Citation: 2010TCC609
Date: 20101130
Docket: 2007-1374(GST)G
BETWEEN:
COSTCO WHOLESALE CANADA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
There is a risk in
writing reasons for a judgment, in a matter that has been referred back from
the Federal Court of Appeal, of tediously restating the facts. I refrain
from doing so but suggest the parties read my Reasons of March 10, 2009 for a
more detailed background.
[2]
Briefly, Costco
Wholesale Canada Ltd. ("Costco") and Amex Bank of Canada
("Amex") entered two agreements coincidentally, the Merchant
Agreement and the Co-Branded Agreement, which together called for a payment of
a merchant fee of X percent by Costco to Amex and Y percent by Amex to Costco,
resulting in an effective fee of Z percent from Costco to Amex. The Respondent
assessed Costco for GST on the Y percent on the basis it was a supply of
something from Costco to Amex, in which Costco should have collected the GST.
[3]
In March 2009, I gave
Judgment allowing the Appellant’s appeal on the basis that there was only a
supply for consideration flowing from Amex to Costco, and that the quarterly
payments (Y) from Amex to Costco were effectively a rebate of part of the fee,
not a payment for any supply from Costco to Amex. In the alternative, I found
if there was a supply of something from Costco to Amex, for which the quarterly
payments were made, it was an exempt supply of financial services. The
Respondent appealed.
[4]
It is evident from the
Federal Court of Appeal decision that the Respondent’s position was that the
supply from Costco to Amex was a supply of property, being the right of
exclusivity, for consideration equal to the full amount of the quarterly
payments (Y), a position not raised by the Respondent in her pleadings.
[5]
The matter was referred
back to me by the Federal Court of Appeal with the direction that "it may
be decided, taking into consideration the defined meaning of
"property" based on the existing evidence or any further evidence
which the Tax Court Judge may decide to allow". Shortly after this
direction, the parties and I agreed that the issues needing to be
addressed by this direction were the following:
a) Do the rights of
exclusivity as provided in paragraphs 2.11(a) and (b) of the Co-Branded
Agreement constitute property as defined in section 123 of the Excise
Tax Act (the "Act")?
b) Did Costco make a
supply of those rights of exclusivity to Amex?
c)
If so, were the rights
each, or collectively, a single supply?
d)
If the rights were not
separately or together a single supply, but components of a multiple supply,
how do sections 138 or 139 of the Act apply, if at all?
e)
Depending on the
Court’s findings in c) or d), what part, if any, of the payments (Y) made
pursuant to paragraph 3.01(a) of the Co-Branded Agreement, was consideration
for the supply of the rights of exclusivity?
[6]
I allowed the Appellant
to recall two of its witnesses, Ms. Hawkins from Amex and Ms. Gilpin from
Costco, who both briefly expanded their previous testimony, primarily as it
pertained to the role of exclusivity in the deal between Costco and Amex. I
also permitted the Respondent to call the director of commodities tax for
Costco, Ms. Assaraf, who the Respondent subpoenaed.
[7]
The following are the additional
relevant facts from such evidence:
From Ms. Hawkins (Amex’s representative):
- there are two main
elements to the deal: exclusive card acceptance and the Co-Branded arrangement,
but her view was that of the two, the Co-Branded arrangement was the more
important.
- the following
factors were the principles considered in getting to the net merchant rate of
Z:
- nature of the industry
- high volume
- the precedent set in the United States
- types of transactions
- speed of pay
- exclusivity was not
a key driver of the rate, though important to the deal.
- Amex profited greater from use of
co-branded cards outside Costco.
- the rebate (Y) related to
exclusive card acceptance.
From Ms. Gilpin (Costco’s representative):
- the key to Costco in
the deal was to get the rate Z, which was achieved because of the volume that
could be offered by Costco
- Costco was less
concerned with exclusivity and solely concerned with getting to the net
merchant rate of Z
- Costco believed
Amex was a good fit due to the similar profile of customers and the fact that
both entities had a large business customer base
- Y had no meaning to Costco as it
was Amex’s idea
- Costco was
interested in obtaining a general purpose credit card for its members, but only
at the appropriate rate
Ms. Assaraf (also a Costco representative)
- the quarterly payments of Y were
made by cheque
- she signed the
letter of November 5 to Canada Revenue Agency (CRA), making representations on
this matter, in which she stated the following:
The arrangement relating to the acceptance of Amex cards by Costco
is an exclusive arrangement for "in warehouse" purchases. That is,
other than purchases made with Costco’s private label credit card, customers
can only use the Amex card for in warehouse purchases as an alternative to
payment by cash or debit card. As a result of this preferred supplier status,
Amex agreed to charge an effective discount rate of Z percent and this effective
rate is implemented by way of the Y percent rebate payment provided under
section 3.01(a) of the Card Agreement. This discount rate rebate structure was
used by Amex to ensure the confidentiality of the reduced discount rate
negotiated with Costco.
