18 June 2008 External T.I. 2008-0275951E5 - Standard Credit Card Transactions

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether standard credit card transactions are loans for the purposes of, inter alia, Part IV of the Income Tax Regulations.

Position: General comments given only.

Reasons: Insufficient information available to conclude. Matter should be determined in the context of an advance income tax ruling submitted in accordance with IC 70-6R5 or, where the transaction is completed, as a request to the appropriate TSO.

XXXXXXXXXX  						2008-027595
L. Carruthers, CA
June 18, 2008

Dear XXXXXXXXXX :

Re: Credit Card Transactions and Part IV of the Income Tax Regulations

This is in reply to your letter of April 14, 2008, in which you requested our technical interpretation as to whether standard credit card transactions are loans for the purposes of, inter alia, Part IV of the Income Tax Regulations (the "Regulations").

The premise of your submission was that a standard credit card transaction normally involves the following:

• A holder of a credit card (the "cardholder") presents the card to a merchant to make payment for a purchase of goods or services.
• The merchant, using the information on the credit card, transfers the rights to payment to a third party that requests approval to process the transaction by sending notification of the transaction to an electronic payments approval system.
• If the transaction is approved, the issuer of the credit card ("FINCO"), using its own funds, pays an amount that is normally less than 100% of the retail price to the merchant. As a consequence, the cardholder will owe FINCO 100% of the full amount of the retail price of the goods or services for which the merchant has been paid by FINCO.
• Amounts charged to a cardholder must be paid by a certain date or FINCO will charge the cardholder interest. The cardholder pays FINCO, normally by cheque or electronic transfer, to settle his or her obligations in respect of the transaction.

Our Comments

Your request appears to be a factual situation relating to a proposed if not a completed transaction. Written confirmation of the tax implications inherent in an actual proposed transaction is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5 Advanced Income Tax Rulings. Furthermore, this Directorate does not provide written interpretations involving completed transactions since, as mentioned in paragraph 22 of IC 70-6R5, such requests should be made in writing to the appropriate Canada Revenue Agency tax services office ("TSO"). Notwithstanding the foregoing, we are prepared to provide the following general comments.

Given that the term "loan" is not defined for the purposes of Part IV of the Regulations, in our view, a review of the relevant jurisprudence would be required prior to the determination of the relationship between a FINCO and a cardholder. To this end, please find below two cases which, in our view, are relevant to your enquiry.

In GE Capital Canada Retailer Financial Services Co in the matter of an appeal pursuant to Section 32 of the Consumer Protection Act, R.S.N.S. 1989, c. 92, where the issue was whether the retail sellers of gasoline were required to register as "lenders" under said Act, the Supreme Court of Nova Scotia in 2000 commented that:

"20. We have therefore three separate contracts between three separate and distinct parties and each of the distinct parties is a party to two of the three contracts but neither a party nor privy to the third contract. GE Capital Canada operates in accordance with its agreements with the retailers by accepting, processing, approving or rejecting applications for credit by the retailers' customers. GE Capital Canada issues the credit card direct to the retail customers that it has approved for credit and the credit card receivables are owned by GE Capital Canada pursuant to their credit contract with the retailers' customers. GE Capital Canada extends the credit to the customers of the retailers and the retailer accepts the card in full satisfaction of the cost of purchase by its customers and obtains its payment through its contract with GE Capital Canada.

21. This is a relatively standard commercial arrangement that has been in effect for many decades and is described by Professor M. H. Ogilvie in Canadian Banking Law, p. 665:

"The tripartite scheme consists of three separate contracts: between the cardissuer and the consumer card holder, the cardissuer and the participating merchant, and the consumer and the merchant. The contractual obligations of the first two contracts are determined by the cardissuer, while the third contract is an ordinary contract for the sale of goods or of services. Essentially, in the tripartite scheme, the cardholder enters into a contract of sale with the merchant on the understanding that after presentation of the card and approval of the value of the sale by the cardissuer, that the cardissuer will pay the merchant the value of the sale. The cardholder will then pay the cardissuer on a monthly basis, the value of that sale and of all other sale contracts entered into either in stipulated minimum instalments or otherwise in part or in whole. Credit is extended to the cardholder by the cardissuer and interest is charged on accounts outstanding, pursuant to agreement." "

In Dahl v. Royal Bank of Canada [2004 BCCA 419], where the Court was asked to rule on whether the defendants (named banks) had violated certain federal Acts due to their charging of interest between the transaction date and the posting date of credit card transactions, the Court commented that:

"11. ... While the pleadings describe credit card transactions generally understood by millions of consumers and the principles articulated in Re Charge Card Services apply to such transactions, it would be premature and unjust to dismiss the appellants' action without reviewing the contracts applicable to this case."

"69. ... It neither serves the parties nor the development of the law for this Court to make assumptions about what the contracts contain or do not contain, no matter how reasonable those assumptions may appear to be."

Whether a loan exists between a FINCO and a cardholder is a question of fact which can only be determined following a thorough analysis of all relevant documents and agreements between the FINCO, the cardholder and the merchant. Your enquiry, in our view, would best be dealt with in the context of an advance income tax ruling request or, where the subject of your enquiry is a completed transaction, as a request to the appropriate TSO, such that we would have the opportunity to fully review all of the facts and relevant agreements.

We trust that our comments will be of assistance.

Yours truly,

R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate