Citation: 2007TCC281
Date:20070912
Docket: 2003-4234(GST)G
BETWEEN:
ROYAL BANK OF CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
I. Introduction
[1] The Royal Bank of Canada
(“RBC”) appeals a Notice of Reassessment dated August 29, 2003, pursuant to
which the Minister of National Revenue (“Minister”) assessed the Appellant for
$6,641,714.00 of Goods and Services Tax (“GST”) for the period from November 1,
1996 to October 31, 1999. The appeal concerns payments made by RBC to Canadian
Airlines International Ltd. (“CAIL”), a domestic and international airline,
under an affinity credit card agreement. Pursuant to this agreement CAIL issued
frequent flyer points to credit card holders using a RBC Visa Canadian Plus
credit card (the “Affinity Card”).
[2] Under the terms of the agreement between
RBC and CAIL, RBC granted credit and provided credit card services to holders
of the Affinity Card. Cardholders were also enrolled in CAIL’s frequent flyer
program and received frequent flyer points for card usage. Generally, under the
Affinity Card program, for every dollar of qualifying spending on the Affinity
Card, the cardholder received one frequent flyer point which could be redeemed
for CAIL’s travel services. RBC made payments to CAIL according to the number
of frequent flyer points issued by CAIL to Affinity Card holders.
[3] The principal issue in this appeal is the
proper characterization of the supply for which the RBC payments were made. The
Appellant does not dispute the calculation of the GST amount, if the supply is
taxable.
[4] The Minister argues that RBC is the
recipient of a taxable supply of property made by CAIL, namely frequent flyer
points, which is subject to GST under the Excise Tax Act (GST Portions)
(the “Act”).
[5] The Appellant argues that CAIL made a
supply of services which formed part of a service being supplied by RBC to its
credit card holders. On this basis, the
Appellant contends that the payments to CAIL were made for the supply of exempt
financial services in respect of which no GST is payable. In the alternative,
the Appellant argues that if it acquired or was a recipient of the supply of
frequent flyer points, such supply by CAIL was a supply of gift certificates
and not subject to GST. In the further alternative, CAIL as supplier was liable
to collect and remit any GST payable and was already assessed on that basis in
respect of the same transactions at issue in the current appeal. The Appellant
therefore argues that the assessment against CAIL has given rise to a tax
liability and to find the Appellant liable for the same tax on the same supply would
constitute double taxation.
II. Factual Background
[6] The underlying facts are set out by the
parties in an Agreed Statement of Facts which is attached to these Reasons as an
Appendix. The parties also submitted a Joint Book of Documents. No witnesses
gave evidence at the hearing. Briefly, the facts are as follows.
[7] On March 1,
1994, RBC and CAIL entered into an Affinity Card Program Agreement (the
“Agreement”). Under the Agreement, CAIL was to actively advertise, market, and
promote the product including maintaining supplies of application forms. CAIL’s
obligations included displaying advertising material, advising current and
prospective customers of the
existence and availability of the Affinity Card program, accepting the credit
card in payment for airline travel services, and engaging in periodic marketing
and promotion activities such as direct mail campaigns. CAIL was also
responsible for
providing “ancillary services” (as set out in Schedule “G” of the Agreement) which included the
awarding of frequent flyer points called “Canadian Plus” reward points
(“Points”) to cardholders. The Points were to be issued at the rate set out in
Schedule “G” of not less than one Point for every dollar of qualifying credit
card spending. The Points themselves had no assigned cash value but could be
redeemed for travel services with CAIL.
[8] Under the terms of the Agreement, RBC was
responsible for issuing Affinity Cards and providing and administering the
credit card financing services to cardholders. RBC agreed to offer the Affinity
Card with, at a minimum, the same credit financing information and terms and
conditions as the RBC Visa Classic Card product. In accordance with the terms
of the Agreement, CAIL did not participate in the screening, reviewing or
submitting of Affinity Card applications to RBC.
[9] At the outset, each party bore its own
costs and expenses in connection with their respective roles under the program.
More specifically, section 1 of Schedule “H” of the Agreement provided
that CAIL was to pay all costs and expenses incurred in connection with issuing
Points. Under section 2 of Schedule “H”, RBC was responsible for its costs
and expenses incurred in administering the credit card services. Costs in
respect of marketing and promotion were to be shared.
[10] Pursuant to an amending agreement dated May 1, 1994 (the
“1994 Amended Agreement”), the cost sharing provisions for marketing and
promotion expenses associated with the Affinity Card program were amended to
set the maximum amount payable by CAIL in any year at $200,000. The 1994 Amended
Agreement covered joint marketing initiatives and the development of an annual
marketing plan and an annual customer service plan for the program. The 1994
Amended Agreement also set out the procedure for CAIL to credit Points to cardholders
and required RBC to make monthly reimbursements for the costs and expenses
incurred by CAIL in issuing the Points to cardholders. The amount to be paid to
CAIL was determined according to the rate set out in section 4.1 of the 1994
Amended Agreement. Section 4.1 reads as follows:
4.1 Notwithstanding Section
1. of Schedule “H” of the Agreement, the Bank agrees to reimburse Canadian for
the costs and expenses Canadian has incurred relative to the issuance by
Canadian of Points to Cardholders pursuant to Section 2.(a) of Schedule “G” of
the Visa Agreement at the rate of $0.0085 per Point issued or at such other
rate(s) as Canadian and Royal Bank have agreed to in writing.