While Ms. Assaraf signed this letter on behalf of
Costco, she indicated that it had been drafted by Costco’s lawyers. She
suggested the preferred supplier status was not because of exclusivity but due
to the huge volume that could be offered by Costco.
Appellant’s Position
[8]
Mr. Innes stated the
Appellant’s position is simple: regardless of the tax treatment of exclusivity
under the Act, at no time did Costco make a supply of exclusivity to
Amex under the Co-Branded Card Agreement. The Appellant contends that my
earlier decision on this fundamental point is not affected by whether
exclusivity is property under the Act. The Appellant argues that my
earlier finding that the right of exclusivity was simply a bargaining tool and
was not to be considered a supply of anything (property or services) by Costco
to Amex is unaltered. In addressing the issues identified earlier, the
Appellant answers as follows:
a) for purposes of
this litigation, the Appellant does not take issue with the proposition that
the contractual rights granted by Costco to Amex under paragraphs 2.11(a) and (b)
of the Co-Branded Agreement are choses in action that constitute property for
the purposes of the Act.
b) the conduct of Costco
in complying with its contractual obligations to Amex pursuant to paragraphs
2.11(a) and (b) of the Co‑Branded Agreement did not constitute the making
of a supply to Amex. Rather, such conduct was an "attribute" of the
financing arrangement between Costco and Amex whereby Amex agreed to provide
financial services to Costco. In this regard, the Appellant stresses the
contractual covenant in section 2.11 of the Co‑Branded Agreement is more
in the nature of an attribute (e.g. a debtor will maintain a AAA credit rating
or a contractor will employ only non-union personnel), not something being
supplied, but a descriptor of their relationship. Without the supply of
services from Amex to Costco, there could be no purchase of any exclusivity
rights.
c) If Costco could be
seen to be making a supply to Amex pursuant to the terms of the Co-Branded
Agreement (which the Appellant submits was not the case), then the conduct of
the Appellant in providing rights of exclusivity to Amex pursuant to the terms
of that agreement amounted to components of a single supply.
d) Section 138 would
deem the supply of exclusivity to Amex to be the provision of a financial
service since that supply would be incidental to the other supplies made by the
Appellant under the Co-Branded Agreement; similarly, section 139 would have the
same effect since the total of all amounts paid to Costco pursuant to paragraph
3.01(a) was less than 50% of the total of all amounts, each of which would be
the consideration for the supply of exclusivity had it been supplied
separately.
e) Nil.
Respondent’s Position
[9]
The Respondent takes
the position there were reciprocal supplies; the rights of exclusivity were
essential to the deal and were property, property supplied to Amex by Costco
for an amount clearly identified as Y in the Co-Branded Agreement. It is simply
not plausible, argues the Respondent, that Costco would give exclusivity rights
to Amex for nothing. So, the Respondent answers yes to the issues a) and b) and
draws a direct link between the payment of Y and the supply of the rights of
exclusivity, therefore answering issue e) that the full amount of Y is
consideration for such rights. With respect to issue c), the Respondent now
maintains that it is no longer feasible to look at all services and property
provided by Costco to Amex as a single supply, rather Costco was making two
separate supplies: one, a supply of exclusivity rights and two, a supply of
marketing, promotional and administrative services in connection with the Co‑Branded
cards. This approach would, therefore, not engage sections 138 or 139 (issue
d)). However, even if there were multiple supplies and sections 138 or 139 were
engaged, the rights of exclusivity could not be seen as incidental to the other
property or services.
[10]
Finally, the Respondent
argues that if I must resort to the definition of financial services, I must
apply retroactively the July 12, 2010 amendments to the definition of
"financial service" contained in Bill C9, which definition would
exclude services or property from Costco to Amex as financial services.
Analysis
[11]
I have repeated the
relevant provisions, 2.11 and 3.01 (a) and (b) of the Co‑Branded
Agreement as Appendix A to these Reasons.
