Citation: 2009 TCC 134
Date: 20090310
Docket: 2007-1374(GST)G
BETWEEN:
COSTCO WHOLESALE CANADA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Miller J.
[1]
Costco Wholesale Canada
Ltd. (“Costco”) and American Express (“Amex”) had an arrangement that was set
out in two contracts between them: a Merchant Agreement and a
Co-Branded Agreement. Pursuant to the Merchant Agreement, Amex charged
Costco a percentage fee (“X”) based on the volume of sales charges
(the “Discount”). Pursuant to the Co-Branded Agreement, Amex agreed to pay
Costco a percentage (“Y”) of the aggregate of charges submitted by Costco.
The effect was to achieve a net rate of X minus Y or Z. The Canada
Revenue Agency considered that the payment (Y) from Amex to Costco was
consideration for a taxable supply by Costco to Amex, and assessed Costco for
unremitted GST for a three-year period from September 3, 2001 to August 29,
2004. The pleadings do not identify the amounts involved, nor do they identify
the percentages represented by X, Y or Z. Costco’s position is that provision
for Y in the Co‑Branded Agreement was a confidential way to achieve
the net rate of Z and did not represent consideration for a supply of anything
from Costco to Amex. In the alternative, if there was a supply from Costco
to Amex, Costco maintains it was a supply of financial services, and
consequently exempt from GST. The Respondent’s position is that there were
a number of supplies made by Costco to Amex pursuant to the terms of the
Co-Branded Agreement, and notwithstanding it may have been the intention
of Costco and Amex to structure it this way to keep the net fee (X minus Y)
confidential from the public domain, the correct interpretation of the
written contracts is that Amex made the payment of Y to Costco for taxable
supplies.
[2]
This is entirely a
matter of interpreting the two contracts to ascertain the deal between Costco
and Amex. Was the deal that Amex charged Costco Z for accepting the Amex card?
Or was the deal that Amex charged Costco X for accepting the Amex card and
Costco charged Amex Y for supplies including accessing its membership list,
exclusivity rights and assisting in the promotion and sale of the Co-Branded
Amex/Costco card?
Facts
[3]
Two witnesses testified
for Costco, Ms. Gilpin, an Assistant Vice-President of Marketing for Costco and
Ms. Hawkins, a Vice-President of Marketing for Amex.
[4]
Costco is a major
wholesaler of goods in North America. One need only attempt to shop there on a
Saturday afternoon to appreciate its popularity. In 1999, Costco U.S. entered a relationship with Amex in the United States, which led to their Canadian counterparts doing the
same. The Canadian arrangement mirrored the American arrangement, including the
rate charged by Amex to Costco. The arrangement was documented in two
contracts, both signed November 4, 1999. The first contract is
entitled “Agreement for American Express Card Acceptance” and referred to by
the witnesses as the Merchant Agreement or Card Acceptance Agreement. The
second agreement is entitled “American Express/Costco Co-Branded Card
Program Agreement”, referred to as simply the Co-Branded Agreement. I have
attached the relevant excerpts from these two agreements: Schedule “A” for the
Co-Branded Agreement and Schedule “B” for the Merchant Agreement.
[5]
According to Ms.
Hawkins, there were two major elements to the arrangement between Costco and
Amex:
(i) Exclusive card acceptance at
Costco of the Amex card; and
(ii) Co-Branded cards:
that is a joint Costco membership and Amex credit card such that both Amex and
Costco were referenced on the one card.
[6]
The Merchant Agreement
sets out under “Payment” the fee charged by Amex to Costco for acceptance of
the Amex card. This is called the Discount and it is a percentage (X) of
sales charges made by customers using any and all Amex cards. Both Ms.
Gilpin and Ms. Hawkins testified that X did not represent the net fee charged
to Costco, as that information is highly industry sensitive and the Merchant
Agreement is not particularly confidential. So, according to both
witnesses, Costco and Amex agreed to a rebate (the percentage Y) which
would effectively reduce the net fee (X minus Y) to Z. This rebate,
according to the witnesses, is to be found in the Co‑Branded Agreement
at subsection 3.01(a). There is no reference in that subsection to the term
“rebate”. The exhibits of these two agreements presented at trial had the
actual percentages redacted so that this information would not become public.
Access to the Co‑Branded Agreement is limited to just a handful of Costco
and Amex executives.
[7]
The arrangement appears
to have been confirmed in an internal Costco e‑mail to Ms. Gilpin dated
May 11, 2001 in which Z is acknowledged as the Amex merchant fee.
[8]
The Co-Branded
Agreement establishes a program between Costco and Amex for a joint card; that
is, a card that combines the Amex credit card and the Costco membership card.
Article III is entitled “Compensation to Costco”. In subsection 3.01(b), a
fee is determined for every such card approved by Amex. This was referred
to as a bounty fee by the witnesses. In subsection 3.01(b),
it specifically indicates that that fee is for services provided by Costco
pursuant to subsection 2.02(a) (Marketing by Costco) of the Co-Branded
Agreement. The amount of that payment by Amex to Costco is not part of the
assessments before me.
[9]
Subsection 3.01(a) of
the Co-Branded Agreement provides for quarterly payments from Amex to Costco of
Y of “Costco Net Volume of Charges”. “Costco Net Volume of Charges” is defined
in the Co-Branded Agreement as:
“Costco Net Volume of Charges” means, for purposes of this Agreement, the aggregate of Charges
submitted by Costco pursuant to the Costco Card Service Agreement and received
and accepted by Amex, less credits, adjustments and amounts charged back by
Amex pursuant to Amex’s rights to full recourse under the Costco Card Service
Agreement.
In effect Y applies to all Amex credit card
sales, not just sales from Co-Branded cards. Similarly, the discount (X) in the
Merchant Agreement applies to charges on all Amex cards, not just charges
arising on Co-Branded cards. Ms. Hawkins testified that in the early stages of
the arrangement, the Co‑Branded cards were only 10% of all Amex cards
charged, though this later rose to approximately 20%.
