Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 243033a
Dear [Client]:
Subject: GST/HST INTERPRETATION
Credit card surcharge
We write with reference to our letter, case #243033, dated [mm/dd/yyyy], in response to your enquiry of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to a surcharge that a service provider (“Company A”) proposes to add to its bills for certain services when customers pay using their credit cards. Upon further review of our letter, it has become necessary to amend our response to you. Accordingly, this amended response supersedes our letter of [mm/dd/yyyy]. We regret any inconvenience or difficulty that this may cause.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references herein are to the Excise Tax Act (ETA) unless otherwise specified.
Based on the information that you have provided, we understand the following:
1. Company A is a GST/HST registrant and provides various services (“Business Services”), which are taxable supplies for GST/HST purposes.
2. In some situations, a customer’s invoice may include charges for supplies of Business Services on which the GST/HST is payable at a positive rate of tax, as well as charges for supplies of Business Services on which no GST/HST is payable, either because the supplies are zero-rated supplies (i.e., supplies taxable at the rate of 0%) or are made outside Canada.
3. Customers may pay for the Business Services in different ways: cash, cheque, debit card, e-transfer, wire transfer and credit card.
4. Historically, there has been no additional charge (premium) or reduction (discount) based on the customer's chosen method of payment.
5. The Visa and MasterCard credit card network rules have been amended, effective October 6, 2022, to permit most merchants in Canada to add a surcharge to their bills when customers choose to pay for their purchases with the use of their credit cards, subject to the terms and conditions set out in the amended network rules. Under those rules, the surcharge is a fee that is charged by the merchant to the customer solely for the merchant’s acceptance of the customer’s credit card as a payment method.
6. Under the amended credit card network rules, a merchant who intends to levy a surcharge on a credit card transaction must disclose the surcharge to the cardholder before the completion of the transaction and the cardholder must have the opportunity to opt out of using their credit card upon such disclosure. The network rules also govern the calculation and level of the permissible surcharge and require that the surcharge amount be included in the total amount that is charged to the credit card.
7. As provided for under the amended credit card network rules, Company A intends to add a surcharge to its bills for Business Services (the “Surcharge”) when customers choose to pay with the use of their credit cards.
INTERPRETATION REQUESTED
You have asked for an interpretation as to how the Surcharge would be treated for GST/HST purposes. In particular, you would like to know whether the Surcharge would be treated as additional consideration for Company A’s supply of the Business Services or as consideration for a separate supply made by Company A. If it is the latter, you would also like to know if the Surcharge would have to be prorated on any given billing between charges for zero-rated supplies or supplies made outside Canada and charges for supplies that are subject to the GST/HST at a positive rate of tax.
INTERPRETATION GIVEN
The amendments to the credit card network rules that went into effect on October 6, 2022, permit most merchants in Canada to levy a type of fee that was previously not permitted under those rules, being a separate surcharge that is levied solely for the acceptance of a credit card as a method of payment. The network rules require that this surcharge be disclosed to the customer before the transaction is completed and that the customer have the opportunity to opt out of using the credit card upon that disclosure, in which case the surcharge would not be payable. It is thus a choice that the customer makes to take the merchant up on the offer to accept the use of a credit card as a payment method in return for the payment by the customer of the surcharge. In this situation, we view the merchant as providing a service to the customer in allowing the customer to use the credit card as a method of payment and we view the surcharge as an amount of consideration that is attributable to that service.
Considered on its own, the service of accepting the use of a credit card as a method of payment in return for a credit card surcharge falls within the definition of “financial service” in subsection 123(1) under paragraph (i) thereof, which refers to “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”. In this context, the relevant agreement is the agreement between the merchant and its payment processor relating to the payment of amounts in settlement of the merchant’s credit card transactions with customers. Pursuant to that agreement, the merchant is obliged to comply with the relevant credit card network rules pertaining to merchants, which include the network’s surcharging rules.
Under the GST/HST, a supply of a financial service is an exempt supply, unless it meets the conditions for being a zero-rated supply, which is a supply that is taxable at the rate of zero percent. In either case, there is no tax payable on a supply of a financial service.
In certain circumstances, a charge for a financial service that is connected to the provision of other services or property is treated, for GST/HST purposes, as consideration for a separate supply of the financial service despite the extent to which the financial service and the other elements of the transaction are bound together. For example, this is generally the treatment in the case of a financing charge under an instalment sale contract for the sale of goods, provided there is a clearly identifiable amount imposed as a fee or charge solely for the financial service and that amount is disclosed and charged separately from other charges contained in the details of the transaction.
The situation in which a customer chooses to pay by credit card and thereby incurs a credit card surcharge is considered to be comparable to the situation in which a customer chooses to pay by instalment and thereby incurs a financing charge. In the case of a credit card surcharge that is provided for under the amended credit card network rules, the surcharge will generally be treated for GST/HST purposes as consideration for a separate supply of a financial service where it meets all of the following conditions:
- it is charged to the cardholder solely for the acceptance of the use of the credit card as a payment method and is not charged if another payment method is used;
- it is imposed by (and is thus the revenue of) the merchant who provides, to the cardholder, the property or service that is purchased with the use of the credit card, and not by a person who acts only as a billing agent or payment service provider in facilitating the payment transaction;
- it is subject to the relevant credit card network rules relating to surcharging, including rules regarding the calculation and level of the surcharge; and
- it is shown and charged separately to the cardholder.
Accordingly, if Company A were to accept the use of a credit card by a customer and thereupon add the Surcharge to the customer’s bill, the Surcharge would be treated as consideration for a separate supply of a financial service made by Company A to the customer if all of the above conditions were met with respect to the Surcharge. Since in that case the Surcharge, as a fee for a financial service, would not attract the GST/HST, there would be no need to prorate the Surcharge on any given billing between the charges for different supplies.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 416-709-0130 or my manager, Hélène Lacasse, at 343-571-0207. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Marlene Legare
Industry Sector Specialist
Financial Services Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
Email this Content