[12]
The following
definitions from the Act are also relevant to the analysis: section
123(1):
"property"
means any property, whether real or personal, movable or immovable, tangible or
intangible, corporeal or incorporeal, and includes a right or interest of any
kind, a share and a chose in action, but does not include money;
…
"supply"
means, subject to sections 133
and 134,
the provision of property or a service in any manner,
including sale, transfer,
barter, exchange, licence, rental, lease, gift or disposition;
…
"taxable
supply" means a supply that is made in
the course of a commercial activity;
[13]
I wish to be clear at the
outset that I heard no evidence that has caused me to change my view of the
deal between Costco and Amex; that is, it was a deal first for the acceptance
by Costco of the Amex card, and only the Amex card, at its Canadian stores for
a net merchant fee charged by Amex of Z, and second for the co-branded card
arrangement pursuant to which Costco provides marketing services to Amex for
what is called a bounty fee (which is not the subject of this dispute). The
difficulty arises because buried in the Co‑Branded Agreement is a quarterly
payment from Amex to Costco (Y), which is not explicitly related to
consideration for anything in particular. The reason, I find, is because it was
simply a secret rebate to get to the real fee charged by Amex to Costco. Period
- full stop.
[14]
I will proceed to go
through the arguments regarding property, supply and consideration, as they
were so thoroughly addressed by the parties. But, this is dragging me into an
artificial, or perhaps a better description is a manufactured, agreement,
shaped by the technical provisions of the Act rather than by the common
sense commercial view of the business deal. It is the tax tail wagging the dog!
The question should not be how can we make this business deal fall into the tax
regime, but how does the tax regime apply to this business deal.
Property
[15]
While both parties
agree that rights of exclusivity are property within the definition of property
in the Act, it is helpful to clarify what that property is. Certainly
the rights of exclusivity can be captured as a "right of any kind",
yet it is more specifically a contractual right of action Amex has against
Costco: a chose in action. As Justice Noel commented in the case of RCI Environnement
Inc. v. The Queen,
rights, such as agreements not to compete, are property within the broad Income
Tax Act definition.
[16]
This right, property,
arises at the time of the entering of the agreement. It cannot exist
independently of an agreement – it is a contractual right of action,
therefore, obviously requires a contract. This is unlike tangible property
which exists independently of any agreement. Bear in mind, I am not addressing
the provision or supply of property, just the nature of the property itself.
[17]
The Appellant suggests
this type of property, this right of action, is more aptly described as an
attribute, similar to a debtor agreeing to maintain a AAA credit rating or
the loan will go into default, or a contractor agreeing not to employ non-union
personnel. The Appellant provides some comments on "attributes" from
the Canadian Medical Protective Association v. The Queen
case of former Chief Justice Bowman. Former Chief Justice Bowman’s comments
related to expertise, which I frankly do not put in the same category as the chose
in action before me. A closer parallel may be a covenant that Costco agrees to
maintain a certain level of sales volume or even agrees to a certain level of
growth over a seven-year period. These rights would also be swept into the Act’s
broad definition of property. It would seem that any covenant upon which a
party to a contract might sue, any chose in action, could, according to the
Respondent, be a property that may attract GST. I have an uneasy feeling that
such an approach could open every contract to review to see if such contractual
covenants, properties, would unintentionally transmogrify a contract for a
supply of one thing from a vendor to a purchaser to a contract for the supply
of two things, one from the vendor to purchaser and another from the purchaser
back to the vendor. Given the nature of this type of property, I find that it
cannot simply follow that because there is a property there must be a supply of
this particular type of property.
[18]
Indeed, the Appellant
goes further than this and suggests that if there is a supply of anything it is
not of property, but a supply of a service. The Appellant argues:
"The only right the Appellant did not have after signing the
Co-Branded Agreement that the Appellant had before, was the right it shared
with every other merchant to issue its own charge card or accept any charge
card from any issuer with whom it chose to sign an agreement. Whatever the
Appellant gave up in assuming its obligations under section 2.11, it was not
"property". It follows therefore, that if the exclusivity under the
Co-Branded Agreement was a supply by the Appellant to Amex, such supply is
properly characterized as a "service" for purposes of the Act."
This leads to a discussion of supply and of
consideration.
Supply
[19]
Again, I am dealing
with a very broad definition. It is also useful to reproduce section 133 of the
Act.