[10]
Both witnesses
testified that Costco received the rebate (Y) without having to do anything. It
arose simply as part of the exclusive card acceptance arrangement. According to
the witnesses, none of the rebate (Y) related to marketing of the Co‑Branded
card.
[11]
Subsection 3.01(a) goes
on to reduce the rebate amount (Y) (effectively making the fee to Costco
greater) for the first couple of months. Also, in the first few months of the
arrangement Amex wanted to keep pressure on Costco to get its information
systems up and running so it reduced the rebate until Costco “completes its
information system requirements”. It is important to note the difference in
wording between subsections 3.01(a) and 3.01(b). Subsection 3.01(b)
specifically sets out what the payment is for (marketing efforts pursuant to
subsection 2.02(a)), whereas subsection 3.01(a) is silent in this regard.
[12]
There are two other
provisions, subsection 3.01(c) and section 3.02 which also cover compensation
from Amex to Costco. Subsection 3.01(c) compensates for usage of the joint card
and section 3.02, drafted in a manner worthy of inclusion in the Income Tax
Act, compensates for the difference between amounts Costco earned from new
membership fees and a percentage of charges incurred at Costco.
[13]
Subsection 2.02(a) of
the Co-Branded Agreement sets out several pages of Costco’s marketing
obligations vis‑à‑vis the Co-Branded program. Section 2.03 of the
Co-Branded Agreement (“General Obligations of Costco”), while mainly concerning
obligations related to the Co-Branded Program such as training employees about
attributes of the Co-Branded cards, also requires Costco to maintain its
membership program and to be responsible for “all activities associated with
servicing Costco members”.
[14]
Other provisions of
note in the Co-Branded Agreement are section 2.07, pursuant to which Costco
grants Amex a non-exclusive license to use Costco’s trademark and
section 2.11 pursuant to which Costco grants Amex exclusivity and agrees not to
accept competitors’ cards. Finally, an addendum to the Co-Branded
Agreement made pursuant to section 2.03 sets forth the “standards and
procedures for the collection, capture and transfer of Co‑Branded card applications
and related information to Amex”. Effectively, Costco was responsible to obtain
application data and ensure its security.
Analysis
[15]
The issue is a simple
one. Is the payment (Y) in subsection 3.01(a) of the Co‑Branded Agreement
consideration for a supply of something by Costco to Amex or, is it simply a
reduction of the fee (X) in the Merchant Agreement from Costco to Amex.
Basically, what supply does this payment relate to? If Y is consideration for a
supply from Costco to Amex, is that supply an exempt supply on the basis
it falls under the definition of financial service?
Interpretation of the Contracts
[16]
I can readily conclude
that the quarterly payment by Amex of Y pursuant to subsection 3.01(a) of the
Co-Branded Agreement had the effect of reducing the net fee charged by Amex to
Costco in a confidential way. According to the two witnesses, this is what the
parties had intended, although I will have more to say on that question later
in my Reasons. But, because the contracts have this effect, does it necessarily
follow that the quarterly payment from Amex to Costco is not, for Excise
Tax Act
purposes, a payment for the supply of something from Costco to Amex? The
Respondent argues that because the payment of Y is set forth in the Co‑Branded Agreement
under the heading “Compensation” (making no mention that it is effectively a
rebate of the discount charged by Amex to Costco pursuant to the Merchant
Agreement), and because Costco obliges itself to do certain things under the
Co-Branded Agreement, the payment under subsection 3.01(a) must be payment by
Amex to Costco for those obligations. In interpreting these contracts, the
question to be answered is to what supply do these payments relate: a supply
from Amex to Costco (i.e., a rebate) or a supply from Costco to Amex?
[17]
In answering this
question, and in interpreting these contracts, the parties agreed that the
principles of contractual interpretation to be relied upon are well summarized
by the Ontario Court of Appeal in 3869130 Canada Inc.
v. I.C.B. Distribution Inc.:
31 …
Broadly stated ... a commercial contract is to be
interpreted,
(a) as a whole, in a manner that
gives meaning to all of its terms and avoids an interpretation that would
render one or more of its terms ineffective;
(b)
by determining the intention of the
parties in accordance with the language they have used in the written document
and based upon the "cardinal presumption" that they have intended
what they have said;
(c) with regard to objective evidence
of the factual matrix underlying the negotiation of the contract, but without
reference to the subjective intention of the parties; and (to the extent there
is any ambiguity in the contract),
(d) in a fashion that accords
with sound commercial principles and good business sense, and that avoids a
commercial absurdity.
(a) A commercial
contract is to be interpreted as a whole, in a manner that gives meaning to all
of its terms and avoids an interpretation that would render one or more of its
terms ineffective.
[18]
The first issue to
determine is whether the two contracts are so intertwined as to be read as one.
The Merchant Agreement in the section entitled “Entire Agreement”
specifically includes the “relevant portions” of the Co‑Branded Agreement.
The Co-Branded Agreement incorporates parts of the Merchant Agreement, for
example, by defining Costco “Net Value of Charges” to mean the aggregate of
charges submitted by Costco pursuant to the Merchant Agreement. The two
agreements were entered into contemporaneously. The termination provisions of
both provide that if the other agreement is terminated, it may also be
terminated by either party upon written notice. In I.C.B. Distribution
Inc., the Court adopts the following passage from “The Law of
Contracts”
by Professor John McCamus:
Many transactions, especially large commercial transactions such as
the purchase and sale of a large and complex business, may involve the
execution of several agreements. In such contexts, it is an interesting
question, then, whether in the interpretation of one of the agreements, regard
may be had to the others. The basic principle is that such regard may
be had only where the agreements essentially form components of one larger
transaction. Where each agreement is entered into on the faith of the others
being executed and where it is intended that each agreement form part of a
larger composite whole, assistance in the interpretation of any particular
agreement may be drawn from the related agreements.
[Emphasis added by Blair J.A.]
[19]
I conclude that the
circumstances require, and the agreements themselves demand, they be read
together to fully determine the extent of the deal between the two parties.
They are components of one larger transaction.