This original rate of $0.0085 per Point
was adjusted in subsequent amendments to $0.01 per Point issued.
[11] CAIL did not charge or collect GST from RBC
on the payments made pursuant to section 4.1 of the 1994 Amended Agreement.
Where Points were purchased by RBC for use in certain in-house promotions, GST
was paid by RBC.
[12] CAIL commenced proceedings under the Companies
Creditors Arrangement Act (“CCAA”) in March of 2000. Pursuant to
these proceedings, a Plan of Compromise and Arrangement (the “Plan”) was filed. The Plan released
CAIL of its liabilities arising
before March 24, 2000. The Plan was accepted by CAIL’s creditors, including the Canada
Revenue Agency (the “CRA”), and approved by the Alberta Court of Queen’s Bench.
The approval of the Plan led to the merger of CAIL with Air Canada. CAIL was not assessed
for GST remittances in respect of the payments made to it by RBC pursuant to
section 4.1 of the 1994 Amended Agreement until June of 2000.
[13] RBC was first
assessed for GST payable in respect of such payments in January 2001. After a
series of assessments and objections and adjustments, the Notice of Reassessment that is the subject
of this appeal was issued in August 2003.
III. Issues
[14] The issues to be decided in this appeal are
as follows:
A. Were the payments made
by RBC to CAIL in consideration for taxable supplies or did CAIL supply a
GST-exempt financial service?
B. In the alternative, did
CAIL make a supply of non-taxable gift certificates in the form of the Points
to RBC?
C. Does the prior
assessment of CAIL for GST preclude the subsequent assessment of RBC for the
same supply?
IV. Arguments and Analysis
A. The Supply of a Financial Service
[15] In addition to section
165 of the Act which provides that the recipient of a supply must
pay the GST on the consideration paid for the supply, it is important to note that
the term “recipient” is defined in section 123 of the Act to include:
…
(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,
…
and any reference to a person to whom a supply is made shall be read
as a reference to the recipient of the supply;
[16] In this appeal, the
Appellant does not dispute that pursuant to paragraph (a) of this definition, it
is the recipient of a supply. It is not in dispute either that the Points are
property capable of being a supply paid for under the 1994 Amended Agreement.
The Appellant rather contends that the Points were not the supply for which
consideration was paid. The threshold question then is whether the supply
or the dominant element of the supply was the issuance of Points. If so and if
such finding supports the further finding that the consideration paid by RBC to
CAIL was for this supply, as a single supply, the Appellant’s principal
argument cannot prevail.
[17] The Appellant argues that the payments to CAIL fell under the definition
of “financial service” as they were made not for Points but for services that
were in the nature of “arranging for” the “granting of any credit”. Under the Act, “financial service” includes:
…
(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), or
…
but does not include
…
(t) a prescribed service;
[18] The Appellant argues
that CAIL participated in the establishment and operation of the Affinity Card
program, including either specifying or agreeing to specified terms and
features of the credit card product. The Appellant argues that
such participation is sufficient to constitute “arranging for” the credit
services made available by RBC and relies on the ordinary meaning of the verb
“to arrange”, which means “to plan or to provide for; to cause to occur.” The Appellant argues that the Affinity
Card and its credit facility would not be available but for CAIL’s role. As a
matter of causation, CAIL’s participation was essential.
[19] The Appellant relies
on the English Court of Appeal decision in Customs & Excise
Commissioners v. Civil
Service Motoring Association (“CSMA”),
relating
to a similar financial service exempting provision in the United Kingdom Value
Added Tax legislation (VAT). In CSMA, the English Court of Appeal held that the participation of the
automobile association in a credit card program fell within the VAT exemption
for financial services because it was involved in the design and operation of
that program and was paid commissions for credit card use. The Court found that
it was not necessary for the automobile association to be involved in
individual applications and credit approvals in order to meet the exemption of
making arrangements for the granting of credit.
[20] The Appellant argues
that CAIL, like the automobile association in CSMA, was involved in the
design and operation of the subject credit card program and that CAIL was paid
for credit card use. Payments by RBC to CAIL were set at a rate per dollar of
credit extended by the use of the Affinity Card which should be seen as a
commission for helping to arrange the credit line granted to Affinity Card
holders. This reflects the true nature and character of the service for which CAIL
was paid, namely its role in giving birth to and facilitating a credit granting
business. The Appellant contends that the reference to the payments as
reimbursements for the Points in the 1994 Amended Agreement should not be determinative
of their nature and cites Hidden Valley Golf Resort Association v. Her Majesty the
Queen as authority for this principle.
[21] The Respondent’s position is premised on
the argument that the dominant element of the supply made by CAIL is the
issuance of the Points and relies on the
decision of this Court in O.A. Brown Ltd. v. Her Majesty the Queen, which has
been cited as the seminal case for single and multiple supplies. The Respondent
argues the present appeal is not about CAIL being paid for arranging credit, it
is about acquiring a perk to enhance credit card use. While the Affinity Card
program was a joint program under which CAIL was to promote the issue and use
of the card by its customers and potential customers, the dominant service was
promoting use of the card by the issuance of Points to card users. This is
reflected by the fact that $200,000,000 in payments for Points dwarfed the cost
of every other element in the contract. Whereas the Agreement, as amended,
limits the cost to CAIL of providing non-monitored promotional services to no
more than $350,000 per year, accounts for Points, in contrast, were issued and
paid monthly.
