Citation: 2009 TCC 170
PRESIDENT'S CHOICE BANK,
HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
The assessment under
appeal was made pursuant to the Excise Tax Act (ETA), for the
period from December 31, 2000 to December 30, 2002. The
appellant (hereinafter also referred to as PC Bank) is an indirect
wholly owned subsidiary of Loblaw Companies Limited (Loblaw) and is
licensed to operate as a bank in Canada with full banking powers under the Bank
Act. Letters patent were issued to PC Bank on November 29, 2000. Prior
to November 29, 2000, PC Bank operated pursuant to the Trust
and Loan Companies Act as President’s Choice Financial Trust Company,
established on November 30, 1998 (see the introductory paragraph in the notes to
the PC Bank audited financial statements for December 31, 2000,
December 31, 2001 and December 31, 2002 in Exhibit A-1,
Tabs 7, 12 and 13, and the corporate structure by entity in Tab 14). The notes
to the financial statements also state that the PC Bank, together with
other institutions, offers financial and loyalty products to individuals in Canada.
The issues in the
present appeal relate to two agreements entered into on
November 1, 1997, between Loblaw and the Canadian Imperial Bank of Commerce
(CIBC), a Canadian chartered bank, and an amending agreement entered
into on January 17, 2001. On October 1, 2000, Loblaw had assigned
its rights and obligations under the above‑mentioned agreements to the
President’s Choice Financial Trust Company, the predecessor to the appellant
(see Exhibit A-1, Tabs 1, 2, 5 and 6).
The admitted facts
surrounding the execution of those agreements and the issuance of the
assessment under appeal ensuing from the execution of the agreements are stated
in a Partial Agreed Statement of Facts, filed jointly by the parties and reproduced
PARTIAL AGREED STATEMENT OF FACTS
The Appellant, President’s Choice Bank, is a
wholly owned subsidiary of Loblaw Companies Limited (Loblaw).
Loblaw is a diversified retailer of groceries
and other merchandise operating across Canada.
The Canadian Imperial Bank of Commerce (CIBC) is
a Canadian chartered bank with its head office in Toronto, Ontario.
Financial Services Agreement
Prior to November 1, 1997 Loblaw determined that
it wished to provide financial products to its customers because it was not a
bank it understood that it could not legally do so.
On November 1, 1997, Loblaw executed a Financial
Services Agreement (FSA) with CIBC. That agreement included the following
The parties established a Steering Committee
(the "Steering Committee") composed of an equal number of
representatives of each of Loblaw and CIBC for the purpose of determining
launch times, geographic scope, marketing strategies and overall strategic
direction of the President’s Choice Financial Offer. All decisions of the
Steering Committee were required to be unanimous. The parties intended that the
guiding principle of the Steering Committee was to provide direct to the public
through electronic means a full range of financial products and services under
the President’s Choice Financial trade-mark, with discount pricing but quality
consistent with non-discounted financial products and services offered by CIBC.
In addition the Steering Committee was to be guided by the principle that it was
the intention of each party to use all commercially reasonable efforts to
ensure that Termination Thresholds are met. However, nothing therein restricted
the discretion of the Steering Committee, and it was not to be obligated to
decide any matter in accordance with such guiding principle.
Other than as set out in the FSA, CIBC would be
the exclusive provider of financial services under the name "President’s
Choice Financial", a trade-mark of Loblaw. These financial services
included (i) mutual funds sales, (ii) credit products, (iii) securities
brokerage, (iv) financial planning, (v) debit cards, (vi) check cards, (vii)
bill payment services, (viii) person to person payment services, (ix) ABM
services, (x) insurance products relating to credit products and home
warranties, and (x) [sic] credit cards. The financial services provided
by CIBC as described above were each a "financial service" as that
term is defined in subsection 123(1) of the ETA.
CIBC, after consultation with Loblaw, would have
a broad discretion to establish the attributes of the financial products to be
offered, subject to specific restrictions in the agreement providing for no fee
banking, and competitive posted interest rates. More specifically, CIBC was to
price all PCF Products constituting a deposit or credit product, and mortgages,
on an average product portfolio basis (e.g. the average of mortgage rates
across all terms, weighted according to balances) at a minimum 45 basis points
better than traditional national (or regional, if and when applicable), CIBC
branch posted rates.
CIBC was to install banking machines at Loblaw
locations, operate a telephone banking facility, and maintain an internet
Loblaw was to design, install and maintain the
kiosks at locations to be determined by the Steering Committee.
Each party was to pay its own marketing costs
for promoting the PCF brand in their own promotional materials.
A number of program parameters were to be
established or changed, as needed, by the Steering Committee.
Either party could terminate the FSA for any
reason, upon ninety days written notice.
CIBC was obliged to pay to Loblaw, fees
calculated by reference to each new account, or other financial products
opened, as well as a fee calculated by reference to the average funds and
assets under management by CIBC under the PCF program.
Contemporaneously with the execution of the FSA,
Loblaw also entered into a Loyalty Services Agreement (LSA) with CIBC, which in
part provided for a loyalty program to be offered to PCF customers or members
("Members"). It was agreed that CIBC would initially administer the
Loyalty Program pursuant to the terms and conditions of the LSA. The LSA
provided among other things that:
The Loyalty Program provided for the award of
"Loyalty Points" (or PC Points). The PC Points were issued to the
Appellant’s customers as a reward for making eligible Loblaw Purchases and
Eligible PCF purchases and as part of any other offer made available through
the Loyalty Program;
The redemption of the PC Points was available at
any participating Loblaw location as well as any other location as agreed to by
the FSA Steering Committee. The PC Points could be redeemed, subject to the
Loyalty terms and conditions, against the purchase of any eligible products, as
defined in the LSA. Loblaw customers (Members) were required to earn a minimum
of 20,000 PC Points before the points could be redeemed. Upon accumulating
20,000 PC Points, the Member could redeem the points acquired for the purchase
of goods for a fixed value to [sic] equal to $20.00. PC Points could be
further redeemed in fixed increments of 10,000 points, e.g., 30,000
points could be redeemed for $30.00, 40,000 points could be redeemed for
$40.00, etc. A Member could only apply a PC Points redemption to a purchase of
goods with a value equal to or greater than the value of the points being
redeemed. In other words, a Member could not redeem 30,000 points on the
purchase of $20.00 worth of goods.
Loyalty points could also be exchanged for
travel with Thomas Cook, a travel service provider, and Famous Player [sic]
movie coupons; however, during the approximately 24 month period, these options
were available to Members, the percentage of PC Points redeemed on Thomas Cook
and Famous Players was less than 0.5% of the total PC Points otherwise redeemed
on Loblaw merchandise.
CIBC was bound to pay the Appellant $1.00 per
every 1000 points issued by it which were redeemed in that month or such other
amounts that were agreed to by the Steering Committee; the formula provided for
a reduction to reflect the total PC Points issued by CIBC as a proportion of
total PC Points issued overall under the program;
CIBC was entitled to receive a payment for the
cost of administering the Loyalty Program calculated by reference to the points
initially issued by Loblaw which were redeemed in any given month.
Neither the FSA nor the LSA was intended to
create any partnership or joint venture or similar relationship between the
Appellant and CIBC.