[20]
Subsection 3.01(a) is
the provision of the Co-Branded Agreement requiring interpretation. If, instead
of using the term “Net Volume of Charges” in subsection 3.01(a), I insert the
full definition of that term into subsection 3.01(a), that subsection then
reads, in part, as follows:
…Costco shall be paid an amount equal to Y%
of the aggregate of Charges submitted by Costco pursuant to the Merchant
Agreement.
[21]
In the Merchant
Agreement, Amex obliges itself to pay Costco the face amount of charges minus
the discount of X, being the amount charged for accepting the card. Reading
this provision together with subsection 3.01(a) of the Co‑Branded Agreement,
it is clear the parties have agreed that Amex is to receive X minus Y or Z%. What
is missing from subsection 3.01(a) is any express indication that Y is a rebate
and precisely to what Y is intended to relate. Subsection 3.01(a) is unlike
subsection 3.01(b) which clearly indicates the consideration set out therein is
for marketing efforts required pursuant to subsection 2.02(a) of the Co‑Branded
Agreement. Due to this lack of clarity and because Costco obliges itself in
many other respects in the Co‑Branded Agreement, and because subsection
3.01(b) is compensation only for the subsection 2.02(a) marketing efforts, does
it necessarily follow that subsection 3.01(a) must be for the remaining
obligations in the Co-Branded Agreement? No, I suggest such an interpretation
ignores the interconnection of the two agreements, and reads into subsection
3.01(a) words that are not there.
[22]
Nothing in subsection
3.01(a) ties the general obligation to pay Y to any obligation of Costco under
the Co-Branded Agreement. If there are charges submitted pursuant to the
Merchant Agreement, Amex pays Costco Y. The charges are the only element
in subsection 3.01(a) that suggests what supply the payment is connected to,
and that is nothing relating to the Co-Branded card, but only the
acceptance of all Amex cards on charges on the sale of Costco goods.
The provision does go on to vary Y in the event Costco does not meet its
information system requirements to support issuing the Co-Branded cards.
While that may relate to the Co-Branded cards, it covers a period prior to
the periods before me and does not impact on how I interpret the general
obligation to pay Y. That obligation in context of the entirety of the two
agreements relates solely to the determination of the net discount. The
Merchant Agreement refers to “relevant portions” of the Co-Branded Agreement, without
specifying exactly what are the relevant portions, but given that the Merchant
Agreement deals entirely with the acceptance by Costco of the Amex card
generally, it only makes commercial sense that anything to do with that subject
is relevant. So what parts of the Co‑Branded Agreement deal with all Amex
cards and not just Co-Branded cards? The obvious answer is subsection 3.01(a).
[23]
The Respondent argues
all compensatory provisions of the Co-Branded Agreement must be read
collectively as consideration for all supplies rendered by Costco. This ignores
the specific language of subsection 3.01(b) that explicitly states that the
3.01(b) fee (the bounty fee) pertains only to Costco’s subsection 2.02(a)
marketing obligations.
[24]
This leaves open to
question how to connect Costco’s other obligations with the appropriate
consideration. What are Costco’s other obligations? Specifically, the
Respondent raises sections 2.03, 2.05, 2.07 and 2.11 which obligate Costco to:
- collect application forms for the Co-Branded
cards and transmit that information to Amex;
- provide Amex access to its members list;
- maintain and operate the Costco
membership program;
- provide Amex with a response rate on
marketing efforts described in subsection 2.02(a);
- train its employees about the Co-Branded
cards;
- disclose to its members the cost of its
fee;
- grant Amex a non-exclusive license to use
Costco trademarks in connection with the Co-Branded cards;
- grant Amex exclusivity and agree not to
accept competitor credit cards; and
- to make information system changes.
[25]
I note that, apart from
the granting of exclusivity, all other obligations relate to the issuance of
the joint card. Further, these obligations are all supportive of Costco’s
marketing obligations found in subsection 2.02(a). This suggests to me
that the deal Amex sought from Costco, vis-à-vis the Co‑Branded card, was
for Costco to promote the issuance of the cards through expanding Amex’s
customer base. Again, with the exception of the exclusivity provisions, the
essence of the Co‑Branded Agreement was the promotion of the Co‑Branded
card. All these other obligations relate directly to successfully marketing the
Co-Branded card. Even the agreement to grant Amex a non‑exclusive license
to use Costco’s trademark relates just to the Co-Branded card. The bounty fee
(subsection 3.01(b)) is specifically directed at consideration for marketing
efforts of the Co-Branded cards as required by subsection 2.02(a). The
Respondent argues that this consideration was not significant or sufficient to
cover all Costco’s obligations, beyond the subsection 2.02(a) marketing
efforts. I had no evidence of actual dollar amounts to draw any conclusion as
to its significance. What I do conclude, however, is that Costco’s obligations,
other than subsection 2.02(a) marketing efforts, were incidental to those
marketing efforts, supporting such efforts. While subsection 3.01(b) is
prefaced with the words “in exchange for the marketing efforts provided by
Costco as contained in subsection 2.02(a)”, this should not preclude a finding
that incidental marketing obligations are likewise covered.
[26]
The Respondent
also argues that subsection 3.01(c) and section 3.02, the other two
compensation provisions, are for marketing efforts, not for any other Costco
obligations. But that is just what the Co-Branded Agreement is all about ‑ the
marketing of the joint card. There are four elements to compensation in the
Co-Branded Agreement: subsections 3.01(a), 3.01(b) and 3.01(c) and section
3.02. The latter three relate specifically to the joint card: only subsection
3.01(b) identifies the compensation as consideration for subsection 2.02(a)
marketing efforts. Viewing the agreement as a whole, I conclude subsections
3.01(b) and 3.01(c) and section 3.02 together are compensation to Costco for
all obligations in connection with the joint card. I see no such connection
with the compensation set out in subsection 3.01(a), which is compensation
based on all Amex cards – not just the joint card. Had the Merchant Agreement
not specifically incorporated the relevant portions of the Co-Branded
Agreement, one might be left to wonder why subsection 3.01(a) was included.