[22] Further, while the original Agreement provided that
each party was to pay its own expenses, the 1994 Amended Agreement provided
that CAIL’s costs and expenses incurred relative to the issuance of Points was
to be reimbursed at a rate per Point. There was a legal obligation to
pay consideration in respect of the issuance of the Points and the link between
the payment and that supply is close enough for the payment to be regarded as
having been made “for” that supply.
[23] The Respondent
relies on the fact that services provided by CAIL did not include responsibility for screening,
reviewing or submitting applications for the Affinity Cards and could not
thereby be considered to be services supplied in the course of “arranging for”
the supply of credit. Only RBC reviewed and screened applications and granted
the approvals necessary for the cards to be issued. The credit facility and
services were established, provided and administered by RBC. In this sense they
were wholly arranged by RBC. Accordingly, the Respondent submits that there was
no supply of financial services by CAIL even if the dominant element of the
single supply was not Points.
[24] In this regard the
Respondent argues that the Appellant’s services did not meet the threshold
requirement for “arranging for the granting of credit” as set down in Les Promotions D.N.D. Inc. v. Her Majesty
the Queen and the administrative practice set
out by the CRA in Policy Statement P-239.
[25] Finally, Respondent’s counsel argues that paragraph
(t) of the definition of “financial service” and subsection 4(2) of the Financial
Services (GST/HST) Regulations, (the “Regulations”) apply to exclude
the services supplied by CAIL to the extent they might otherwise be regarded as
financial services.
[26] I will first consider
the decision of O.A. Brown which
looked to the English VAT authorities. In his Reasons for Judgment, Rip J.
considered such authorities and explained at page 2095:
21 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 entered.
[Emphasis added]
[27] The Appellant does
not deny that it was the recipient of a single supply of which part of, or a
component of, was Points. However, the Appellant asserts that this component
was not the property or the supply for which payment was made by
it to CAIL. I do not agree. Not only is that the most substantive aspect of the
supply to which all else relates but there is in my view no substantive single
supply of the financial services variety relied on by the Appellant.
[28] The substantive focus of the program was to
promote use of the Affinity Card by the issuance of Points for such use. Everything
CAIL did from being involved in establishing the terms of the credit facility
to advertising the program was to promote the use of the card by the issuance
of Points and that is what it was paid for – the issuance of Points. When the
Appellant acquired Points for its own use, it paid the same price for the
Points. As well, when there was a separate purchase for promotional purposes,
it paid the same price for the Points.
In all cases, CAIL was paid for issuing Points and not for its role in setting
up the program. Paragraph 4.1 of the 1994 Amended Agreement says exactly that. That
is, the sole dollar consideration forming the subject of this appeal was paid
for the acquisition of Points. If no Points were issued, there was no
consideration payable. Further, from CAIL’s perspective, by selling Points, it was
selling air travel services which was its business. While the consideration
payable is referred to as cost recovery payments, it seems apparent that such
cost was the cost of giving free air travel. Accordingly, I find that the
subject payments are not payments for the supply of a financial service.
[29] In coming to this
conclusion, I have not ignored the critical role CAIL played in the
establishment of the Affinity Card program and the extent of credit use thereby
generated for RBC. However, having considered the authorities cited by the
parties and the meaning of the phrase “arranging for” in the definition of
“financial service”, I find there is no other perspective of this appeal that
would change my conclusion that the consideration paid was for the issuance of the
Points.
[30] The Appellant argues
that the statutory language “arranging for” must be given a broad
interpretation and that finding that CAIL’s role in setting up the program was
essential to the granting of credit under the program requires a finding that
it arranged for the granting of credit. To support a broad interpretation of
the language “arranging for”, the Appellant relies on the ordinary meaning of
the word “arrange” and on D.N.D. Promotions which accepted a fairly
minimal threshold as to what would constitute “arranging for” the granting of
credit.
[31] In D.N.D. Promotions, the taxpayer’s
business was promoting credit cards. The taxpayer’s employees distributed the
credit card applications in shopping centres. The employees would review the
applications for completeness and then the taxpayer would send the applications
to the credit card company for approval. The taxpayer had no decision making
capacity or involvement in the granting of credit. The Minister denied the ITCs
sought by the taxpayer on the basis that the taxpayer was providing the exempt
financial service of arranging for the granting of credit pursuant to paragraph
(l) of the statutory definition. This Court agreed with the Minister and the
decision of the Court formed the basis for the CRA’s administrative practice, as set out
in Policy Statement P-239.
[32] Appellant’s counsel
argues that if checking an application for completeness was sufficient to
constitute “arranging for” granting credit, then surely establishing the terms
of the credit for cardholders must be seen as “arranging for” the credit
granted under such terms. CSMA is a clear and persuasive authority for
the view that that role overshadows the supply of property (Points). As well, the
Appellant would rely on D.N.D. Promotions as authority for not invoking the exclusion in paragraph
(t) of the definition of “financial service”.