Amendment of Agreement
A letter dated January 17, 2001 (the
"Amending Agreement") from Loblaw to CIBC supplemented and amended
the FSA and LSA; the amendments dealt with matters such as the issuance of PC
Visa Cards and PC insurance by Loblaw in conjunction with someone other than
CIBC, the establishment of performance standards and dispute resolution
The Amending Agreement contemplated the
assignment of the FSA by Loblaw to a new subsidiary trust company and by CIBC
to Amicus Bank, a CIBC subsidiary.
Pursuant to the Amending Agreement, Loblaw
became the administrator of the Loyalty Program and became entitled to receive
an amount from CIBC in respect of the administrative costs.
The Amending Agreement provided that CIBC would
reimburse the Appellant for the Appellant’s costs in promoting and marketing
PCF Products and the Appellant would reimburse CIBC for CIBC’s costs in
promoting and marketing Loblaw Sponsored Products.
The Amending Agreement provided that the parties
would promote, on their respective call centres, the other party’s products,
and services for reasonable compensation.
Assignment to Appellant
On October 1, 2000, as a result of a series of
transactions Loblaw assigned both the LSA and the FSA, and their ensuing legal
rights and obligations, to the President’s Choice Financial Trust Company, the
predecessor to the Appellant, PC Bank.
No payment of GST
No GST was charged or collected on the fees paid
by CIBC to Loblaw or to its successors, including the Appellant, under the FSA,
or under the amendments thereto.
No GST was charged or collected on the fees paid
by CIBC to Loblaw or its successors, including the Appellant, under the LSA or
under the amendments thereto.
Under the FSA the CIBC paid to the Appellant
fees of $12,346,591 in 2001 and $17,793,556 in 2002 for Product Sales and
Trailer fees. GST of 7% was assessed under section 165(1) of the ETA for both
Under the LSA, CIBC paid to the Appellant fees
of $13,246,737 in 2001 and $17,774,626 in 2002 for points provided as per their
participation in the Loyalty Program. GST of 7% under section 165(1) of the ETA
was assessed for both years.
Payments were made to the Appellant by CIBC for
Administration Costs incurred by the Appellant in administering the Loyalty
Program of $1,703,480. GST of 7% under section 165(1) of the ETA was assessed.
A summary of the audit adjustments for the years
ended 2001/12/29 and 2002/12/30 is as follows:
Adjustment No. 1 – GST on PCF Products
Adjustment No. 2 – GST on PCF Points (CIBC
Adjustment No. 3 – GST on Loyalty Admin
Total Audit Adjustments
Less Allowable Credits under S.296(2)
Total Audit Adjustments including penalty
The parties hereto agree that this Partial
Agreement [sic] Statement of Facts does not preclude either party from
calling evidence to supplement the facts agreed to herein, it being accepted
that such evidence may not contradict the facts agreed.
ALL OF WHICH IS RESPECTFULLY SUBMITTED.
Mr. Kevin Lengyell, CA,
senior vice-president at PC Bank, testified concerning the context and the application
of the above-mentioned agreements.
He said that Loblaw had the idea of taking advantage of the constant weekly
foot traffic through its doors by offering its customers attractive financial
services products. With that in mind, they entered into discussions with a few
banking institutions, and ended up negotiating with CIBC regarding a joint
offering of financial products under the brand name President’s Choice
Financial (PCF). This culminated in the two agreements signed in
November 1997, namely the Financial Services Agreement (FSA) and the
Loyalty Services Agreement (LSA). When PCF was launched, it offered
three products: the no‑fee bank account, the line of credit account and
the mortgage account. The principle behind this was to offer PCF customers,
among other things, interest rates lower than CIBC’s posted rate. Further, by taking
out a PCF mortgage, a client earned points (PC Points) that could be
redeemed at a Loblaw store. In other words, the idea was to try to align
Loblaw’s President’s Choice brand with an attractive financial product
offering. From 2001 to 2003, PCF expanded the range of financial products it
offered, to include among others the Interest Plus savings accounts for
CIBC’s interest in
marketing the PCF products at better rates than those offered in its own
branches came from the opportunity it saw to grow its own business by creating
another channel for acquiring new customers.
For a grocery retailer
like Loblaw, in whose business profit margins are very thin, awarding loyalty
points can be uneconomic. The idea was for Loblaw to create a loyalty program
that would be funded through its success in offering financial services. In
other words, the cost of running the loyalty program for Loblaw customers would
be underwritten through the financial services business. As for the customers,
they would get the benefit of both low interest rates, for example, and PC Points.
When the program was
launched in 1997, Loblaw and CIBC both had already assigned employees to work
on bringing PCF to market. Loblaw had 10-15 employees assigned to this program.
They worked together with a CIBC team on designing and pricing the financial
Mr. Lengyell said that
the FSA and the LSA are obviously two different agreements, the FSA governing
the financial services offered and the LSA governing the loyalty program owned
by Loblaw. However, he said that the two agreements work together because they are
part and parcel of the same offering. Mr. Lengyell said that Loblaw does not
recognize income on the award of loyalty points as Loblaw is reimbursed by CIBC
through PC Bank upon redemption of the points issued by the CIBC to PCF
customers. As regards the financial services, the compensation received from
CIBC is governed by the FSA, which determines the rate at which PC Bank
gets paid for participating in the financial services offering: this compensation
is income for Loblaw or PC Bank.
Mr. Lengyell explained
that, at first, the income generated from the financial services was small
because they were starting a new business. They used points as a marketing tool
to grow the business. Indeed, in the early years, the value of the points
awarded and the amounts received from CIBC relating to those points were almost
the same as the amounts received for participating in the financial services
offering. However, this has changed over the years.
Mr. Lengyell testified
that over the ten‑year existence of the business the value of the amounts
that PC Bank has received with respect to the financial services has been at
least twice the value of the points awards paid by CIBC, and that the gap is
continuing to grow. Mr. Lengyell said that PC Bank and CIBC both share the
economic benefit of the program and that they work on a formula that determines
how those financial rewards are to be split. PC Bank did not charge CIBC any GST
with respect to the points because it viewed the loyalty points as being
interchangeable with the financial product. PC Bank recognized that CIBC had
control over the pricing mechanism. Indeed, CIBC can choose to give the
customer a lower rate flat out or to take the rate somewhat lower and make the
difference up ‑ which would make the product a PCF product ‑ and
use PC Points interchangeably. In Mr. Lengyell’s view, PC Points are interchangeable
with interest or dollars; they are part of the financial services product.
Mr. Lengyell said that most of the financial products (but not all of them)
were offered by CIBC. PC Bank was acting as an intermediary to bring these
products to Loblaw customers. But PC Bank did not want to overemphasize the CIBC
name. From Loblaw’s perspective, it put itself at risk by associating its brand
with CIBC and by working together with CIBC to make sure this business was a
success. Indeed, it is in the economic interest of both parties that PCF
products meet a high standard of performance. At the same time,
PC Bank/Loblaw has to protect its trademark quality and maintain the high
standards expected of PCF products. Mr. Lengyell also recognized that PC Bank
would not suffer a direct loss in the event of a default on a mortgage, but
would suffer an economic loss as its rate of compensation is determined by the
amount of funds in each category (mortgages being one category of PCF products listed
in the remuneration schedule).