The only connection to anything in the Co‑Branded Agreement would be
the right of exclusivity granted by Costco to Amex. This needs further
explaining.
[27]
What is the right of
exclusivity granted by Costco to Amex? It assures Amex that Costco will not
honour any other credit cards. If a customer wants to use credit at Costco, the
customer must use Amex. This is certainly significant. But is it a good or
service from Costco to Amex? No. It is a bargaining tool. It is akin to a
purchaser of a fleet of cars seeking a discounted price due to volume.
It is significant that the compensation pursuant to subsection
3.01(a) from Amex to Costco is based on all Amex card sales. It is also
significant Costco does nothing to obtain payment. If sales are made with Amex
cards, Costco gets paid. Again, without the Merchant Agreement read
together with the Co-Branded Agreement one might query this compensation, as it
is a type of blanket fee that bears no relation to the Co-Branded card. Read
with the Merchant Agreement, however, it becomes clear: Costco gets a better
rate because it can offer this exclusivity. This goes directly to the fee
charged by Amex, not to any obligation of Costco relating to the Co-Branded
Agreement.
(b) Intention
discerned from language of agreements and regard to factual matrix
[28]
The second and third
principles of contractual interpretation can be taken together as these
principles address the search for the parties’ intention. I do not take these
principles to preclude parol evidence, though it is clear (see General Motors
of Canada Ltd. v. R.
for example) that direct evidence of the parties’ subjective understanding
is inadmissible. Objective extrinsic evidence is permissible as is evidence of
the factual matrix underlying the negotiation of the contract. This is
important, especially in a case such as this where two contracts are entered
contemporaneously and cross-reference one another. Why was this done?
What were the circumstances? As Lord Wilberforce stated in Reardon Smith
Line v. Hansen-Tangen:
…No contracts are made in a vacuum: there is always a setting in
which they have to be placed. The nature of what is legitimate to have regard
to is usually described as “the surrounding circumstances” but this phrase is
imprecise: it can be illustrated but hardly defined. In a commercial contract
it is certainly right that the court should know the commercial purpose of the
contract and this in turn presupposes knowledge of the genesis of the
transaction, the background, the context, the market in which the parties
are operating.
[29]
The Court of Appeal of Ontario has adopted this approach in I.C.B Distribution
Inc.:
32 …
[52] No doubt, the dictionary and grammatical meaning of the
words (sometimes called the “plain meaning”) used by the parties will be
important and often decisive in determining the meaning of the document.
However, the former cannot be equated with the latter. The meaning of a
document is derived not just from the words used, but from the context or the
circumstances in which the words were used. Professor John Swan puts it well in
Canadian Contract Law (Markham, Ont.: Butterworths, 2006) at 493:
There are a number of inherent features of language that need to be
noted. Few, if any words, can be understood apart from their context and no
contractual language can be understood without some knowledge of its context
and the purpose of the contract. Words, taken individually, have an inherent
vagueness that will often require courts to determine their meaning by looking
at their context and the expectations that the parties may have had.
[30]
It is equally important
to consider the factual context to clarify any vagueness. The ambiguity facing
me is the lack of a direct expressed link between the payment in subsection
3.01(a) of the Co-Branded Agreement and the supply to which it relates. The
provision (unlike subsection 3.01(b)) is simply silent. What then are the
circumstances that can shed light on the meaning of this provision:
(i) Critical to the
overall deal between Costco and Amex was the exclusive acceptance of all Amex
cards by Costco.
(ii) The Canadian
agreement followed the negotiation of the same deal in the United States, resulting in similar contracts with the three
percentages, X, Y and Z.
(iii)
Confidentiality was
key.
(iv) There was no
obligation on Costco to do anything to receive the Y ‑ it simply
flowed from a customer’s use of an Amex card.
[31]
The Respondent argues
that if confidentiality was key, the parties would not need a 37-page document
to hide it. I disagree. What better way to bury something? The Respondent also
argues that by reading the subsection 3.01(a) compensation as simply a rebate
renders the terms setting out Costco’s obligations ineffective. Again, I
disagree. The Co-Branded Agreement, as I have indicated, contains other
compensatory provisions, which have a closer link to the obligations than
subsection 3.01(a). Finally, the evidence of an internal memo after the
agreements have been in operation for some time confirms the true nature of the
deal, that is, that Amex’s net fee was X minus Y or Z.
(c) What
interpretation accords with sound commercial principles and good business sense
and avoids commercial absurdity?
[32]
I conclude it is an
absurdity for Amex to pay a percentage on all Amex credit card purchases at
Costco in exchange for services that relate to the Co-Branded cards only. That
is simply out of kilter. The agreement that Amex will be the only credit card
recognized by Costco (exclusivity) goes entirely to the determination of the
fee Amex agrees to charge Costco. The fact that the fee has been divided in a
somewhat obscure manner, which has been thoroughly explained and justified,
does not alter the underlying commercial deal between these two parties of a
supply by Amex to Costco for X minus Y or Z%. That is the only good business
sense interpretation.
[33]
My conclusion on the
first issue is sufficient to allow the appeal without deciding the alternative
issue. However, I will address the alternative argument and consider, if the
payment of Y from Amex to Costco is consideration for a supply, then what is
the nature of that supply? The Appellant argues that the supply in this regard
is an exempt supply of a financial service. The Respondent argues that the
exclusive promotion, marketing and administrative services relating to the Co‑Branded
cards go well beyond “financial services” and constitute a taxable supply.