[33] Paragraph (t) of the definition of
“financial service” excludes prescribed services and subsection 4(2) of the Regulations
excludes as financial services the transfer, collection or processing of
information and any administrative service. If reviewing credit card
applications was not an administrative service excluding it from being a
financial service, then surely establishing the terms of the credit for cardholders could not be excluded under paragraph (t)
of the definition of “financial service”.
[34] While I agree with
the Appellant’s argument that D.N.D. Promotions supports a broad
construction of the phrase “arranging for” and that arranging credit terms on
behalf of cardholders goes well beyond any prescribed administrative exclusion
set out in subsection 4(2) of
the Regulations, these conclusions do not rescue the Appellant from my
finding that what was paid for in the present appeal was so materially tied to
another supply (the Points) as to be subsumed in that dominant supply. In my
view, there was no severable consideration paid for “arranging” the terms of
credit role served by CAIL. The entire consideration I have been addressing is
clearly consideration paid for the Points. Establishing and promoting credit
card use was a means to issue Points which as noted above was a form of selling
air travel services. Ensuring competitive credit card terms was not done in an
intermediary capacity as a service to RBC or credit card users nor was
consideration paid for such a service; it was a condition of CAIL’s
participation in the program to encourage use of the Affinity Card in order to
sell Points.
[35] This fact also
distinguishes the present appeal from CSMA. The automobile association
in CSMA played an active intermediary role in negotiating the terms of
the credit facility being offered to its members. On behalf of its members, the
automobile association designed a credit card arrangement for the specific
purpose of granting credit to those members. Critical terms of the credit
arrangement, such as interest rates, were negotiated for members. An
arbitration process for members was put in place. The Court determined that the
nexus between the intermediary’s function and the credit granting process
warranted a finding that the compensation paid was a commission for these
credit arrangement services. Such services were the dominant aspect of the supply
provided and paid for. The substantive element and real character of the supply
in that case was to arrange favourable, special credit terms and benefits for
its members from the financial institution granting the credit facility.
Indeed, there was no other supply, like a supply of Points, made in CSMA.
[36] In the case at bar,
there is no supply, other than the Points, to which the payments can be
attributed. The major terms of the credit card contract are set out in the
Agreement but there is no evidence of negotiations on behalf of cardholders. Listing
RBC services and ensuring that the financing services to be provided by RBC were
to be at least the same as those provided under RBC’s Visa Classic Card, do not
in themselves speak to an intermediary role on behalf of cardholders. An interest
in the attractiveness of the terms of the cardholder contract speaks more to
CAIL’s financial interest in selling Points than to its role as an
intermediary.
[37] A finding that CAIL
was not a financial intermediary arranging for credit for cardholders is
further supported considering its role in terms of risk. There are situations
where the business of an intermediary might put that intermediary at material
risk for credit failures or card service failures. Such cases go beyond the
mere administration excluded under paragraph (t) of the definition of “financial
service” and would more clearly be an exempt financial service under the
“arranging for” provisions. However, CAIL had no business risk in the credit
granting process. The liability, indemnity and save harmless provisions in the
Agreement sought to ensure that CAIL did not bear any risk in respect of the
credit financing services provided by RBC. Its role was the provision of travel
services, for a fee.
[38] Further, I do not accept the Appellant’s argument
that the subject payments received by CAIL were made as commissions for credit
card usage. Credit card usage was the yardstick used to measure the Points
being bought and sold. Tools or reference points used to measure the amount of
consideration payable for that supply should not be mistaken for the supply. Clearly CAIL could
increase its revenue from this arrangement by promoting the Affinity Card and
offering good value for the Points issued. Shared advertising and marketing
costs then do not relate to promoting credit card use from a credit financing
perspective but relate to increased sales revenue that result from increased
card use. Promoting the use of a
credit facility may have been good business for CAIL but is not to be seen as
“arranging for” the granting of that facility.
[39] To conclude, I find
that CAIL’s role in arranging the credit facility was incidental to its own
business of selling Points. This follows as a matter of common sense and
commercial reality. CAIL sold travel services. Selling Points was selling
travel services. The Appellant purchased travel services as a reward for use of
its Affinity Card which in turn increases its revenues. All else is incidental
to this synergistic arrangement. It is simply not reasonable to find on the
facts of this case that CAIL played any substantive role in arranging for the
granting of credit by RBC.
[40] Before turning to
the Appellant’s alternative arguments I note that while I have only made
reference to one English case on this issue of “arranging for” the granting of
credit (CSMA), I was referred to a number of other English cases. The
cases referred to by the Appellant, like CSMA, involved non-financial
organizations endorsing a particular credit card product. The Respondent on the other hand
relied on the case of Tesco plc v. Commissioners for Customs and Excise which dealt with, and which cited
other English cases dealing with, customer loyalty incentive programs. These
cases were factually more comparable to the case at bar than the endorsement
line of cases relied on by the Appellant. Unlike CSMA, Tesco involved
the issuance of patronage reward points in a credit facility program and unlike
CSMA, the point issuer (Tesco) was found to have supplied promotional
services which could not be regarded as arranging credit.
[41] In Tesco there were a variety of
programs considered. In very general terms, customer loyalty reward points were
issued for vouchers for future purchases. The Court found that no part of the
purchase price paid by consumers for goods was consideration for such rewards.