133 For the purposes of this Part, where an
agreement is entered into to provide property or a service,
(a) the
entering into of the agreement shall be deemed to be a supply of the property or service made at the
time the agreement is entered into; and
(b) the
provision, if any, of property or a service under the
agreement shall be deemed to be part of the supply referred to in
paragraph (a) and not a separate
supply.
[20]
A supply is a provision
of property in any manner. Pursuant to section 133, where an agreement is
entered into to provide property, the entering into of the agreement shall be
deemed to be a supply of the property made at the time the agreement is entered
into, and the subsequent actual provision of the property is deemed to be part
of its supply. So, with this type of property, a right in action, the property
comes into existence and is supplied coincidentally. But what is the subsequent
provision of the property? It is Costco simply living up to the covenant it has
made. It does not actually do anything, provide anything. It is merely just the
coming into existence of the covenant in the contract that is meant to be the
supply. While it is easy to appreciate the Respondent’s argument that the
rights of exclusivity are property and, as such, upon the entering of the
agreement creating the property, section 133 deems there to be a supply, how
does this alter my previous finding that the fundamental deal was a supply of
Amex credit card services to Costco for Z? Costco agreed to not honour any
other cards. How does this differ, for example, from renting a car and
promising not to drive it on gravel roads? The car rental agency is supplying a
car for pavement driving only; that is the supply. Here, Costco gets Amex’s
credit card services at Z provided it does not honour other cards (drive off
paved roads). Amex is supplying its credit card services to a credit card-less
customer – that is the supply. While neither side raised it, if Costco breached
its covenant or car renter drove on gravel roads, and Amex or rental agency
successfully recovered some amount, I presume section 182 would click in to
subject such payment to GST, yet if the Respondent is right, the property, the
chose in action, would already have been subjected to GST.
[21]
If the rights of action
vis-à-vis exclusivity are the supply of property, then what about all the other
covenants Costco has provided in the Merchant Agreement? While I was not
directed to these, I gleaned from the Merchant Agreement that Costco agrees to,
amongst others:
- accept the card at all Canadian
locations
- create a charge record
- verify the card is not altered
- ensure the card is used within
valid dates
- verify the card is signed
- obtain authorization
- complete a record of credit
- submit all charges within seven
days
- disclose refund policy to card
members
- display Amex signs, decals, icons,
etc.
- not accept the card for capital
obligations
- test equipment
- train employees
[22]
In signing the Merchant
Agreement, wherein Costco agrees to be charged X by Amex, Costco has also
supplied all these rights of action to Amex by obliging itself to do or not do
a number of things. Presumably, if Costco did not live up to its many
obligations, Amex could bring an action against Costco. Yet, surely these all
relate to the supply by Amex of its credit card services. Technically, they are
no different from Costco’s agreement to not honour other cards. Is this simply a matter of degree; is it a matter of
form?
[23]
The Appellant answers
this by calling the contractual covenant an attribute, an attribute that also
happens to be a property under the Act, but not one that, with any
commercial common sense, should be viewed as being provided by Costco to Amex
for purposes of levying the GST. Does this overcome the Respondent’s technical
argument that, by adding the definition of property to section 133 to a
separate payment going from Amex to Costco, one is inevitably led to a supply
of property for consideration? It does, if one appreciates that these
intangible properties cannot be separate stand alone properties: they can and
do only arise as a result of the supply of the credit card services by Amex.
None of these "choses in action" would be supplied in isolation; none
would be supplied without the contract for the supply from Amex to Costco and
consequently GST should only arise when there is a breach or if there is an
explicit agreement for payment related to a specific chose in action. I will
deal with this in discussing consideration.
[24]
This situation is
unlike Vanex Truck Service Ltd. v. R.
to which I was referred, where Vanex re-supplied fuel, licence and
insurance to owner‑operators of trucks. It was clear there were two
supplies – one of the owner‑operator services to Vanex and the
other of the right to fuel, licence and insurance, effectively re‑supplied
by Vanex. The agreement was clear. The owner‑operators had the
option to obtain these supplies directly, not having to go through Vanex.
Such supplies could exist independently of the supply of services by the
owner-operators.
[25]
This leads me full
circle to my conclusion in the first round. Notwithstanding rights of
exclusivity are intangible property, they are not what was supplied in this
commercial deal for credit card services.