[34]
Financial service is an
exempt supply. The starting point then is the definition of financial service
found in subsection 123(1) of the Excise Tax Act. This reads in part:
123(1) In section 121, this Part and Schedules V to
X,
"financial service" means
(a) the exchange,
payment, issue, receipt or transfer of money, whether effected by the exchange
of currency, by crediting or debiting accounts or otherwise,
(b) the operation or
maintenance of a savings, chequing, deposit, loan, charge or other
account,
…
(g) the making of any
advance, the granting of any credit or the lending of money,
…
(i) any service
provided pursuant to the terms and conditions of any agreement relating to
payments of amounts for which a credit card voucher or charge card voucher has
been issued,
…
(l) the agreeing to
provide, or the arranging for, a service referred to in any of paragraphs (a)
to (i), or
but does not include
(n) the payment or
receipt of money as consideration for the supply of property other than a
financial instrument or of a service other than a financial service,
…
(q) the provision, to
an investment plan (as defined in subsection 149(5)) or any corporation,
partnership or trust whose principal activity is the investing of funds, of
(i) management or administrative service, or
(ii) any other service (other than a prescribed
service),
if the supplier is a person who provides management
or administrative services to the investment plan, corporation, partnership or
trust,
…
(t) a prescribed service.
[35]
Subsection 4(2) of the Financial
Services (GST/HST) Regulations
exclude the following from the definition of financial service as a
prescribed service:
(a) the transfer, collection
or processing of information, and
(b) any
administrative service, including an administrative service in relation to
the payment or receipt of dividends, interest, principal, claims, benefits or
other amounts, other than solely the making of the payment or the taking of the
receipt. [Emphasis
added]
[36]
What supply is at
issue? As the Respondent pointed out, a supply is defined and characterized by
asking, as a matter of common sense, “what did the recipient acquire for the
money that it paid?” There are two ways to address that issue. First, as
the Respondent suggests, the consideration set out in subsections 3.01(a),
3.01(b), 3.01(c) and section 3.02 are best read together such that all payments
are for all supplies under the Co-Branded Agreement; and that the true nature
of what was to be supplied pursuant to the Co-Branded Agreement were marketing
and administrative services. The Respondent argues those marketing and
administrative services go well beyond any “financial service” as defined in
the Act. And, even if I were to find some part of the supply constituted
an element of “arranging for” the supply of a financial service, as was
determined in Les Promotions D.N.D. Inc. v. Her Majesty the Queen, this
is a minor component of the overall services provided by Costco.
[37]
The second way to
review the issue of what supply is at issue is to isolate the consideration in
subsection 3.01(a) from the other compensatory provisions, noting that
subsection 3.01(b) pertains explicitly to marketing efforts. In effect,
the supplies to which subsection 3.01(a) must relate are the supplies
other than subsection 2.02(a) marketing efforts. Costco’s obligations, other
than pursuant to subsection 2.02(a) are found in sections 2.03, 2.05, 2.07 and
2.11, and outlined in paragraph 24 of these Reasons.
[38]
I will first address
the Respondent’s approach that the consideration in subsection 3.01(a) is to be
read as part of the whole package of compensation for all supplies provided by
Costco under the Co-Branded Agreement. It is clear from the first operative
section of the Co-Branded Agreement, section 2.01, that Costco’s obligation to
Amex is to market the Co-Branded card, market Amex card acceptance and accept
Amex cards in Canada under the Merchant Agreement. Given the
terms of acceptance are primarily covered under the Merchant Agreement,
the supply from Costco to Amex in the Co-Branded Agreement is to market the
joint Costco/Amex credit card. The agreement then goes on for several pages
under subsection 2.02(a) to describe those marketing efforts required of
Costco. Added to this are the other obligations I have previously outlined.
Together, what is it Costco is supplying? Costco is supplying an immense
network of stores and personnel through which Amex and only Amex can obtain new
cardholders. The Respondent labels this as marketing and administration.
It is less important how Costco’s activities are labelled as to
understand exactly what those activities are, and what they are intended to
provide to Amex. They are facilitating services of an intermediary between a
major credit card company and its potential customers. I see no distinction
between the circumstances in Les Promotions D.N.D. Inc., where the
services were the promotion and solicitation of applications for credit cards,
and the circumstances before me. Any distinguishing facts do not topple
the overall essence of what was being supplied by Costco and Les Promotions
D.N.D. Inc.
[39]
The following words of
Justice Lamarre Proulx in Les Promotions D.N.D. Inc. are equally
applicable to Costco:
37 The services provided during the transition between the
acquisition of the service and the provision of the service sought are exempt,
provided that they are linked in their purpose. Thus, in this case, between the
person obtaining credit and the financial institution granting it there is an
intermediary, and that is the appellant. The appellant’s services are an
integral part of the business of the person agreeing to provide the service of
granting credit.
[40]
I agree with the
Appellant’s contention that Costco did everything Les Promotions D.N.D.
Inc. did and more: trained employees in the Amex card application,
solicited applications, assisted in the completion of the applications,
received the applications back from customers, reviewed for completeness and
forwarded them to Amex. Costco was an integral part of Amex’s business of
granting credit and issuing credit cards. I find this case is on all fours with
Les Promotions D.N.D. Inc. and I reach the same conclusion; that
is, Costco was an intermediary arranging for the issuance of credit cards and
granting of credit by Amex. This falls squarely within the definition of
financial service and is consequently exempt.
[41]
The Respondent goes on
to argue that, in any event, such services from Costco are prescribed services
pursuant to paragraph (t) of the definition of financial service. This
exception does not save the Respondent’s position. Les Promotions
D.N.D. Inc. was clear that “the services provided by the Appellant are not
in the nature of the collection or processing of information, or of
administrative services”. Costco is in a stronger position in this regard, more
in the nature of an equal participant in the promotion of the card. Its
services go well beyond data collection or administration. This is further
evident from the very fact the card was not just a credit card but was Costco’s
membership card as well. I agree with this Court’s observations in Royal
Bank of Canada v. Her Majesty the Queen:
18 …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.
[42]
Is my conclusion any
different if I isolate Costco’s obligations not covered by subsection 2.02(a)
of the agreement? In viewing those specific activities together,
I conclude they too relate to the sale and ultimate use of the Co‑Branded
card. When I consider the combination of paragraphs (g) and (l)
of the definition of financial service as the arranging for the granting of any
credit, I readily conclude that is precisely what these obligations
related to. This too is consistent with this Court’s finding in Les
Promotions D.N.D. Inc. Clearly, Costco’s only objective in agreeing to
these obligations was to have Co-Branded cards issued; that is,
the bringing into existence of a financial product.