Likewise, the Court held that assisting another party’s business by issuing
points for consideration to that other party or that other party’s customers
should be treated as a promotional service as opposed to a sale of property.
While this latter conclusion does not accord with my findings in the case at
bar, it does not assist the Appellant. Had I reached a similar conclusion on
the facts as reached in Tesco and determined that the
Appellant paid for promotional services from CAIL, the result, as in Tesco,
would be that such services are not exempt financial services. Promotional
services do not constitute “arranging
for … the granting of any credit”.
[42] Considering the authorities as a whole, it
is apparent that there is no one principle that might apply to any given
situation. It is always a question of fact as to how GST will be applied in the
context of a particular affinity or loyalty program. While the contractual
agreements relating to the program and the actual manner in which the program
is conducted will generally dictate how GST will be applied, it is always open
for a Court in each case to determine the substance of the supply for which
consideration was paid. As stated, the express language in section 4.1 of the
1994 Amended Agreement identifies that payments were made for Points. In my
view, it is clear that the substance of the supply in this case was the supply
of Points.
B. Gift Certificates
[43] In the alternative, the Appellant argues that the purchase of the
Points should not be subject to GST upon acquisition because the Points are
gift certificates as described in section 181.2. The Appellant relies on
section 181.2 to defer payment of tax until the Points are redeemed by the
cardholder.
[44] Section 181.2 states:
181.2
Gift certificates --
For the purposes of this Part, the issuance or sale of a gift certificate for
consideration shall be deemed not to be a supply and, when given as
consideration for a supply of property or a service, the gift certificate shall
be deemed to be money.
[45] The Technical Notes to the
section indicate that the sale of a gift certificate is not considered to be a
supply (despite consideration) and therefore will not attract GST. Only when a gift certificate is
subsequently exchanged for goods or services is its redemption value to be
treated as part of the consideration for those goods or services.
[46] At this point, in order to
help put matters in perspective, a few preliminary observations need to be
made:
- The term "gift
certificate" is not defined in the Act so that the common understanding
of what that term embraces will have to be considered. According to the CRA, a
gift certificate must have a stated or face value. As the Points have no such
stated or face value, administrative practice dictates that they cannot be gift
certificates.
- There is another type
of instrument dealt with in section 181 in an entirely different way. This
instrument is called a "coupon" and is simply defined as a device
other than a gift certificate. In general terms, unlike a gift certificate, a
coupon is not treated on its use by a consumer as consideration paid by the
consumer. That is, the ultimate consumer pays tax on the value of the
consideration paid for the services or goods acquired net of the coupon
reduction amount. Respondent’s counsel argues that the sale of Points is
a sale of coupons which, unlike the sale of gift certificates, is a taxable
supply. On that basis when credit card holders redeem Points for air travel, no
GST is payable pursuant to section 181 which reflects the CRA’s current
assessing practices.
- To help distinguish
between the two instruments, the CRA has conveniently (or arguably necessarily)
prescribed characteristics to them that are not prescribed in the Act. The
CRA has administratively prescribed that a gift certificate must have a stated
value and that it must be acquired for an amount equal to that stated value. Coupons may or may not have a stated
value and, generally at least, would offer a discount as opposed to a free
supply and would be issued without consideration.
[47] Dealing firstly with
the Respondent’s argument that
the Points cannot be gift certificates for want of a stated or face value, I find no support in the
Act or case law for such position. Still, the Respondent argues that because a gift
certificate is deemed under the Act to be “money” there is an implicit
requirement in the legislation for a stated value when section 181.2 is read
together with the definition of “money” in subsection 123(1):
"money" includes any currency,
cheque, promissory note, letter of credit, draft, traveller's cheque, bill of
exchange, postal note, money order, postal remittance and other similar
instrument, whether Canadian or foreign, but does not include currency the fair market value
of which exceeds its stated value as legal tender in the country of issuance or
currency that is supplied or held for its numismatic value;
[48] This definition certainly imports a necessity
that “money” have a stated value. Respondent’s counsel then in effect asks:
“How can section 181.2 deem something to be that which it cannot be given that
it lacks a fundamental characteristic of what it is deemed to be?” Of course
that is exactly what a deeming provision does. Respondent’s counsel then argues
that deeming the certificate to be money without requiring it to have stated
value makes the deeming provision unworkable. How can it operate as money when
it lacks the very feature that it needs to operate as money? This argument
presupposes a limited definition of what a gift certificate is. Such presupposition
is not warranted based on case authorities or any provision of the Act.
[49] As to a common understanding of what a gift
certificate is, perhaps it is presumptuous to think that there is such a thing.
Respondent’s counsel’s
argument that I read in an implicit requirement for a stated value for an
instrument to be a gift certificate might have merit if, for example, the
common understanding of a gift certificate is that it affords its user some
discretion as to its use as money does. If that is the case, a certificate for
a "basic exterior car wash" at Joe's Car Wash which has no stated
value would not be a "gift certificate" regardless that it might say
that on its face and that I acquired it as such. As the purchaser of such a
certificate my understanding would be that I had acquired a gift certificate. On
the other hand, the user of such a certificate might expect that such a
certificate is GST prepaid which is to say that the common understanding of the
user in this case may be that the car wash certificate is not a "gift
certificate" as that term is used in the Act.