Consideration
[26]
I am going to jump to
the fifth issue addressing consideration, for even if the Act is to be
interpreted as sweeping into its net these contractual covenants as supplies of
property, I find the Respondent has not proven on balance that Y represents
consideration for such supply. Subsection 165(1) of the Act imposes GST
"on the value of the consideration for the supply".
[27]
The Respondent points
to the heading of Article 3.01, "compensation" to argue that the
agreement explicitly identifies Y as compensation and, therefore, it must be consideration
for something. I had already found in my prior Reasons that Y is effectively a
rebate: the agreement was for the supply of American Credit Card services for
Z. Is my conclusion altered now, if the rights of exclusivity are found to be a
supply of property? No, the consideration simply went one way: from Costco to
Amex of Z. The Respondent refers to the definition of consideration as including
"any amount that is payable for a supply by operation of law". The
Respondent connects the dots by suggesting because there is an amount payable
pursuant to Article 3.01(a) (therefore, by operation of law) there is
consideration. The Respondent goes on to complete the circle by arguing the
evidence supports a direct link between the payment and the rights of
exclusivity, the supply.
[28]
Before analyzing this
further, I note that this was not an argument raised by the Respondent in her
pleadings. This has arisen from my findings in my original Reasons. I agree
with the Appellant that in such circumstances, it is for the Respondent to
prove on balance that some or all of Y is in fact consideration for the rights
of exclusivity.
[29]
Article 3.01(a)
of the Co-Branded Agreement makes no mention that the quarterly payments are
consideration for the rights of exclusivity. The section is silent. However, as
I found previously, this is because the amount Y is simply a rebate, a rebate
intended to be kept confidential. It reduces Amex’s charge to Costco. It is not
consideration from Amex to Costco notwithstanding the form is that of a payment
from Amex to Costco: it remains a reduction of the fee flowing from Costco to
Amex for the supply of services from Amex to Costco.
[30]
I do not believe
paragraph 153(1)(a) of the Act assists the Respondent: it reads:
153(1) Subject to this Division, the value of the consideration,
or any part thereof, for a supply shall, for the
purposes of this Part, be deemed to be equal to
(a) where the consideration or that
part is expressed in money, the amount of the money; and
…
[31]
This presupposes the payment
is consideration flowing from Amex to Costco, which I have concluded it is not:
it is a secret reduction of the consideration from Costco to Amex. The
Respondent identifies the sole issue at this point as whether the payments were
for a supply by Costco or simply gratuitous, claiming it is simply not
plausible that such payments, in an arm’s length situation, would be
gratuitous. I do not believe this is the appropriate question as it continues
to focus on Y, which I find is simply a reduction of X. Y is a percentage meant
to remain private, not intended to reflect anything more than that. The
question to be addressed at this point, if I accept that Costco has supplied
property and Y is consideration for something, is whether none, some or all
of the payments (Y) represent the value of consideration for that property
(rights of exclusivity), to be taxable pursuant to subsection 165(1). My sense
is that it is this element of the analysis which the Federal Court of Appeal
was driving at. Interestingly, in addressing this as a valuation issue, neither
party provided me with any valuations, connecting Y to exclusivity or any other
contractual covenant or supply. The Appellant claims the value is nil and the
Respondent claims the value equals the full amount of the payment. Both rely on
the evidence from Costco and Amex witnesses from Canada.
Neither presented any evidence of valuators or of American individuals
responsible for negotiating X, Y and Z in the United States, which percentages
were simply adopted in Canada.
[32]
The Respondent argues
the evidence is clear that exclusivity was an important part of the deal, and,
relying heavily on the November 4, 2005 letter from Ms. Assaraf to the
CRA, that Y relates entirely to the supply of the exclusivity rights. The
Appellant acknowledges exclusivity is an important part of the deal but that it
went into getting to the rate of Z, along with many other factors. The
Appellant argues that the Respondent cannot prove what value is specifically
attributable to exclusivity rights. Given the Respondent has the burden of
proof and has not met it, no amount can be identified as the value of the
consideration for the exclusivity rights. I agree with the Appellant.
[33]
Addressing this now
then as a valuation issue, (although I want to reiterate my view here that Y is
simply a fiction, a secret to get to Z.) I have not been convinced, based on
the evidence before me, that all of Y is the value of the consideration for the
exclusivity rights. Maybe some part of it is but how much is entirely left to
speculation.