There are four issues
to be resolved as laid out by the parties in their respective memoranda of fact
and law. Those issues are the following:
(1) Are the services
provided by PC Bank to CIBC under the FSA part of an exempt supply of
"arranging for" a financial service, such that GST is not exigible
thereon, as per the definition of "financial service" in
subsection 123(1) of the ETA, or are these services taxable under
subsection 165(1) of the ETA?
(2) Are the supplies
provided by PC Bank to CIBC under the LSA part of a single composite supply
(together with the FSA) so that such single composite supply is an exempt
supply of a financial service, or are these supplies taxable under subsection
165(1) of the ETA?
(3) Is PC Bank
entitled to notional input tax credits (ITCs) pursuant to subsections
181(2) and 181(5) of the ETA in respect of reimbursements paid to Loblaw on the
redemption of PC Points?
(4) Was PC Bank duly
diligent in attempting to comply with its obligations under the ETA, such that
penalties under section 280 of the ETA should not apply?
I. The services provided by PC Bank to CIBC
under the FSA
The parties, in their
respective memoranda of fact and law, provided an overview of the statutory
provisions relied on.
Section 165 of the ETA
charged to the recipient of a taxable supply GST at the rate of 7% (the rate
applicable during the period at issue) of the value of the consideration for
the supply. Subsection 165(1) of the ETA, as applicable herein, provided as
165(1) Imposition of goods and services tax – Subject to this Part,
every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the
value of the consideration for the supply.
Subsection 221(1) of
the ETA imposes on PC Bank an obligation to collect GST in respect of the
provision of a "taxable supply". Subsection 221(1) reads as follows:
221(1) Collection of tax – Every person who makes a taxable supply
shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in
respect of the supply.
definitions are found in subsection 123(1) of the ETA:
"supply" means, subject to sections 133 and 134, the
provision of property or a service in any manner, including sale, transfer,
barter, exchange, licence, rental, lease, gift or disposition;
"taxable supply" means a supply that is made in the course
of a commercial activity;
"consideration" includes any amount that is payable for a
supply by operation of law;
"recipient" of a supply of property or a service means
(a) where consideration for the supply is payable
under an agreement for the supply, the person who is liable under the agreement
to pay that consideration,
(b) where paragraph (a) does not apply and
consideration is payable for the supply, the person who is liable to pay that
(c) where no consideration is payable for the supply,
in the case of a supply of property by way of
sale, the person to whom the property is delivered or made available,
in the case of a supply of property otherwise
than by way of sale, the person to whom possession or use of the property is
given or made available, and
in the case of a supply of a service, the person
to whom the service is rendered,
and any reference to a person to whom a supply is made shall be read
as a reference to the recipient of the supply;
"commercial activity " of a person means
(a) a business carried on by the person
. . ., except to the extent to which the business involves the making of exempt
supplies by the person,
. . .
"exempt supply" means a supply included in Schedule V.
Part VII of Schedule V
of the ETA provides that an exempt supply includes:
1. A supply of a financial service . . ..
service" is defined in relevant part, as follows in subsection 123(1) of
(a) the exchange payment, issue, receipt or
transfer of money, whether effected by the exchange of currency, by
crediting or debiting accounts or otherwise,
(b) the operation or maintenance of a savings,
chequing, deposit, loan charge or other account,
(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
. . .
(g) the making of any advance, the granting of any
credit or the lending of money,
. . .
(l) the agreeing to provide, or the arranging
for, a service referred to in any of paragraphs (a) to (i), .
but does not include
. . .
(t) a prescribed service.
Subsection 4(2) of the Financial
Services (GST/HST) Regulations excludes the provision of administrative
services from the definition of "financial service".
4(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
(a) the transfer, collection or processing of
(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.
In summary, under the
foregoing provisions of the ETA, making an "exempt supply" does not
constitute a "commercial activity", and such a supply does not fall
within the definition of a "taxable supply". In the result, an exempt
supply is not taxable pursuant to subsection 165(1) of the ETA. The question is
whether the services provided by PC Bank to CIBC under the FSA qualify as a
financial service so that they would be an exempt supply and thus not taxable
under subsection 165(1).
(ii) Appellant’s argument
I will reproduce here
paragraphs 60, 64 and 65 of the appellant’s memorandum of fact and law, which I
find reflect the crux of the appellant’s argument:
It is PC Bank’s position that its supply to CIBC
involves "arranging for" the provision of financial services by CIBC
to its customers and is therefore a financial service pursuant to paragraph (l)
of the definition of "financial service" in subsection 123(1) of the
ETA. Simply put, PC Bank says that it was being paid by CIBC for the
origination, design[,] pricing and strategic deployment of the PCF Product.
. . .
In essence, PC Bank undertook to leverage its
corporate strength to negotiate better rates, terms and conditions for Loblaw
customers from a mainline bank than such customers would have obtained
individually. PC Bank’s role in ensuring the nature and pricing of the PCF
Products is reflected both (i) in the terms of the FSA and, (ii) in the
functional role which PC Bank has played since the inception of the PCF product
The FSA provides that PC Bank shall work with
CIBC on the joint Steering Committee to deal with all governance issues and to
develop the business strategy for the PCF business. Section 2(a) of the FSA
provides that [the] Steering Committee is to be composed of an equal number of
representatives from each of Loblaw and CIBC and that all decisions of the
Steering Committee must be unanimous. The FSA further provides that PC Bank
will consult with CIBC to determine the type of financial products and the
product attributes to be offered to Loblaw customers e.g., contractual term/terms,
fees, interest rates etc. and jointly with CIBC, review and approve all product
marketing and advertising materials and all call centre and personal banking
Counsel for the
appellant also argues that the administrative position of the Canada Revenue
Agency (CRA) and the leading Canadian cases support a finding that a
broad meaning must be assigned to "arranging for" the supply of a
financial service by a financial service supplier to a recipient. The
administrative position of the CRA is found in GST/HST Policy
Statement P‑239 Meaning of the term "arranging for" as provided
in the definition of "financial service" ("Policy Statement
In counsel’s view, the
Attorney General’s position at trial that the activities of PC Bank do not
constitute "arranging for" a "financial service"
contradicts several administrative policies issued by the CRA,
including Policy Statement P–239. Policy Statement P–239
reads in part as follows:
Elements of an Arranging For Service
To qualify as a service of "arranging for" the
supply of a financial service, each of the following elements should be
the intermediary will help either the supplier
or the recipient or both, in the supply of a financial service,
the supplier and/or the recipient count on one
or more intermediaries for assistance in the course of a supply of a financial
the intermediary is directly involved in the
process of the provision of a financial service and will therefore, expend the
time and effort necessary with the intent to effect a supply of a service
described in paragraphs (a) to (i) of the definition of financial service.
In counsel’s view, all
the elements listed by the CRA in Policy Statement P‑239 are present
here: (1) PC Bank helps CIBC through the design, pricing, marketing, etc. of
savings, chequing and mortgage accounts; (2) CIBC counts on PC Bank for
assistance in the course of the supply of PCF products; and (3) PC Bank is
directly involved in the process of the provision of PCF products and expends the
time and effort necessary with the intent to effect the supply of a financial
As for the case law,
counsel referred to State Farm Mutual Auto Insurance Co. v. R.,
 G.S.T.C. 35 (TCC). In that case, Bowman A.C.J. (as he then was),
held that services performed by the head office of State Farm Insurance in the
United States on behalf of its Canadian office, which services involved the
design and pricing of insurance policies to be sold by the Canadian office to
retail customers, constituted "arranging for" the supply of a
financial service. Bowman A.C.J. so ruled notwithstanding the fact that
State Farm’s head office did not have any role in the sale of any particular
contract of insurance to the recipient of that particular financial product.