[50] While it may be
presumptuous to suggest that the term “gift certificate” means one thing or
another, it is not presumptuous to think that pronouncements of this Court as
to how to interpret the term, will not be ignored. A clear statement has been
made by this Court that a gift certificate as used in section 181.2 does not
have to have a stated value and may be for identifiable goods or services. In Canasia Industries Limited v. Her
Majesty the Queen, while noting that the term “gift certificate” is a
colloquial term that may be applied in a variety of forms and transactions,
then Chief Justice Garon provided a description of the constituent elements of
a gift certificate:
What is essential is that the bearer of the certificate who could be
anyone to whom the certificate was transferred by the original purchaser of the
certificate or by a subsequent bearer, is entitled to receive free of charge
from the issuer of the certificate either a product or a service or the stated
value towards a product or service. I do not think it is important that the
bearer of the certificate may have paid something or given consideration for
securing the gift certificate from the original purchaser of the certificate or
some subsequent intermediary. In my view, the concept of “gift certificate” in
the context of a situation contemplated by section 181.2 of the Excise Tax
Act necessarily implies that the product or service referred to in the
certificate is provided free of charge to the certificate holder when the
certificate is redeemed by its issuer. Otherwise, the reference to the “gift”
portion in the phrase “gift certificate” is meaningless.
[51] This passage does not suggest that a gift
certificate must have a stated value on its face to be a gift certificate. It
says that a gift certificate must be for free goods or services or have
a stated value toward a product or service. If the certificate entitles the
holder to an identifiable supply, it can still be a gift certificate. As well,
in Canasia, then Chief Justice Garon notes that the
consideration paid to purchase the gift certificate need not be equal to the
stated value “if one appears on the certificate since the requirement in
the latter section is simply that there must be a consideration.” The “if” clearly suggests that a stated value need not appear on a
gift certificate as a condition of it being a gift certificate. Further, I note
that there is no reference to the need for a gift certificate to have a stated
value in either of the Technical Notes to section 181.2 or subsection 157(2).
[52] While I appreciate
the Respondent’s position - that this Court should recognize that section 181.2
requires that a gift certificate be treated like money which requires it to
have “money” attributes - I am faced with what appears to me to be a sensible
analysis by this Court which comes to a different conclusion in allowing that a
gift certificate could include an instrument entitling the bearer to an
identifiable supply at no charge. I am not prepared then, nor is it necessary
on the facts of this case, to undermine such jurisprudence which puts emphasis
on giving the word “gift” some meaning. In this regard, Canasia stands
for the principle that a gift certificate would not include an
instrument that only gives the bearer conditional rights. This qualification imports both a common
and legal understanding of what a gift is.
[53] In Canasia, this Court was asked to
determine whether travel certificates which were redeemable for round-trip
airfare to vacation resort destinations were gift certificates. They were held
not to be gift certificates as the bearer was not entitled to anything
unless both a processing fee was paid and at least seven nights accommodation
at specific hotels at the destination were paid for. The Court noted that by ordinary
usage and a common understanding, a gift certificate would not include an
instrument that required a substantial
outlay before it could be used. The travel certificates were not gift
certificates under section 181.2 because they did not entitle the holder to
unconditional free goods and services.
[54] Similarly, the
purchase of the Points in the case at bar was only one step in the midst of a
series of requirements and events – credit card use, payments by RBC as Points
are issued, continued credit card use as necessary to permit accumulations of
Points, the reward program not being cancelled, and a surrender of such number
of Points regarded at the time of surrender as sufficient to secure a
particular air travel service at no cost. No single step, including the
purchase or issuance of Points, gives unconditional rights to anything.
[55] As well, making what
I believe to be the same point, the Respondent argues that the Points cannot be
considered to be a gift certificate under a common understanding of that term
as there is no fixed correlation between the Points issued and their use.
Travel rewards are subject to change. The value of the Points ultimately
depends on the number of Points accumulated over time and the number of Points
required at the time of conversion in order to receive travel rewards. Further,
CAIL can cancel the Points at any time so there is no right or entitlement to
anything at the time of their issuance.
There is no identifiable gift of or right to anything at that time. I concur
with this reasoning.
[56] These conclusions
are sufficient to support a finding that the Points are not gift certificates.
As such, there is no provision deeming the supply of Points not to be a supply.
[57] While nothing
further need be said about this alternative argument, some observations
concerning the Respondent’s argument that the Points be considered to be section
181 “coupons” seem necessary.
[58] The Respondent argues that the Points
should be considered as a “coupon” as defined in section 181 of the Act.
Under the Act,
unlike a gift certificate which is treated as a right to have the price payable for goods or services
satisfied in whole or in part, with GST payable when the certificate is
redeemed, a coupon is treated as a right to obtain a particular good or service
at a reduced price. When the coupon is redeemed, it reduces the taxable value
to the consumer of the particular good or service acquired with the coupon to
the net amount paid.
[59] The relevant subsections of section 181
provide as follows:
181 (1) Definitions -- The definitions in this
subsection apply in this section.
"coupon" includes a voucher, receipt, ticket or other
device but does not include a gift certificate or a barter unit (within the
meaning of section 181.3).
...
(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.