[43]
Further, paragraph (i)
of the definition of financial service which refers to any service
provided pursuant to the terms of any agreement relating to payments of
amounts for which credit card vouchers have been issued is so broad as to
easily capture Costco’s obligations, especially if read in conjunction with the
expression “agreeing to provide” such services, even where these obligations
are not the direct “marketing efforts” obligation of subsection 2.02(a).
[44]
In summary, I have been
satisfied that the only supply to which the payment in subsection 3.01(a)
relates is Amex’s supply of its credit card services to Costco, not the supply
of anything by Costco to Amex. The payment in subsection 3.01(a) is indeed what
the Amex and Costco representatives indicated, a rebate of part of the gross
fee. This is gleaned from reading the agreements together, and if ambiguous,
the parol evidence and subsequent extrinsic evidence clarify that was the
substance of the agreement. Further, even if the payment from Amex to Costco
was for a supply of something, that something can only be financial services,
which are exempt. The appeal is allowed on the basis that the amount, Y,
referred to as the rebate, was not subject to GST under the Excise Tax Act.
Costs to the Appellant.
Signed at Ottawa, Canada, this 10th day
of March, 2009.
“Campbell J. Miller”
SCHEDULE “A”
Excerpts from the American Express/Costco Co-Branded Card
Program Agreement dated November 4, 1999
…
ARTICLE I
DEFINITIONS
Section 1.01. Defined
Terms.
The following terms shall have the following meanings as and when
used in this Agreement:
…
“Costco Card Service Agreement” means the agreement between
Costco and Amex, dated November 4, 1999, whereunder Amex Cards are accepted by
Costco for the purchase of goods and services, as such agreement is renewed,
succeeded or amended.
…
“Costco Net Volume of Charges” means, for purposes of this
Agreement, the aggregate of Charges submitted by Costco pursuant to the
Costco Card Service Agreement and received and accepted by Amex, less credits,
adjustments and amounts charged back by Amex pursuant to Amex’s rights to full
recourse under the Costco Card Service Agreement.
…
ARTICLE II
ESTABLISHMENT AND ADMINISTRATION OF
THE PROGRAM GENERALLY
Section 2.01. The
Program.
(a) Pursuant to the terms and conditions of this Agreement,
Amex and Costco hereby establish the Co-Branded Card Program in Canada (the
“Program”), pursuant to which generally: Amex shall issue Co-Branded Consumer
Cards and extend credit to Co-Branded Consumer Cardholders pursuant to the
terms of the Co-Branded Consumer Cardholder Agreement; Amex shall issue
Co-Branded Small Business Cards for use by Co-Branded Small Business
Cardholders pursuant to the terms of the Co-Branded Small Business Cardholder
Agreement; Amex will market Costco Membership and Amex Card acceptance to Amex
Cardholders; Costco will market Co-Branded Consumer Cards and Co-Branded Small
Business Cards; Costco will operate the Costco Membership Program; and Costco
will accept Amex Cards in Canada under the Costco Card Service Agreement and
market Amex Card acceptance. It is understood that to address competition,
innovations in the marketplace, customer needs and the strategic objectives of
the parties, the parties may determine to modify the Program, including the mix
of Co-Branded Cards. Any such modifications shall be implemented only upon a
written amendment to this Agreement signed by all parties hereto.
…
Section 2.03. General
Obligations of Costco.
(a) For each Applicant (who must first be a Costco Member),
Costco shall collect the Co-Branded Card application and the information needed
to complete a Co-Branded Card application, and transfer said application and
information to Amex in accordance with the procedures and minimum standards in
Schedule 7. Before issuance of the first Co-Branded Card, the parties shall
enter into an addendum setting forth mutually agreed upon standards and
procedures. Costco shall comply with all disclosure and other regulatory
requirements specified by Amex when conducting the above activities. Other than
the first sixty (60) days of the Winddown Period as specifically provided in
Section 5.02 (b) (iv), Costco shall not access or use any information
identifying Co-Branded Cardholders as Co‑Branded Cardholders or other
Amex Cardholders for use in any marketing activities whatsoever without the
prior written approval of Amex, said approval not to be unreasonably withheld,
it being understood that, without Amex’s approval, Costco may use such
identifying information to suppress a mailing to Co-Branded Cardholders that
would be redundant to a recent mailing or conflict with another mailing or
marketing activity at that time. Any information identifying Co-Branded
Cardholders as Co-Branded Cardholders in Costco’s files or databases shall be
purged 120 days after termination of this Agreement.
...
(c) Costco shall transmit at its expense to Amex all Costco
Member information necessary to be included on the back of the Co-Branded Card
within two (2) Business Days of notification to Costco by Amex that a new
Co-Branded Card Account has been approved.
(d) Costco shall accept reward coupons earned by Co-Branded
Consumer Cardholders as described in Section 2.14 below.
(e) At Amex’s request, and subject to Costco’s confidentiality
policies (including prior approval of third party vendors) and Costco’s
approval which shall not be unreasonably withheld, Costco shall provide Amex
access to the Costco Member list for the sole purpose of acquiring Co-Branded
Cardholders. Costco shall segment the Costco Member list based upon mutually
agreed upon specifications, which agreement shall not be unreasonably withheld
by Costco. Costco shall bear any costs it incurs in creating such lists and
transmitting them to Amex or a designated third party.
(f) Costco shall provide Amex with response rates on the
marketing efforts described in Section 2.02(a) above, mutually agreed upon
information to determine level of usage of Co-Branded Cards by Co-Branded
Cardholders as a percentage of overall purchases at Costco Warehouses by such
Co-Branded Cardholders, and other information regarding the performance of the
Program as mutually agreed by the parties.
(g) Costco shall notify Amex promptly of Costco Member
cancellations and once a month of any other known material changes in the
Costco membership status pertinent to servicing Co-Branded Cardholders.