The sale of State Farm insurance policies was done entirely by independent
sales agents. (Appellant’s memorandum of fact and law, page 17, paragraph 78)
Counsel for the
appellant also referred to Royal Bank v. R., 2005 TCC 802,  G.S.T.C. 198
(TCC), (referred to in the present reasons as Royal Bank 2005), Promotions
D.N.D. Inc. v. R.,  G.S.T.C. 79 (TCC) and Canadian Medical
Protective Assn.,  G.S.T.C. 88 (TCC).
On the basis of the
foregoing, counsel for the appellant concludes that the supply of services made
by PC Bank to CIBC under the FSA is an exempt supply of "arranging
for" the supply of a "financial service" and that PC Bank is therefore
not required to collect and remit GST on that supply.
(iii) Respondent’s argument
Counsel for the respondent
argues that the services provided by PC Bank to CIBC under the FSA are taxable
A supply is defined and
characterized by asking, what, as a matter of common sense, did the
recipient acquire for the money that it paid (O.A. Brown v. Canada,
 G.S.T.C. 40 (TCC)).
Counsel for the
respondent submits that the predominant element of the FSA is a supply of
facilities, trademarks, advertising and other non‑financial services in
return for a fee calculated by reference to the funds placed under the
management of the CIBC as a result of the FSA. The consideration paid was for
intellectual property supplied under the FSA and the appellant’s role in the
arrangement with CIBC was incidental to its own business, which was the
promotion of the PC trademark. In counsel’s view, the supply of the
services in question by PC Bank does not fall within paragraphs (a)
to (m) of the definition of "financial service" in subsection
123(1) of the ETA and it does not constitute "arranging for" the making
of any of the supplies referred to in that definition. Therefore, the
appellant’s supply of services under the FSA is a taxable supply pursuant to
subsection 165(1) of the ETA.
Counsel for the
respondent relies mainly on the case of Royal Bank of Canada v.
Her Majesty the Queen, 2007 TCC 281 (referred to in the present reasons as Royal
In Royal Bank 2007,
referred to by counsel for the respondent, the Court concluded that everything Canadian
Airlines International Ltd. (CAIL) did in that case, from being involved
in establishing the terms of the credit facility to advertising the program,
was for the purpose of promoting the use of the Royal Bank of Canada (RBC)
credit card by the issuance of points, and that that was what CAIL was paid for:
the issuance of points. In other words, CAIL was paid for issuing points and
not for its role in setting up the program. If no points were issued, there was
no consideration payable.
Accordingly, the Court
found that the payments made by the RBC to CAIL were not payments for the
supply of a financial service. In so finding, the Court did not ignore the
critical role CAIL played in the establishment of the Affinity Card program and
the extent of credit use thereby generated for RBC (paragraphs 27 to 29).
I find that the present
case is distinguishable from Royal Bank 2007. I do not find that
PC Bank was paid under the FSA for issuing points or for granting CIBC exclusive
use of PC’s trademark. That is not what the agreement says. Rather, it reflects
Loblaw/PC Bank’s desire to promote the no-fee bank account or the low-interest
mortgages offered to its customers, just to give examples. Obviously, that
agreement was entered into by Loblaw/PC Bank with the intention of maximizing
the revenue potential from its own clientele. At the time the FSA was
originally entered into between CIBC and Loblaw, the latter could not legally offer
attractive financial products of this nature on its own. Loblaw thus had to
make an arrangement with a chartered bank. Such an arrangement was advantageous
for CIBC as it benefited from the PC trademark by being able to enhance the
position of its own financial products. But for PC Bank, the advantage had to
involve more than the association of its trademark with CIBC, since, as Mr.
Lengyell testified, Loblaw was putting itself at risk through this association.
The agreement with CIBC was in fact a necessary step for Loblaw in order to be
able to increase its revenues by offering services other than those relating to
its retail grocery business. Evidence of that is the fact that Loblaw, and then
PC Bank, received fees that were calculated by reference to each new
account opened or other financial products sold, and by reference to the
average funds and assets under management by CIBC under the PCF program. Not
only was PC Bank paid for its major role in selling attractive financial
products to its members, but its fees were directly linked to the profitability
of PCF’s business. The more of these products that were sold and the more
profitable the arrangement was for CIBC as measured by the funds and assets
managed by it, the more profitable it was for the appellant as well.
Further evidence of
Loblaw’s and then PC Bank’s direct interaction in the sale of financial products
is that Loblaw, in signing the FSA, insisted on the no‑fee bank account
and the lower, attractive rate of interest on mortgages and on lines of credit.
These were non‑negotiable aspects of the program with respect to which
Loblaw and PC Bank agreed to work together with CIBC, as can be seen from
paragraphs 2(a), 2(d) and 3 of the FSA (Exhibit A‑1, Tab 1, pp. 6, 7, 11,
12, 13, 17 and 18). A steering committee with equal representation from both parties
and whose decisions were required to be unanimous was provided for in the FSA
to ensure that CIBC would meet Loblaw’s or PC Bank’s requirements.
Moreover, if those requirements caused a decline in profitability or resulted
in the "termination thresholds" (minimum required funds under
management per year) not being met, the steering committee had, under certain
conditions, the authority to re-evaluate the program, or the FSA could simply
be terminated (see paragraph 2(a), clause 2(d)(i)(b) and subparagraph 11(a)(iv)
of the FSA, Exhibit A‑1, Tab 1, pages 6, 7, 12, 13 and 29).
The present case has
more similarities with the English Court of Appeal decision in Customs &
Excise Commissioners v Civil Service Motoring Association ("CSMA"),
 BVC 21 (C.A.) than with Royal Bank 2007. The Automobile Association
in CSMA negotiated the terms of the credit card facilities being offered
to its members. It was involved in designing the credit card arrangement,
including such things as the interest rate charged. The English Court of Appeal
determined that the compensation paid to the Automobile Association was a
commission for its services in making arrangements for the granting of credit.
The substantive element of the supply was arranging for favourable special
credit terms and benefits to be provided to the Association’s members by the
financial institution granting the credit. In the present case, Loblaw/PC Bank
has negotiated no-fee bank accounts, lower interest rates on mortgages and
later on, an Interest Plus savings account for its members. That is
equivalent to arranging for favourable special credit terms and benefits to be
provided to its customers by CIBC.
In the Royal Bank
2005 case, in determining whether branch services offered were to be considered
as "arranging for" the issuing of mutual fund units, Bowie J. of
this Court, said that it was necessary to decide what RBC provided in return
for the consideration it received. Bowie J. said at paragraph 15:
 It is necessary to decide what the Appellant provided in
return for the consideration it received. The ordinary meaning of the verb
"to arrange" is found in the Canadian Oxford Dictionary at
plan or provide for; cause to occur
is not for me to decide, of course, whether the arrangements between the
Appellant and RMFI that I have described conform to the federal and provincial
regulatory requirements. I am satisfied, however, that the Appellant did not
simply provide personnel services and the use of branch office space to RMFI.