[60] While a principal
feature of a coupon is that it is a discount vehicle, section 181 does not
preclude by its language a discount equal to the full price of goods or
services on redemption of the coupon. The consideration that is taxable under
the foregoing provision is the amount “if any” by which the price of the goods
or services exceeds the discount. That there could be a nil excess of the price
payable after the discount illustrates that the Points can indeed be coupons
even though they can only be used in fixed blocks that are sufficient to ensure
that the taxable excess is always nil.
[61] Accordingly, I agree
with the Respondent that it is not inconsistent with terms of the Act to
treat the Points as coupons. However, that said, it is important that I add
that I have reservations about appearing to give a general endorsement of CRA’s
administrative practises relating to the application of section 181 and the
distinctions it seeks to make between coupons and gift certificates. In my
view, the provisions are not easily applied as the CRA seeks to apply them. This
leaves the state of the law uncertain – a situation that begs for legislative
clarification. Without such clarification, the Act will impose
collection and remittance obligations on suppliers who will have little
guidance as to the outcome of a dispute relating to such obligations should one
arise.
C. Double Taxation
[62] As to the third and final issue, the
Appellant claims that it cannot be assessed for GST in January 2001 because
CAIL was assessed in June 2000 in respect of the same transactions. Both
assessments were confirmed. The assessment against CAIL has not been vacated, varied
nor otherwise dealt with. Therefore, there are two assessments outstanding in
respect of the same taxable supply which could result in double taxation.
[63] Counsel for the Respondent maintains that
the law is clear that the Minister is permitted to assess both the supplier and
recipient in respect of the same supply pursuant to subsection 296(1) of the Act.
Under paragraph 296(1)(a), the Minister can assess the supplier for net tax and
under paragraph 296(1)(b) he can assess the recipient for the tax payable. The
relevant portions of subsection 296(1) read as follows:
296 (1) Assessments -- The Minister may assess
(a) the net tax of a person under Division V for
a reporting period of the person,
(b) any tax payable by a person under Division
II, IV or IV.1,
(c) …
(d) … and
(e) …
[64] Paragraph 296(1)(a) permits the Minister to
assess net tax under Division V which pursuant to section 225 includes amounts
that suppliers must collect pursuant to subsection 221(1). CAIL was required to
collect GST payable in respect of the taxable supply to the Appellant and is
assessable on this basis. The net tax amount must be remitted to the Receiver
General pursuant to section 228.
[65] Paragraph 296(1)(b) permits the Minister to
assess any tax payable under subsection 165(1) of the Act. Subsection
165(1) requires the Appellant as the recipient of a taxable supply to pay GST
and is assessable on this basis.
[66] It is apparent that
the “and” after paragraph (d) in subsection 296(1) must be read adjunctively to
permit the Minister dual assessment power under the express terms of the Act.
To read it otherwise would undermine the scheme of the Act. If someone
is liable to pay and someone else is liable to remit, dual liability is
essential. Furthermore, such dual liability is not dependant on an assessment
having been made. Subsection 299(2) makes that abundantly clear:
(2) Liability not affected -- Liability
under this Part to pay or remit any tax, penalty,
interest or other amount is not
affected by an incorrect or incomplete assessment or
by the fact that no assessment
has been made. [Emphasis added]
The emphasis added highlights two
co-existent liabilities. However, the nature of each liability is different.
The liability of the recipient is a liability to “pay” tax that arises
as a consequence of being a recipient of a taxable supply. The liability of the
supplier is to “remit” to the Receiver General the amount of tax collected or
collectable from the recipient to whom the supplier has made a supply. The
remittance liability is a gun to the supplier’s head – “collect and remit or
remit the tax yourself and then seek reimbursement from the recipient as
provided in section 224”. A
failure to remit results in the supplier being assessed pursuant to paragraph
296(1)(a).
[67] This was how the
course of events unfolded in the present case at least until the Appellant was
assessed. At that point an interesting question arises: Is it arguable that
there are two parties to whom the Appellant is liable to pay GST – the Receiver
General and its agent CAIL?
[68] I believe it should
go without saying that it is untenable to think that recipients would be liable
to pay two collectors for GST on the same transactions. To prevent this, the
limitation on collection would be on the Crown. Subsection 278(2) provides that
amounts collectable by the Crown from a recipient cannot be paid to the Crown if
the supplier is liable to collect the tax from the recipient. That subsection
reads as follows:
(2) Place of payment -- Every person who is
required under this Part to pay or remit an amount shall,
except where the amount is required under section 221 to
be collected by another person, pay
or remit the amount to the
Receiver General.
[69] It is not enough
then that an assessment has been issued against the Appellant. As long as CAIL
as supplier has an obligation under section 221 to collect tax from the
Appellant as agent of Her Majesty in the right of Canada, the Crown cannot collect the tax
payable by the Appellant as recipient of a supply except on behalf of CAIL.
That subsection 315(1) requires an assessment before collection action can be
taken by the Crown does not in itself, in light of subsection 278(2), suggest
that collection action by the Crown requires that payment be made to the Crown when
an assessment is issued if there is a supplier liable to collect the tax. That
subsection 313(2) permits collection proceedings in Court by the Crown where an
assessment may be issued does not in itself, in light of subsection
278(2), suggest that collection proceedings in Court by the Crown requires that
payment be made to the Crown where a supplier is liable to collect the tax. Regardless
of such actions or proceedings, subsection 278(2) requires that the payment of
recipient tax debts be made to the supplier who is liable to collect it.
