RBC – Tax Court of Canada finds that foreign interchange fees earned by RBC were zero-rated – entitling it to ITCs on a portion of its interchange expenses, but not on loyalty point costs

When cardholders of RBC credit cards used their cards for purchases from a foreign merchant, RBC would earn an “interchange fee” from the foreign bank of the foreign merchant for accepting the charge. Upon such acceptance, the cardholder discharged their purchase obligation to the merchant, RBC advanced the amount charged (less its interchange fee) to the foreign bank for crediting to the merchant’s account, and RBC would then request payment of the balance from the cardholder at the end of the applicable billing cycle.

Smith J rejected the Crown position that such interchange financial services supplied by RBC to the non-resident merchant acquirer to be the recipient) were not zero-rated under Sched. VI, Pt. IX, s. 1 by virtue of the exclusion in para. 1(a) thereof for a “service [that] relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”. He noted that, in contrast to para. (g) of the financial service definition, which referred to “the making of any advance, the granting of any credit or the lending of money”, the carve-out in subpara. 1(a)(ii) referred only to the “lending of money”. He found that, on a proper legal analysis, RBC was not lending money to the foreign bank but, rather, advancing credit: there was a three-party arrangement under which the cardholder became indebted to RBC and RBC became liable to the foreign merchant (but not pursuant to a loan of money). According, RBC was entitled input tax credits (ITCs) based on the proportion of its expenses incurred in providing interchange services that it apportioned to its zero-rated interchange fees.

However, RBC unsuccessfully submitted that it offered loyalty reward points to its cardholders to entice them to use their cards and increase the volume of interchange fee revenues, so that the costs to it of honouring loyalty points when redeemed were a direct input to generating the interchange fee revenues , including the zero-rated charges, In rejecting this position, so that RBC had no ITCs for its GST/HST incurred in honouring points redemptions, Smith J stated:

[E]xpenses incurred by RBC in the redemption of loyalty reward points were inextricably linked and an integral component of the Appellant’s agreement to extend credit pursuant to the Cardholder Agreement.

It followed from this finding of the loyalty points being related to an exempt supply of credit that RBC could also not rely on the “free supply” rule in s. 141.01(4).

Neal Armstrong. Summaries of Royal Bank of Canada v. The King, 2024 TCC 125 under ETA s. 301(1.2)(a), s. 141.02(21), s. 141.02(31)(f), s. 141.02(1) – direct input, s. 123(1) – recipient, Sched. VI, Pt. IX, s. 1(a), and Statutory Interpretation - Exclusionary provisions.