The individuals who provided the services to RMFI were at all times employees
of the bank, and were not employees of RMFI. The locations in
which they worked were premises of the bank, and there is no
basis on which I could find that RMFI had the right to occupy any of that space
for its own purposes, even temporarily. The service that the Appellant provided
to RMFI was that of arranging for the distribution of mutual funds, together
with providing ongoing customer service, including responding to customers'
inquiries and completing surrender documents for customers when requested to do
so. [. . .]
In the present case, Loblaw/PC
Bank had 10-15 employees working with CIBC on the terms to be offered on the
PCF products. Furthermore, during the years at issue, PC Bank had full banking
powers under the Bank Act. I am satisfied that the service provided by
PC Bank to CIBC was that of arranging for the granting of credit or banking
facilities to its members on favourable terms. As was the case with the Automobile
Association in CSMA, I find that PC Bank was not a passive associate
concerned only with promotion and doing no more than allowing access to its
list of members. PC Bank did negotiate, did assist in supervision within the steering
committee, did express views. The fact that customers of Loblaw benefited was
the natural consequence of the negotiation (see CSMA, supra, page
6). I also agree with counsel for the appellant in response to one argument
made by counsel for the respondent, that the fact that PC Bank did not suffer
any direct loss from defaults on mortgages is not a concern in determining
whether it was "arranging for" the provision of financial services.
Finally, while I concur
with Bowie J.’s suggestion in Royal Bank 2005, supra, at
paragraph 16, that CRA policy documents should not be given much weight, I find
that the CRA’s argument in the present case goes against its own Policy
Statement P–239. Indeed, I find that the appellant helped, assisted and was
directly involved in the process of the provision of financial services by CIBC
to PCF customers.
As was decided in CSMA,
I conclude that the arrangement between CIBC and the appellant under the FSA consisted
in arranging for the provision of financial services to the appellant’s customers
and so constituted an exempt supply as being a financial service within the
meaning of paragraph (l) of the definition of this term in subsection
123(1) of the ETA.
supplies made by PC Bank to CIBC under the LSA
Counsel for the
appellant argues that the supply of PC Points and points program administration
services by Loblaw/PC Bank to CIBC pursuant to the terms of the LSA is part of
a single composite supply included with the supply of services under the FSA.
In counsel’s view, the LSA is entirely intertwined with, and ancillary to, the
FSA. It is submitted that the supply of points is an ancillary element which is
subsumed in the principal element, namely the financial services, so as to form
a single composite supply. That entire single composite supply (inclusive of
the supplies made under the LSA) is thus an exempt supply of a financial
This is particularly so,
in the appellant’s view, because the FSA and the LSA are inextricably bound up
with each other. An example of this is that a breach of one agreement could
serve as a basis for terminating the other (subparagraph 11(a)(iii) of the FSA
and subparagraph 15(a)(ii) of the LSA). Furthermore, in order to become a PCF member
a customer must agree to be enrolled in the loyalty program. Simply put, a
customer cannot waive participation in the loyalty program and remain a PCF member.
From the perspective of
the customer, PC Bank and CIBC, the two programs are inextricably linked. PC
Points are an integral component of what PCF is offering and the value it is
providing and it is one of the key differentiators used to set PCF products
apart from other financial products in the marketplace.
Counsel for the
appellant relies on the following cases, among others: O.A. Brown Ltd v.
The Queen, supra, and Canada Trustco Mortgage Co. v.
R.,  G.S.T.C. 169 (TCC). He concludes that the loyalty program and
the points supplied by PC Bank to CIBC under the LSA are an integral part of
the services supplied by PC Bank pursuant to the FSA. It is through the FSA
that PC Bank arranges for financial products to be provided by CIBC to PC Bank
customers. CIBC in turn awards points to Loblaw customers in respect of these
financial products. From the perspective of the parties involved, the FSA and
the LSA are integral parts of a composite whole, being the arranging for
financial services to be provided to Loblaw customers, which cannot, as a
matter of commercial reality, be sensibly separated into separate supplies.
The appellant concedes,
however, that if this Court determines that the supply of PC Points and points
program administration services by PC Bank to CIBC pursuant to the terms of the
LSA is to be regarded as a separate supply and not part of a composite supply
made together with the supply of services under the FSA, that supply may be a
(ii) Respondent’s argument
The LSA calls for the supply
by the appellant of a points reward program in return for a payment to the
appellant based on the number of points issued to the CIBC. Under the LSA, a
payment was made, initially by Loblaw to CIBC, and then by CIBC to Loblaw/PC
Bank, for the cost of administering the loyalty program. In counsel for the
respondent’s view, the dominant element of the supply is that of intangible
personal property, i.e. the points themselves along with the administrative
services needed to operate the program. No exemption exists for the supply of
points or for the supply of a rewards program or of services for the
administration thereof. Thus the supply under the LSA is taxable under section
165 of the ETA.
In the opinion of
counsel for the respondent, the appellant’s role in the arrangement with CIBC
was incidental to its own business, namely the promotion of the PC trademark
and the selling of points. Such a conclusion, according to counsel, can be
reached through the application of common sense and commercial reality. If this
Court were to find that the appellant was providing a single supply of the
elements referred to in both the FSA and the LSA, counsel is of the view that
that single supply is a taxable supply. As mentioned above, the dominant
elements of the supply are, in counsel’s view, the facilities and trademark
rights and the loyalty program supplied by the appellant. A review of the terms
of payment set out in the contracts, as well as the invoices issued between the
parties, support this conclusion, argues counsel for the respondent.
In his memorandum of
fact and law, counsel also argues that an administrative service is excluded
from the definition of "financial service" (pursuant to paragraph (t)
of the definition of "financial service" in subsection 123(1) and pursuant
to subsection 4(2) of the Financial Services (GST/HST) Regulations), and
that the single supply, if such there was, would be excluded under those
provisions. However, in court, counsel admitted that this argument was weak and
did not have much applicability in the present case, other than with regard to
the small item for administrative costs under the LSA ($119,243 in the
Citing abundantly the
case of O.A. Brown Ltd, Canada Trustco Mortgage Co. summarizes well
the approach to be taken in determining whether there is one single supply
or two distinct supplies. I reproduce here the relevant part of that
decision dealing with this matter (paragraphs 16 to 20):
16 There is a great
deal of jurisprudence on the question of single supply. I can do no better than
refer to the leading case decided by Justice Rip, O.A. Brown Ltd. v. R., 
G.S.T.C. 40 (T.C.C.). In that case the appellant bought livestock
for its customers, not as agent but on its own account. It charged the
customers disbursements and a clearing commission in addition to the cost of
livestock. The Minister assessed GST on the commission and other disbursements.
17 Justice Rip said at
pages 40-5 to 40-7:
The GST legislation is of recent vintage in Canada and
Canadian courts have not judicially considered what may constitute a single or
multiple supply for purpose of GST. The Value Added Tax statute in the United Kingdom contains many provisions similar to our GST. In the English cases the
issue has been defined as whether the supply in question comprises a compound
supply or a multiple supply. A compound supply is a supply where there are a
number of constituent elements which, if supplied separately, some would have
been taxed and some not. With respect to these types of supplies, it is
necessary to determine the quality of the final compound supply for tax
purposes regardless of its constituent elements. A multiple supply has been
defined as a transaction involving the supply of a number of separable goods or
services. Each supply must be considered as an independent supply for tax
purposes, the single consideration being apportioned among the separate
supplies as appropriate.
