PC Bank – Federal Court of Appeal finds that loyalty point redemption payments made in the course of a financial business could generate ITCs if also in the course of a commercial activity

PC Bank, a corporation in the Loblaw group, issued loyalty points to its cardholders based on their expenditures, which could then be applied by the cardholders towards purchases at Loblaw-branded stores, with PC Bank then paying the cash value of those points (the redemption payments) to Loblaws, but also receiving payments of two types from Loblaws that reduced its loss on paying the redemptions amounts.

Goyette JA found that that the Tax Court erred in finding that PC Bank’s payments of the redemption amounts did not entitle it to notional input tax credits (“NITCs”) pursuant to s. 181(5) (based on the tax fraction thereof) because such amounts did not satisfy the s. 181(5) requirement of being paid “in the course of a commercial activity” of PC Bank. In particular, the Tax Court had not recognized that it did not matter that the redemption amounts were paid in the course of PC Bank’s exempt financial services business given that they were also paid in the course of its commercial activity of “driving customers to Loblaws” – and it also did not matter that PC Bank was incurring a loss on this commercial activity because a commercial activity of a corporation was not required to have a reasonable expectation of profit.

She noted that the redemption amount was not required by s. 181(5) to be paid “exclusively” or “primarily” in the course of a commercial activity, and stated:

Unlike the words exclusively and primarily, the phrase “in the course of” has a broad meaning; it means “incidental to” or “connected to” directly or indirectly … .

She further stated (at para. 36):

In drafting subsection 181(5), Parliament did not include explicit language that the credit be allocated only “to the extent” that the person made the payment in the course of a commercial activity. The absence of this allocative language indicates that Parliament intended to grant an NITC on the entire amount of a coupon redemption payment from the moment the payment was made in the course of a commercial activity.

Accordingly, PC Bank was entitled to its claimed NITCs.

In the course of his extended dissenting reasons, Webb JA stated:

Just as the scheme of the ETA does not contemplate that 100% of a particular property or service that is acquired can be considered to be used in both a commercial activity and a business of making exempt supplies, Parliament did not intend that 100% of a single payment that is made could be considered to be made in both the course of a commercial activity and in the making of exempt supplies.

Neal Armstrong. Summary of President's Choice Bank v. Canada, 2024 FCA 135 under ETA s. 181(5).