[34]
The Respondent argued
that in my prior Reasons I found Y related to the exclusive acceptance of Amex
cards. The Respondent referred to paragraphs 27, 30(i) and 32 of my earlier
Reasons. What I found was that Costco got a better rate due to exclusivity,
which goes entirely to the determination of Z. What else does the Respondent rely
upon to prove Y is the value of the consideration for the exclusivity rights?
[35]
First, the Respondent relies
on the letter of November 5, 2005 from Ms. Assaraf. This letter, however,
does not say that Y represents the value of the exclusivity rights. It does say
exclusivity played a role in getting to Z and that the X minus Y equals Z
formula was simply used to maintain confidentiality. This supports Costco’s
view, through the testimony of Ms. Gilpin, that Costco was only concerned about
Z.
[36]
Further, Ms. Assaraf,
who wrote the letter, testified that preferred supply status had more to do
with high volume than anything else, though the letter does not explicitly say
that. In reading this letter as a whole, it remains clear Costco’s position is
that Y is simply a rebate and the only supply is from Amex to Costco for Z.
[37]
Second, the Respondent
relies on comments of the Appellant’s counsel at the hearing in December 2008.
Specifically:
a) As a result of the
agreement between Costco and Amex, the in‑house credit card of Costco was
phased out and the only credit card that could be used inside the warehouses
was Amex.
This was obviously
an enormous commercial advantage to Amex, based on the evidence and just common
sense, and it was prepared to do a very lucrative deal with Costco to achieve
this exclusivity.
The essential
elements of the Merchant Agreement and Co‑Brand Agreement were the
exclusive acceptance of all American Express cards at the Costco warehouses, and
the establishment and administration of the Amex-Costco co‑branded
consumer cards and co-branded small business cards.
b) a suggestion that it
is not reasonable to assume the Article 3.01(a) quarterly payments (Y)
relate to the peripheral hodge-podge of services involved in the Co-Branded
Agreement.
[38]
The Respondent argues
the Appellant’s counsel cannot now suggest some portion of Y is allocable to
obligations other than exclusivity. I did not conclude that the Appellant’s
counsel was suggesting that any portion of Y was anything other than a rebate,
factoring into the calculation of Z. My view of the Appellant’s position has
always been that it is simply inappropriate to view Y as consideration for
anything, notwithstanding an acknowledgment exclusivity was an important part
of the deal.
[39]
Finally, the Appellant
relies on the testimony of Ms. Hawkins and Ms. Gilpin. Ms. Hawkins, Amex’s representative, did not deny
exclusivity was an important part of the Amex Costco deal; indeed, she
acknowledged it was one of two main elements. This view was supported by
extracts from news releases. Yet, Ms. Hawkins also made two clarifying points:
one, her view was that the second main element, the Co-Branded arrangement was
more important; two, though exclusivity was important it did not drive the
rate. She identified the driving factors as the nature of the industry
(warehouse club industry), the high volume (which could be grown through the
Co-Branded arrangement and acceptance of Amex cards generally), the precedent
agreement from the United States, and to a lesser extent, the types of transactions
and speed of payment.
[40]
I found nothing in Ms.
Gilpin’s recent testimony that supports the position that Y is compensation for
the rights of exclusivity. Costco’s sole concern was Z. As Ms. Gilpin
testified: "we wanted a general purpose credit card for our members",
and she was adamant this would only be achieved at the rate Z.
[41]
I draw the following
conclusions with respect to any possible allocation of the value of the
consideration to rights of exclusivity. First, rights of exclusivity were a
factor in Costco achieving its desired rate of Z with Amex. But, there were
many other factors considered by Amex in agreeing to charge only Z. There were
also many other covenants or choses in action as part of the commercial deal
between Costco and Amex. There was no evidence of negotiations surrounding the
determination of Y. There was also no comparative evidence of the value of
components of a net discount fee. I can envisage situations of varying degrees
of a credit card company – wholesaler arrangement:
a) credit card company
A is just one of the major credit card companies whose card is accepted and
there is no co-branded arrangement;
b) credit card company
A is just one of the major credit card companies whose card is accepted yet
some other credit card company has a co‑branded agreement;
c) credit card company
A is just one of the major credit card companies whose card is accepted but it
has the co-branded card agreement;
d) credit card company
A is the only credit card whose card is accepted but it has no co-branded
agreement;
f)
credit card company A
is the only credit card accepted plus it has a co‑branded agreement.
I would suppose, though heard no evidence in this
regard, expert or otherwise, that each of these situations might result in a
different net rate.