In deciding this issue, it is first necessary to
decide what has been supplied as consideration for the payment made. It is then
necessary to consider whether the overall supply comprises one or more than one
supply. The test to be distilled from the English authorities is whether, in
substance and reality, the alleged separate supply is an integral part,
integrant or component of the overall supply. One must examine the true nature
of the transaction to determine the tax consequences. The test was set out by
the Value Added Tax Tribunal in the following fashion:
In our opinion, where the parties enter into a
transaction involving a supply by one to another, the tax (if any) chargeable
thereon falls to be determined by reference to the substance of the
transaction, but the substance of the transaction is to be determined by
reference to the real character of the arrangements into which the parties have
One factor to be considered is whether or not the
alleged separate supply can be realistically omitted from the overall supply.
This is not conclusive but is a factor that assists in determining the
substance of the transaction. The position
has been framed in the following terms:
What should constitute a single supply of services
as opposed to two separate supplies, is not laid down in express terms by the
value added tax enactments. It would therefore be wrong to attempt to propound
a rigid and precise definition lacking statutory authority. One must, it seems
to us, merely apply the statutory language, interpreting its terminology, so
far as the ordinary meaning of the words allows, with the aim of making the
statutory system of value added tax a practical workable system. For this
purpose one should look at the degree to which the services alleged to
constitute a single supply are interconnected, the extent of their
interdependence and intertwining, whether each is an integral part or component
of a composite whole. Whether the services are rendered under a single
contract, or for a single undivided consideration, are matters to be
considered, but for the reasons given above are not conclusive. Taking the
nature, content and method of execution of the services, and all the
circumstances, into consideration against the background of the value added tax
system, particularly its methods of accounting for and payment of tax, if the
services are found to be so interdependent and intertwined, so much integral
parts or mere components or items of a composite whole, that they cannot
sensibly be separated for value added tax purposes into separate supplies of
services, then Parliament, in enacting the value added tax system, must be
taken to have intended that they should be treated as a single system,
otherwise, they should be regarded for value added tax purposes as separate
The fact that a separate charge is made for one
constituent part of a compound supply does not alter the tax consequences of
that element. Whether the tax is charged or not charged is governed by the
nature of the supply. In each case it is useful to consider whether it would be
possible to purchase each of the various elements separately and still end up
with a useful article or service.
For if it is not possible then it is a necessary conclusion that the supply is
a compound supply which cannot be split up for tax purposes.
This passage was approved by the Federal Court of
Appeal in Hidden Valley Golf Resort Assn. v. R., 
G.S.T.C. 42 (Fed. C.A.).
18 The approach taken
by Rip J. in O.A. Brown Ltd. did not depend upon the application of the
specific provisions of sections 138 or 139. The premise upon which the
resolution in O.A. Brown Ltd. is based is that a distinction must be
drawn between multiple supplies and a single supply.
. . .
20 For the principle
in O.A. Brown Ltd. to apply there must be an inextricable
interdependency between the two elements so that they are integral parts of a
composite whole that cannot, as a matter of commercial reality, be sensibly
separated into separate supplies. Whether these criteria are met depends
upon a number of factual considerations and these will vary from case to case.
. . .
In the present case,
what is the substance of the transaction between the appellant and CIBC? Can
the LSA subsist by itself independently from the FSA?
On the one hand, we
have two different agreements, but they were entered into at the same time. The
fees received by the appellant pursuant to each agreement are not based on
exactly the same factors, but they are in a way interrelated. Under the FSA,
the fees are calculated in accordance with the number of accounts opened and
the average funds managed by CIBC. Under the LSA, the appellant is reimbursed
by CIBC upon redemption of the points issued by the CIBC to PCF customers. On
the other hand, the appellant would not have concluded the LSA with CIBC
without the FSA. The points issued by CIBC are directly linked to the financial
products offered to PCF members. PCF members are automatically eligible for the
loyalty program established by Loblaw pursuant to the LSA (subparagraph 2(f)(x)
of the FSA and paragraph 2(b) of the LSA).
testified that the FSA was entered into with CIBC, among other reasons, to help
finance the costly point system implemented by Loblaw. CIBC reimbursed PC Bank,
which then reimbursed Loblaw, only for points issued to PCF members. Without
the financial agreement, there would have been no need for CIBC to adhere to
the loyalty program. For customers, what made the PCF products attractive was
not only the financial benefits gained from a no-fee bank account, the Interest Plus
savings account and lower mortgage interest rates, but also the points attached
to those PCF products. As a matter of fact, the FSA provides that CIBC may
attribute the 45 basis point spread to product or service pricing by reducing
fees, changing interest rates or by awarding loyalty points, or a combination
thereof (clause 2(d)(i)(b) of the FSA, Exhibit A-1, Tab 1, page 12).
In my view, if we look
at the degree to which the supply of PCF products and the supply of points
attached to that supply are interconnected, interdependent and intertwined, the
conclusion must be that the supplies effected under the FSA and under the LSA
are both components of a composite whole. The fact that a separate charge is
made for one constituent part of the supply is not conclusive and does not
necessarily alter the tax consequences of that one element. As stated by
Judge Rip (as he then was), in O.A. Brown, supra, (at page
40-7), it is useful to consider whether it would be possible to purchase each
of the various elements separately. Here the points cannot be issued by CIBC
without the PCF products. The two elements are interrelated and, as a matter of
commercial reality, could not be sensibly separated into separate supplies (Canada
Trustco Mortgage Co., supra, at paragraph 20).
As to the respondent’s
argument that the awarding of points is the dominant element and that the supply
of PCF products is only ancillary thereto, I do not accept this proposition.
First of all, the revenues resulting from each of the FSA and the LSA during
the period at issue were almost the same. Furthermore, if one of the supplies in
question is ancillary to the other, I would be inclined to say that the supply
made under the loyalty program is ancillary to the supply of PCF products; the
points are a means to better enjoy the advantageous financial products. (See Card
Protection Plan Ltd v Customs and Excise Comrs,  All. E.R (EC)
339 Court of Justice (Sixth Chamber) of the European Communities, 25 February
1999, at paragraph 30, referred to by counsel for the appellant).
Indeed, I agree with
the appellant that the value of the PC Points earned by Loblaw customers on the
purchase of groceries was dwarfed by the value they received from the no-fee
banking and favourable savings and lending rates offered by PC Bank. The uncontradicted
example given by Mr. Lengyell is self‑explanatory. For an average
Canadian family spending approximately $600 per month on groceries,
the value of the PC Points earned would be approximately $36 annually. In
contrast, the same family with an average mortgage of approximately $300,000 with
a one per cent reduction in its mortgage rate over that charged by a standard
Canadian bank would enjoy annual savings of $3,000. Clearly, the relative value
of the discounted PCF products greatly surpassed the value of the PC
Points issued to a PCF customer (see appellant’s memorandum of fact and law,
page 5, paragraph 25).