(h) Costco, at its expense, shall maintain and operate the
Costco Membership Program while this Agreement is in effect. Attached to this
Agreement as Schedule 4 is the Costco Membership Program terms and conditions
as of the Effective Date of this Agreement. Costco agrees to notify Amex in
writing of any material modifications to the terms and conditions contained in
Schedule 4 as early as practicable.
(i) Costco shall be responsible for all activities
associated with servicing Costco Members and will comply with all applicable
laws and regulations governing the administration of the Costco Membership
Program. Costco shall handle all inquiries relating to the Costco Membership
Program. If Costco receives an inquiry that should be directed to Amex,
Costco’s customer service representative shall notify the Co-Branded Cardholder
of the appropriate Amex toll free (1-800) telephone number to call.
(j) Costco shall train its relevant employees about the
functionality and attributes of Co-Branded Cards as provided in Section 2.14
below and Amex Card acceptance.
…
Section 2.05. Billing
for Costco Membership Fee.
(a) The Co-Branded Card application shall disclose to the
Applicant that, if approved, the Costco Membership Fee shall be automatically
charged to the Co-Branded Card Account, unless the Applicant opts out of such
by following the opt out procedures prominently set forth in the Co-Branded Card
application. In the event of regulatory or material consumer concerns or
complaints, Amex or Costco shall have the right to modify this process to
instead require the Applicant, in the Co-Branded Card application, to opt
for the Costco Membership Fee to be automatically charged to the
approved Co-Branded Card Account. It is Costco’s responsibility to ensure that
the amount and frequency of the Costco Membership Fee is disclosed on the
Costco Membership Program marketing materials and agreements. If a refund for
the Costco Membership Fee billed to a Co-Branded Card, or portion thereof, is
due, then Costco shall use best efforts to ensure that said refund shall be
issued as a credit to the Co-Branded Card Account.
(b) It is Costco’s responsibility to notify Associates
Financial Services of Canada Inc. (“Associates”) to stop charging the Costco
Membership Fee in the event an Applicant holding a House Card issued by
Associates opts to have the Costco Membership Fee automatically charged to the
Co-Branded Card Account instead of the House Card account.
…
Section 2.07. Use
of Marks.
(a) Costco hereby grants to Amex a non-exclusive license to
use the Costco Marks in connection with the Program, subject to the limitations
set forth in this Section 2.07. Such license shall be irrevocable as long as
this Agreement remains in effect and shall continue in effect after any
termination of this Agreement as provided in, and subject to the limitations
contained in, Section 5.02(c)(i) hereof. Amex acknowledges and agrees that the
grant of the foregoing license shall not be construed as the grant of any
right, title or interest in the Costco Marks (except the right to use the
Costco Marks in connection with the Program) and that the Costco Marks are the
sole and exclusive property of Costco. For so long as this Agreement is in
effect and the Costco Marks are being used by Costco, Costco Marks shall appear
on the back of Co-Branded Cards as provided in Schedule 6 hereto and Co-Branded
Account billing statements. Amex shall not have the right to sublicense Costco
Marks without prior written consent of Costco.
…
Section 2.11. Exclusivity.
(a) In Canada, during the term of this Agreement, neither
Costco nor its parent company, subsidiaries or affiliates will (i) issue a
General Purpose Card; (ii) issue a House Card which has a rewards component
based upon spend behaviour; (iii) issue a general purpose stored value card;
(iv) issue a stored value card accepted only at Costco establishments which has
a rewards component based upon spend behaviour; (v) in conjunction with any
other card issuer, association or network (A) issue, market, or co-brand with
respect to, any House Card (subject to the penultimate sentence of this
subsection (a)) or General Purpose Card, (B) issue, market, or co-brand with
respect to, a general purpose stored value card, or a stored value card
accepted only at Costco establishments that has a rewards component based on
spend or other transaction behaviour; or (vi) engage in, or allow its customer lists
to be used for, promotions of any form of payment vehicle (other than simply
indicating acceptance) or any product containing a Prohibited Mark defined in
Section 2.11 (b) below. It is understood and agreed that the above restrictions
shall not apply to the House Card being issued by Associates Financial Services
of Canada Ltd. on the Effective Date or other House Card product (provided that
Costco shall not have more than one House Card regardless of the issuer) so
long as such House Card does not have a rewards component based on spend, other
transaction behaviour or other continuity-based (i.e, on-going rather than one
off promotions) rewards component. A stored value card with a rewards component
based on spend or other transaction behaviour shall not be construed hereunder
to include a discounted stored value card.
(b) In Canada, with the exception of (i) INTENTIONALLY
DELETED, and (ii) a House Card not prohibited under Section 2.11 (a) above,
Costco agrees to the following: Other than an Amex Card, Costco (and their
parent company, subsidiaries and affiliates which own or operate Costco
Warehouses in Canada) shall not, for the first seven Contract Years of this
Agreement, accept for the purchase of goods and services at Costco Warehouses
any charge, credit, Off-Line Debit, stored value or smart card which contains
any of the following name brands, logos or marks (“Prohibited Marks”): Visa,
MasterCard, Discover, Novus, Diner’s Club (and the successor brand names, logos
or marks of any of the foregoing) or a newly created national credit card
association or network brand name, logo or mark, provided, however, that Costco
has the right to continue to accept any and all forms of payment for the
following transactions or businesses: Costco’s gasoline stations, catalogue- or
mail order- based transactions, travel programs, electronic commerce via the
Internet or other network which accesses the Costco website(s), Costco
Membership Fees transacted through Costco’s regional offices (provided,
however, that Costco shall prompt for use of the Amex Card on such transactions
by asking the customer if he or she would like to put the Membership Fee on the
American Express Card), government purchase programs involving purchases from
Costco by government agencies and/or private persons or entities who are
required to use a particular payment vehicle because of a contract with
governments, (it being understood that Costco shall not promote acceptance of
any of the products with Prohibited Marks for such transactions and businesses).