[70] The anomaly here is
that the agent (the supplier) is required to collect tax from the recipient of
a taxable supply and remit that tax before the principal is authorized to
collect it.
However, such state of affairs is much less of an anomaly if one considers that
the Act provides no rules governing the possibility of collections by
two persons of an amount owed by two persons.
Section 278 appears then to be no accident - there can only be one authorized
tax collector/payee at a time.
[71] Such proposition has
not been tested in the courts to my knowledge. In Carlson & Associates
Advertising Ltd. v.
The Queen
there is the suggestion that although the Minister can assess a recipient for
GST, the Minister cannot directly collect tax yet unpaid by the recipient from
the recipient where the CRA was of the view that the supplier would never be
able to collect the tax.
However, that case may well have side-stepped the issue of payment to the
Receiver General in that no “payments” were necessary. The GST liability was
paid by offsetting ITCs pursuant to section 318.
[72] There is also the
question as to how subsection 313(1.1) of the Act interacts with subsection
278(2). While
this provision stipulates that any tax debt owed to Her Majesty is collectable,
it is clear in my view that the direct beneficiary of any action or proceeding can
only be the supplier pursuant to subsection 278(2). That is, a strict construction of subsection 278(2) dictates
that the Crown can only be the direct beneficiary of collection activity when
the obligation of the supplier to collect ceases regardless of the
financial circumstances of either of the recipient or the supplier. However,
the Act is silent on when such obligation ceases.
[73] In the case at bar,
CAIL filed the Plan under the CCAA which released it of its liabilities arising before March 24, 2000. As the Plan was accepted
by CAIL’s creditors, including the CRA, and approved by the Alberta Court of
Queen’s Bench, it may necessarily follow that CAIL’s collection obligation
under section 221 was terminated so as to lift the limitation in subsection
278(2). But in the absence of provisions in the Act spelling out when such
limitation is lifted, such finding is best left for another day – perhaps in a
collection forum.
[74] Returning to the
Respondent’s double taxation argument, the point that continues to stand out is
the need for rules governing the potential duality of liability to the Crown for
GST of suppliers and
recipients in respect of the same supply.
That potential may be of concern but it does not amount to the type of double
taxation that offends general principles of taxation. As to the
recipient, RBC in this case, there should be no concern that it could be
subject to double taxation. The foregoing analysis of subsection 278(2)
hopefully gives some comfort in this regard. Whether it is the Crown or the supplier
that is the direct beneficiary of a collection action against a recipient,
there can only be one payment obligation. If that comfort is not sufficient,
case authorities confirm, in any event, that there is no real likelihood that
this Court or any other would require a recipient to pay the same tax twice.
[75] Regardless of these
observations, the resolution of collection issues does not impact on the
correctness of the assessment against the Appellant. It has received a taxable supply and may be assessed
under section 296. The prior assessment of CAIL does not preclude the
subsequent assessment of RBC for the same supply.
[76] As well, I note that
the issue of the potential for double taxation violating a rule against
double taxation, was dealt with in Carlson Advertising
where the Court of Appeal did not interfere with this Court’s judgment that potential
for double taxation is not double taxation. In dismissing the appeal, Hamlyn J.
held:
32 … It must be noted that the concern is to prevent the incidence
of ‘double taxation’ where not specifically intended to occur, not the potential
of ‘double taxation’. [Emphasis added]
[77] While the potential for double taxation is at
an advanced stage in the case at bar relative to the situation in Carlson
Advertising (where only the recipient had been assessed), the dual
assessments in the case at bar do not in my view in themselves invoke double
taxation. That there are collection issues arising from the dual assessments is
not sufficient to support a finding that the present assessment should fail on
the grounds that it violates a rule against double taxation. Accordingly, I
find this alternative argument of the Appellant insufficient to warrant this
Court’s intervention.
[78] Before concluding I
need mention that the Notice of Appeal asserted that the amounts paid to CAIL
in respect of the subject supplies were GST included. This position was not pursued at trial and on the
evidence could not have succeeded. As well, the Appellant raised concerns that CAIL had
a GST credit of approximately $12,400,000 available to the Minister that was
not applied against the assessment. The Respondent replied that section 318 of the Act and section 155 of
the Financial Administration Act allow Her Majesty in the right of
Canada to set off indebtednesses to the Crown against amounts payable by the Crown and that this was done without reducing the tax
payable in respect of the subject supply of Points as authorized by these
provisions.
[79] I was provided so little in the way of particulars of
the Appellant’s argument on this point that I can only speculate as to its weight and
relevance. That is not sufficient to satisfy the Appellant’s burden to dissuade
me from accepting the Respondent’s position on the point. Further, if the issue
concerns the quantum of tax payable I am satisfied that I need not address it
given that Appellant's counsel conceded at the hearing that the quantum of tax
assessed was not in dispute.
V. Conclusion
[80] For all these
reasons, the appeal is dismissed with costs to the Respondent.
Signed at Winnipeg, Manitoba, this 12th day of September, 2007.
"J.E. Hershfield"
APPENDIX to the Reasons for Judgment
signed on the 12th day of September,
2007.
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