[42]
There is insufficient
evidence to allocate any of the factors that went into the determination of Z
between the determination of X or Y, and given my earlier view that the two
agreements are to be read as one, and given that the only reason for having Y
was to keep Z confidential, the only approach in assessing value is to look at
Z, the net merchant fee, and not some artificial Y, especially where the
agreement is silent as to what Y relates. It would then be appropriate to ask
if Z represents the net consideration for supplies flowing in opposite
directions (a conclusion I have not reached). Has there been sufficient
proof to clearly allocate consideration flowing in each direction? The
Respondent argues that the quarterly payment in and of itself is proof of
consideration. She relies on Justice Noel’s statement in the GST case of Commission
Scolaire des Chêne and Her Majesty the Queen:
[18] Consideration
under the Act is easily discernable when the obligation to pay arises under a
contract. It is more difficult to identify when the obligation to pay arises
from a source other than a contract, as contemplated in paragraph (b) of
the definition of the term "recipient" in section 123. It is that
difficulty that lead to the requirement of a "direct link"
recommended by Technical Interpretation Bulletin B-067 regarding the
"goods and services tax treatment of grants and subsidies"
("Bulletin B-067"). In this case, the judge below concluded that
there was no such link.
[19] Under the Act, in order for a payment
to constitute consideration, it must have been made pursuant to a legal
obligation (contractual or otherwise) and must be closely enough linked to a
supply that it may be regarded as having been made "for" that supply
(see the definition of the term "consideration" in section 123). That
is why a direct link is required.
[43]
While there may be a
link between exclusivity and the Y payment, the Respondent has not proven that
the payment relates entirely to the rights of exclusivity.
[44]
If I am correct in
viewing Y as a rebate, the proposition from the Commission Scolaire des
Chênes case does not apply. But, even if Y is consideration for something, I
reiterate that the Respondent simply has not proven to me that the full amount
of Y is consideration only for the rights of exclusivity. Why would none of the
other property or services have any value attributed to them? Just because
Mr. Innes suggested in argument in December 2008 that Y is unlikely to
relate to the "hodge-podge" of other services provided by Costco, I
ask why not. Also, given there are two main elements to the deal, why should
all of Y relate just to one? If the bounty fee is a small (1.5%) percentage of
"consideration" to Costco, yet the Co-Branded deal is a major factor (indeed
the most important one according to Ms. Hawkins) in getting to Z, it suggests
to me a bit more went into getting to Z than just exclusivity rights. For
example, under section 2.03(e) of the Co-Branded Agreement Costco gives access
to Amex to its membership list. Given Ms. Hawkins’ testimony of the
significant benefit to Amex of a co-branded cardholder using the card outside
Costco, this covenant by Costco is huge. Where is the consideration for this?
It is not part of the bounty fee. Why could it not be thrown into the factors
considered in Y? The Respondent has not proven on balance any allocation of Y
to any elements of the deal.
[45]
I combine these views
with the lack of any valuation evidence, the lack of any evidence in
negotiations that put any numerical value to exclusivity rights, the wording of
Article 3.01(a) that specifically avoids stating it is consideration for
anything, and I weigh that against statements that exclusivity was important to
the deal, and I find the Respondent has not proven a value for
consideration attributable to exclusivity rights.
[46]
Given that conclusion,
I find it unnecessary to address the application of sections 138 or 139 of the Act,
nor the implication of the recent amendments (Bill C-9) to the definition
of financial services.
[47]
In summary, I heard no
additional evidence to sway me from the view that Y is only related to Z, which
goes to the supply from Amex to Costco, not to any supply from Costco to Amex.
Further, if there was a supply of property from Costco to Amex, being the
exclusivity rights, the Respondent has failed to prove what consideration, if
any, is allocable to that property. For these reasons, I stand by my earlier
Amended Judgment of March 10, 2009. The Appellant did not want to address costs
until receiving my Judgment and the Respondent wanted the right to respond. The
Appellant shall therefore provide written representations on costs to me and
the Respondent by December 31, 2010, and the Respondent shall provide written
representations in response by January 21, 2011. If I receive no
representations from the Appellant by December 31, 2010, I award costs in
accordance with the tariff to the Appellant.
Signed at Ottawa, Canada, this 30th day of November 2010.
"Campbell J. Miller "
APPENDIX “A”
Excerpts from the American Express/Costco Co-Branded Card
Program Agreement dated November 4, 1999
…
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 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 cancelled
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.
…
Email this Content