In addition, Costco shall not display in any manner at or in Costco Warehouses
(including but not limited to signage or decals) acceptance of on-line debit
products having the Prohibited Marks even if such on-line products are accepted
for payment. Within 120 days after the seventh Contract Year, and subject to
the notice requirement under Section 5.01 (e) hereof, Costco may begin
accepting any charge, credit, debit, stored value or smart card containing the
Prohibited Marks. If within 120 days after the seventh Contract Year, Costco
does not begin accepting a card containing a Prohibited Mark, then Costco shall
be prohibited from accepting any such card for the remainder of the term of
this Agreement (for example, (x) if Costco does not begin accepting any
products with Prohibited Marks, then Costco shall be prohibited from accepting
any such products for the remaining term of this Agreement, or (y) if Costco
begins accepting Visa within the 120 day period, but not MasterCard, then
Costco shall not accept MasterCard or any other products with the Prohibited
Marks other than Visa for the remaining term of this Agreement). Costco
represents and warrants that compliance with this Section 2.11 (b) shall not
violate any agreement Costco may have in place with respect to such other card
products.
…
Section 2.12. Covenants
With Respect to the Program.
(a) Costco covenants and agrees with Amex that: (i) at all
times during which this Agreement is in effect, Costco shall observe and comply
with, and maintain in full force and effect, the Costco Card Service Agreement,
as from time to time amended or replaced, and (ii) Costco shall comply in all
material respects with its obligations under any and all federal, provincial
and local laws, rules and regulations (including, without limitation, consumer
protection laws, rules and regulations) applicable to it, the Costco Membership
Program or the Program.
…
ARTICLE III
COMPENSATION TO COSTCO
Section 3.01. Compensation.
(a) Within thirty (30) days after the end of each calendar
quarter during the term of this Agreement, Costco shall be paid an amount equal
to “Y”% of the Costco Net Volume of Charges during that calendar quarter.
Provided that for the time period ending January 31, 2000, the amount paid to Costco
shall equal ___% (instead of “Y”%) of the Costco Net Volume of Charges during
that period. Provided further that, if by April 8, 2000 Costco does not
complete its information systems requirements to support the issuance of the
Co-Branded Consumer Cards, then for the time period beginning April 8, 2000
through the date Costco completes its information systems requirements, the
amount paid to Costco shall equal ___% (instead of “Y”%) of the Costco Net
Volume of Charges during that period. (It is understood that, to make a payment
promptly, Amex may be required to use Net Annual Volume of Charge figures which
are tentative, and therefore may require adjustments in a future calendar
quarter.)
(b) In exchange for the marketing efforts provided by Costco
as contained in Section 2.02 (a) above, Costco shall be paid for each 12-month
period beginning with the issuance of the first Co-Branded Card, the amount
specified in the charts below for each Co-Branded Consumer Card Account and
each Co-Branded Small Business Card Account acquired during that 12-month
period. All payments are inclusive of applicable Taxes. “Acquired”, for
purposes of this subsection (b) means that a Co-Branded Card Account was
approved, a Basic Card is issued by Amex, and the Basic Card is not canceled
prior to the end of the calendar quarter in which it was approved. The number
of Accounts Acquired is determined for each such 12-month period independently
under the charts below as if each 12-month period begins with 0 Acquired
Accounts, i.e., there is no accumulation from one 12-month period to the next
12-month period. Payments under this subsection (b) shall be made within thirty
(30) days after the end of each calendar quarter in a given 12-month period.
…
Section 3.02. Payment
if New Costco Member Requirements Not Met.
Within sixty (60) days after the end of each Contract Year, Costco
shall be paid the amount, if eligible under this Section 3.02, by applying the
following calculations:
(i) Determine the number of Canadian Costco Members who are
also Canadian consumer or small business Amex Cardholders (as defined by Amex)
as of a date which may not precede the Effective Date of this Agreement but
shall be no later than five (5) Business Days after the Effective Date of this
Agreement (said date hereinafter referred to as the “Baseline Date”).
The resulting number is hereinafter referred to as the “Baseline Number”.
The Adjusted Baseline Number for purposes of the calculations in (ii) below,
shall be determined as follows: The Adjusted Baseline Number for the first
Contract Year shall be the product of the Baseline Number multiplied by ___%.
The Adjusted Baseline Number for each subsequent Contract Year shall be the
product of the Adjusted Baseline Number for the prior Contract Year multiplied
by ___%. For purposes of this Subsection 3.02, Costco Members means primary
Costco Members only.
(ii) At the end of each Contract Year, (A) re-determine the
number of Canadian Costco Members who were also Canadian consumer or small
business Amex Cardholders (other than Co-Branded Cardholders) as of the last
day of that Contract Year; (B) subtract from the result in (A) the remainder of
the Adjusted Baseline Number minus the number of Canadian consumer or small
business Amex Cardholders on the Baseline Date who have become Co-Branded
Cardholders (it being understood and agreed that, due to the termination and
acquisition of Amex Cardholders since the Baseline Date, this latter number
will be based upon a reasonable process to arrive at an estimate); (C) multiply
the result in (B) by ___, with the result referred to as “Y”; (D) subtract the
number of Co-Branded Cardholders at the end of the Contract Year who were
Costco Members on the Baseline Date from the total number of Co-Branded
Cardholders at the end of the Contract Year, and multiply the remainder by ___,
with the result referred to as “Z”; (E) add Y (only if Y is a positive number)
and Z, with the sum referred to as the “New Costco Member Number”.
Costco agrees to provide Amex with the complete Costco Member lists to conduct
the above analyses or for other uses approved in writing by Costco in advance,
in accordance with Costco’s policies on access and use of such lists. Amex
Cardholders used in (i) above and this subsection (ii) shall consist only of
those Cardholders with Amex Issued cards.
(iii) For each Contract Year, multiply the New Costco Member
Number by the Gold Star Costco Membership Fee (currently $___), with the
product stated in dollars; and
(iv) Multiply the Net Volume of Charges incurred at Costco
Warehouses located in Canada
during that Contract Year by ___%. If the product of such multiplication is
more than the resulting dollar amount from subsection (iii) directly above,
then Costco shall be paid the difference between said product and the dollar
amount from subsection (iii) above.
…
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