CIBC – Tax Court of Canada finds that CIBC’s interchange fees from a non-resident credit-card processor were not zero-rated as relating to the loans effectively made to its Cdn. cardholders

CIBC had outsourced part of its Visa-card operation to an arm’s length non-resident (“GPDI”) so that, in a typical transaction in which a Canadian cardholder presented their CIBC Visa card to a Canadian merchant, GPDI would process the point-of-sale information received from the merchant and transmit it to CIBC for credit authorization, transmit the authorization (assuming no “decline”) back to the merchant and send this and the other day’s transactions to VISA for clearing, following which there was a process involving CIBC, GPDI and VISA by which the settlement funds were paid to the merchant. GPDI would charge the merchant a merchant discount fee of, say, 2%, and pay CIBC an interchange fee of, say, 1.5% in consideration for CIBC’s authorization and payment services.

Before concluding that the interchange fees were not zero-rated on the basis of the exclusion in ETA VI‑IX‑1(a)(ii) for a service that “relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”, Sommerfeldt J found that:

  • regarding the “relates to” test, “there only needs to be ‘some connection’ between the interchange services and the debt described in the carve‑out;
  • in this context the verb “lend” should have “a broad meaning (recognizing that a loan arises when the lender, at the request of the borrower, pays money to a third party in satisfaction of an obligation owed by the borrower to the third party)”, so that “when a Cardholder used a CIBC Visa Card in respect of a transaction, CIBC loaned to the Cardholder, and the Cardholder borrowed from CIBC, the monetary amount of the transaction” (even though the funds went to the merchant);
  • “in a tax context, the word primarily generally means (among other things) principally, mainly, most importantly, or more than 50%”; and
  • “the loaned money was used to pay merchants located in Canada” so that “the money paid by CIBC indirectly to the merchants (i.e., through the Visa Payment System), in satisfaction of the Cardholders’ obligations to the merchants, was loaned money that was primarily for use in Canada”.

However, CIBC established a due diligence defence to reverse the penalties imposed under former ss. 280(1)(a) and 280(2)(a) given inter alia that “CIBC’s filing position was not unreasonable” and had been prepared by qualified tax-group employees.

Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The King, 2024 TCC 160 under ETA s. VI‑IX‑1(a)(ii) and s. 280(1)(a).