With respect to the
administration of the loyalty program, for which the appellant received $119,243
during the period at issue, section 5 of the LSA sets out in the following
terms the services to be performed thereunder:
[. . .] the following administrative services and any other services
which may from time to time be agreed to by the parties in writing (collectively,
the "Administrative Services"):
enrol each PCF Customer as a Member;
attempt to obtain Member Identifying Information
from each PCF Customer upon his or her enrolment as a Member;
advise each Member as to the various uses and
transfers of Member Identifying Information and Program Information set forth
in Section 8 of this Agreement and shall provide a valid opportunity to each
such Member to object to such uses or transfers of the Member Identifying
Information and Program Information;
record any changes to Member Identifying
Information as provided to CIBC from time to time;
on behalf of Loblaw, establish, maintain and
operate (including updating on a regular basis) a Points Account for each
provide each Member access to his or her Points
Account, free of charge, through PCF automated banking machines, the PCF
telephone banking facility and the PCF Internet site;
establish and maintain all controls and
procedures which are necessary to protect, enhance and safeguard the integrity
and confidentiality of Program Information and Member Identifying Information
as if such Program Information and Member Identifying Information were its own;
make available to Loblaw upon Loblaw’s request
(which shall be no more frequently than once per week) in electronic format
such Member Identifying Information and Program Information that CIBC has
collected during that month and Member identification numbers which permit
cross-referencing between the identity of Members and SKU Information;
allow each Member to obtain, free of charge,
Redemption Certificates from each PCF automated banking machine; and
track, accumulate and report to Loblaw at least
once a month the number of Loyalty Points issued to, withdrawn by and / or
redeemed by each Member and, in the case of withdrawals, the location of each
PCF automated banking machine from which a Redemption Certificate was issued to
such Member and the number of Loyalty Points withdrawn by such Member in
respect of each Redemption Certificate.
In Promotions D.N.D.
Inc. v. R.,  G.S.T.C. 79 (TCC), it was decided that the mere
distribution and reviewing for completeness of credit card applications
constituted a financial service and did not constitute an administrative
service as contemplated in the Financial Services (GST/HST) Regulations.
In Royal Bank 2005,
Bowie J. of this Court specifically considered the application of paragraph (t)
of the definition of "financial service" in subsection 123(1) of the
ETA and of section 4 of the Financial Services (GST/HST) Regulations as
follows, at paragraph 18:
18 The Appellant argues that, in any event, the branch
services cannot come within the definition of financial service because they
are administrative services, and therefore are specifically excluded from the definition
by paragraph (t) and section 4 of the Regulation. This provision
has been considered only twice by this Court, and neither case sheds any light
on the meaning of the expression "any administrative service"
("les services administratifs"). The Canadian Oxford Dictionary (2nd Ed.) gives this definition at page 17:
administrative: concerning or relating to the management of affairs.
Other dictionaries, both French and English, are no less vague.
Clearly this expression is both broad and elastic in meaning, but it seems
clear that when read in its context within the statutory scheme of Part IX of
the Act, and relative to the definition of "financial service"
("service financier") in particular, it is intended to exclude from
that definition such ancillary services as data processing, record keeping and
the like, but not those activities enumerated specifically in the first part of
the definition for inclusion within it, of which arranging for the distribution
of securities is certainly one. In my view paragraph (t) of the
definition and the Regulations have no application in this case.
Department of Finance
News Release 90-103 (August 20, 1990), referred to by counsel for the appellant
in paragraph 106 of the appellant’s memorandum of fact and law, provided the
following background information regarding the Financial Services (GST/HST)
106. . . .
The Definition of a Financial Service
… Bill C-62 contains provisions for prescribing services as either
financial services or as excluded from the financial service definition. These
provisions provide the flexibility to address any necessary technical
refinement to the definition of a financial service contained in the Bill. The
prescribed services will be defined by regulations to be released over the
coming weeks. This note outlines the intention and effect of these regulations.
B. Third Party Administrative Services
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
It is worth noting that this regulation will affect only services
that would otherwise be considered to be financial services under paragraphs
(a) to (m) of the definition under subsection 123(1). Therefore, this
regulation will not affect services that are not captured by these paragraphs
and, as a result, would not be financial services in the absence of this
Services that will be prescribed under paragraph (t) as excluded
from the definition of a financial service will, in broad terms, be described
(a) the service of transferring, collecting or
(b) an administrative service involving the
payment or receipt of dividends, interest, principal, claims, benefits, or any
other amount, (other than a service that is solely the transfer of money from
one person to another) or,
(c) any other service of an administrative
The services with
respect to the administration of the loyalty program, as described in section 5
of the LSA reproduced above, are provided within the framework of that program,
under which points are awarded to PCF customers. These services in themselves
are not otherwise considered to be financial services under paragraphs (a)
to (m) of the definition in subsection 123(1) of the ETA. However, they
are ancillary to the services supplied under the FSA and therefore part of the
financial services provided by PC Bank through CIBC. In my view, they do not
fit in with what the case law and the Department of Finance News Release
describe as being administrative services related to those activities
specifically enumerated in the definition of "financial service" in
subsection 123(1) of the ETA.
I therefore conclude
that the administration of the loyalty program, for which PC Bank was paid $119,243
by CIBC, was part of the consideration received by the appellant in respect of
the single exempt supply made under the FSA and the LSA and therefore was not
subject to GST.
III. Is PC
Bank entitled to notional input tax credit (ITCs) pursuant to 181(2) and 181(5)
of the ETA on the PC Points redeemed at Loblaw?
PC Bank submits that,
pursuant to subsection 181(5) of the ETA, it is entitled to claim notional
input tax credits equal to 7/107 of the amount of "reimbursement" made
by it to Loblaw in consideration for Loblaw accepting PC Points as full or
partial consideration for products purchased by customers of Loblaw.
It is the respondent’s
position that PC Bank is not entitled to notional input tax credits equal to
7/107 of the value of PC Points redeemed by it because PC Points do not
have a "fixed dollar" value as required by subsection 181(5) of the
ETA. Instead, the respondent says, subsection 181(4) of the ETA properly
applies to the redemption of PC Points.
(i) Legislative framework
Subsection 181(4) of
the ETA provides as follows:
(4) Acceptance of other coupons – For the purposes of this
Part, if a registrant accepts, in full or partial consideration for a supply of
property or a service, a coupon that may be exchanged for the property or service
or that entitles the recipient of the supply to a reduction of, or a discount
on, the price of the property or service and paragraphs (2)(a) to (c) do not
apply in respect of the coupon, the value of the consideration for the
supply is deemed to be the amount, if any, by which the value of the
consideration for the supply as otherwise determined for the purposes of this
Part exceeds the discount or exchange value of the coupon.
