrument -- the services are provided on a
third-party basis by the financial institutions. Examples include
debt collection services and administrative-services-only
(ASO) provided in respect of health insurance services. Under a
broad based sales tax, these types of services should be
taxable.
As a result, services which are purely administrative and
provided on a third-party basis will be excluded from the
definition of a financial service as a result of a regulation to
be issued under paragraph (t) of the definition of a
financial service. This regulation will provide that these
services be taxable and will thereby further clarify the
application of the tax in this area.
[My emphasis.]
[37] In light of this backgrounder, but at the same time
recognizing the predominance of the wording of the provisions in
force during the relevant years, one may wonder to what extent
the collection service provided by Skylink can be considered as a
service contemplated by paragraph (t) of the
definition of "financial service".
[38] First of all, it must be determined whether this service
was an administrative service that was "solely the
. . . taking of the receipt . . .
of other amounts". It seems to me that the answer
must be that they were. I do not see here any other kind of
service. To collect the amount of the credit card slip, Skylink
forwarded it to the issuer. Once it received payment from the
issuer, Skylink handed the money over to the retail agency. These
are all actions that must be taken to collect on a claim. If this
interpretation is valid, the collection service provided by
Skylink is not excluded from the definition of "financial
service". And yet that does not appear to be consistent with
the purpose stated by the Minister of Finance in the backgrounder
cited above because the service in question here is a collection
service provided by a third party. However, the text I must apply
is that of the Regulations, not that of the backgrounder
accompanying the draft regulations.
[39] If my interpretation of paragraph 4(2)(b) of
the Regulations were to prove incorrect, the question would then
arise as to the applicability of the second exception. In my
opinion, the administrative services provided by Skylink were so
provided by a person at risk. Skylink is exposed to a financial
risk by virtue of the acquisition, ownership or issuance of an
instrument (the credit card slip) in relation to which the
administrative service was provided. In my opinion, Skylink
acquired the credit card slip with a view to collecting on it for
the retail agency's benefit. As I have concluded that, in so
doing, Skylink was not acting as the retail agency's
mandatary, it goes without saying that Skylink is the owner of
the credit card slip. In transferring it to the issuer, Skylink
wanted to obtain payment of the amount appearing thereon.
[40] By accepting ownership of the credit card slip, Skylink
took a financial risk, albeit a slight one. Under the terms and
conditions of its agreement with the issuer, Skylink could be
required to pay back to the issuer the amount of the credit card
slip. For example, if a customer does not sign the slip and
disputes its validity, the issuer is entitled to require Skylink
to repay it the amount appearing on the slip. As a rule, Skylink
will recover this amount from the retail agency. However, in some
instances, as a result of bankruptcy or for some other reason,
the retail agency may be unable to reimburse Skylink. Ultimately,
Skylink is exposed to the financial risk arising from the supply
of administrative services with regard to the collection of the
amount of the credit card slip.
[41] Consequently, in my view, the exclusion provided for in
paragraph (t) of the definition of "financial
service" in section 123 of the Act does not apply to
the circumstances of this appeal. As the collection services
provided to the retail agencies by Skylink constitute financial
services which are exempt supplies, Skylink did not have to
collect the GST.
[42] In view of the foregoing, it is not necessary to comment
on the other arguments put forward by counsel for Skylink.
[43] For these reasons, Skylink's appeal is allowed and
the notice of assessment is referred back to the Minister for
reconsideration and reassessment on the basis that the
cancellation charges constitute taxable supplies and the
collection charges constitute exempt supplies. The appellant is
entitled to its costs.
Signed at Ottawa, Canada, this 17th day of March 1999.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 14th day of January
2000.
Erich Klein, Revisor
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