Subsection 181(5) of
the ETA states the following:
(5) For the purposes of this Part, where in full or partial
consideration for a taxable supply of property or a service, a supplier who is
a registrant accepts a coupon that may be exchanged for the property or
service or that entitles the recipient of the supply to a reduction of, or a
discount on, the price of the property or service and a particular person at
any time pays, in the course of a commercial activity of the particular person,
an amount to the supplier for the redemption of the coupon, the following
(a) the amount shall be deemed no to be consideration for a
(b) the payment and receipt of the amount shall be deemed not
to be a financial service; and
(c) if the supply is not a zero-rated supply and the
coupon entitled the recipient to a reduction of the price of the property or
service equal to a fixed dollar amount specified in the coupon (in this
paragraph referred to as the "coupon value"), the particular person,
if a registrant (other than a registrant who is a prescribed registrant for the
purposes of subsection 188(5)) at that time, may claim an input tax credit for
the reporting period of the particular person that includes that time equal to
the tax fraction of the coupon value, unless all or part of that coupon value
is an amount of an adjustment, refund or credit to which subsection 232(3)
Counsel for the
appellant argues that subsection 181(5) of the ETA is intended to apply to the
redemption of coupons whose value is equal to a "fixed dollar amount"
whereas subsection 181(4) is intended to apply to coupons that may be exchanged
for a property or service or that entitle the recipient of the supply to a
discount on the price of property, that is, coupons whose value is equal to
something other than a "fixed dollar amount". Counsel states, by way
of example, that subsection 181(5) would apply to a coupon which provided for a
$20.00 discount whereas subsection 181(4) would apply to a coupon which offered
a percentage discount or to a two‑for‑one meal voucher. The parties
do not dispute that PC Points qualify as coupons for the purposes of section
181 of the ETA. The issue is whether PC Points have a "fixed dollar"
value as required by subsection 181(5).
Counsel for the
appellant paraphrased subsection 181(5) as follows to show what conditions must
be met in order for it to apply:
(i.e., Loblaw) must make taxable supplies and accept a "coupon" in
full or partial consideration therefore,
(i.e., the Loblaw customer) is entitled to a discount of a "fixed dollar
amount" on the price of the Loblaw supplies,
person" (i.e., PC Bank) pays, in the course of its commercial activity, an
amount to Loblaw for redeeming the PC Points coupon, and
Loblaw’s supply (in
respect of which the PC Points coupon is redeemed) must not be a zero-rated
According to Mr.
Lengyell’s testimony, Loblaw calculates the GST on the full sale price, that
is, the price before the coupon value is deducted. The customer’s receipt
indicates that the customer was charged GST on the total amount of the taxable
items purchased. According to Mr. Lengyell, the redemption of PC Points
entitles the customer to a reduction of the price equal to a fixed dollar
amount. For example, if the Loblaw customer redeemed 20 000 points, the
customer would receive a $20 discount on the price of the groceries purchased.
Counsel for the
appellant argues that the opening words of subsection 181(5) indicate that the
time at which the value of a coupon must be ascertained, that is, the
"fixed dollar amount", is not at the time of issuance but at the time
of redemption of the coupon, i.e. the time at which Loblaw "in . .
. consideration for a . . . supply of property . . . accepts a coupon".
Counsel for the
appellant further submits that the third condition laid down in subsection
181(5) has also been met. PC Bank pays an amount to Loblaw with respect to the
redemption of the PC Points, which it does in the course of its commercial
activity. It should be remembered here that the appellant previously argued
that the supplies made by PC Bank to CIBC under the LSA (points awards) are
exempt supplies which by definition are excluded from the definition of
commercial activity in subsection 123(1) of the ETA. However, counsel submits
that the PC Points coupons are issued, at least in part, in the course of a
commercial activity of PC Bank because that entity is engaged in commercial
activities, such as the sale of PC Points to Petro-Canada.
Counsel for the
respondent submits that the value of the PC Points was subject to change at any
time. According to the documentation provided to the public (Exhibit A‑1,
Tab 9), Loblaw reserves the right to restrict, suspend or change any aspect of
the loyalty program with or without notice and has the right to cancel a person’s
participation in the program. PC Points are not transferable. In counsel’s
view, since PC Points may be redeemed only after certain thresholds are met,
and because their value may change or the points may be cancelled, it is
difficult to argue that the PC Points have a fixed dollar value as argued by
the appellant. As a matter of fact, the document setting out the terms and
conditions governing PC Points (Exhibit A‑1, Tab 9, last page)
specifically states that PC Points are not transferable and have no cash
for the respondent argues, subsection 181(5) has no application. In his view,
subsection 181(4) applies such that the points are treated as reducing the
consideration paid for a supply rather than as constituting consideration for a
In the alternative, argues
counsel for the respondent, if the court finds that the supplies in question
are exempt supplies and that the points have a fixed value, the appellant
should not be entitled to ITCs under subsection 181(5) because ITCs are only
available where the particular person claiming them has redeemed the coupons
while in the course of engaging in a commercial activity and the appellant
would no longer meet the commercial activity requirement.
In my view, counsel for
the appellant is right in his interpretation of subsection 181(5). It is at the
time of redemption of the coupon that we have to determine whether that coupon
has a fixed dollar value. Subsection 181(5) states that:
. . . where . . . a supplier . . . accepts a coupon . . .
that entitles the recipient of the supply to a reduction of, or a discount on,
the price of the property or service and a particular person at any time
pays, in the course of a commercial activity of the particular person, an
amount to the supplier for the redemption of the coupon, . . .
(c) if . . . the coupon entitled the recipient to a reduction
of the price of the property or service equal to a fixed dollar amount
specified in the coupon (in this paragraph referred to as the
"coupon value"), the particular person . . . may claim an input
tax credit . . .
The February 1993
Technical Notes issued by the Department of Finance describe the policy
rationale which informs subsection 181(5) of the ETA:
. . .
Subsection 181(5) also entitles the issuer [PC Bank] of a
reimbursable, fixed dollar value coupon to claim an input tax credit equal to
7/107ths of that value when the issuer redeems the coupon from the vendor
[Loblaw]. By allowing the issuer an input tax credit, subsection 181(5) ensures
that the correct overall net amount of GST is remitted to the government in
respect of the supply by the vendor . . .
It can be inferred from
these Technical Notes that the fixed dollar value has to be established at the
time the issuer (PC Bank) redeems the coupon from the vendor (Loblaw). Even
though the respondent is right in saying that the coupon does not have any cash
value when it is issued, this is not what is required by subsection 181(5). What
we need to determine is whether a fixed dollar value exists at the time of
redemption. There is a cash value at that time: there is a paper coupon or an
electronic device showing a fixed dollar amount for the points redeemed; that amount
is applied as a discount on the price of groceries purchased and is recorded on
the customer’s invoice.
However, I am of the
view that PC Bank should not be entitled to ITCs on points awarded on PCF
products and subsequently redeemed. Indeed, I have decided that the supplies of
these PC Points in accordance with the LSA are part of the financial services
offered by PC Bank through CIBC and are not subject to GST, as they are exempt
supplies. Since they are exempt supplies, PC Bank does not make them in the
course of a commercial activity.
For points awarded on
taxable supplies, PC Bank should be entitled to ITCs when it pays for the
redemption of those points.
IV. Penalties under section 280 of the ETA
Considering the above
conclusion, the penalties assessed are not justified.
The appeal is allowed,
with costs in favour of the appellant, and the assessment under appeal is
referred back to the Minister of National Revenue for reconsideration and reassessment
taking into account that the audit adjustments for the years ended December 29,
2001 and December 30, 2002 referred to in paragraph 20 of the Partial Agreed
Statement of Facts (reproduced at paragraph 3 of the present reasons for
judgment) are to be cancelled in totality.
With respect to the
ITCs claimed by the appellant pursuant to subsection 181(5) of the ETA, the
appellant is not entitled to any ITCs with respect to points awarded on PCF
products and subsequently redeemed. The appellant is only entitled to ITCs in
respect of points awarded on taxable supplies and subsequently redeemed.
Signed at Ottawa, Canada, this 9th
day of April 2009.
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