Canada: Tax Court Decision Overturned: Visa Does Supply GST/HST Exempt "Financial Services"

On January 22, 2021, the Federal Court of Appeal (the “FCA”) overturned the Tax Court of Canada's dismissal¹ of a Canadian bank's (the “Bank”) appeal in connection with the Bank's claim for GST/HST rebates for tax paid in error.² While the Tax Court had originally found that the transaction processing services provided by Visa Canada (“Visa”) for the credit cards issued by the Bank constituted a taxable supply, the FCA was of the view that such supply was an exempt “financial service” that was not otherwise excluded pursuant to the specific exclusionary paragraphs in the definition of that term in the Excise Tax Act (Canada) (the “ETA”).

Background

As part of its retail banking business, the Bank issues Visa-branded credit cards to its customers. Customers are granted credit by the Bank so as to facilitate the payment system managed and operated by Visa.

Visa develops, operates, manages, and promotes a proprietary global retail electronic payments network. Its participants, including the Bank, use its Visa-branded payment instruments and are charged fees by Visa pursuant to a services agreement. Indeed, it was precisely the fees charged to the Bank by Visa, in exchange for the bundle of rights and services supplied to the Bank (the “Visa Supply”), that formed the subject of this case.

Between September 1 and November 30, 2013, the Bank paid to Visa amounts that included GST/HST (as calculated on the fees invoiced for the Visa Supply). The Bank then filed tax rebate claims under section 261 of the ETA on the basis that the Visa Supply was a GST/HST-exempt supply for a “financial service”, as defined in subsection 123(1) of the ETA. In other words, the Bank argued that it paid taxes in error and was entitled to a rebate. All of its rebate claims were denied by the Canada Revenue Agency, whose decision prompted the Bank's appeal before the Tax Court of Canada.

Generally, under the ETA, a supply is a financial service (and is therefore exempt) if it is described within any of paragraphs (a) to (m) of the definition (the “Inclusions”). However, if such supply also falls within any of the exclusions in paragraphs (n) to (t) of the definition (the “Exclusions”), it is not a financial service (and is therefore taxable), – unless a saving provision (a “Saving Provision”) applies. Administrative services, for example, fall within the Exclusions provided in the ETA, unless supplied by a “person at risk” ³.

The Tax Court's Decision

The Tax Court was tasked with determining whether the Visa Supply was an exempt “financial service” as defined under subsection 123(1) of the ETA. Considering that the service provided by Visa did not involve any direct handling of the funds that were in its possession, the Tax Court examined the application of paragraph (l) of the statutory definition of “financial service” (paragraph (l) is part of the Inclusions). By facilitating the transfer of payments between issuers, acquirers and merchants, it ruled, notably, that the services provided by Visa were for purposes of “arranging for” the credit services offered by the Bank. On top of paragraph (l), the Tax Court also concluded that services supplied by Visa met the conditions of two other Inclusions at paragraphs (a) and (i).  

The finding that the Visa Supply fell under one or more of the Inclusions did not settle the matter, however. The ETA required that the Tax Court consider whether any of the Exclusions also applied – if so, the Visa Supply would not qualify as a “financial service” after all.

The Tax Court examined paragraph (t), also known as the “prescribed service exclusion”, and determined that the Visa Supply was “quintessentially administrative in nature” (TCC, para. 116) and was therefore prescribed under subsection 4(2) of the Financial Services and Financial Institutions (GST/HST) Regulations (the “Regulations”) (and thus excluded under paragraph (t)) – unless the Saving Provision for supplies provided by or for, inter alios, a “person at risk” under subsection 4(3) of the Regulations applied.

The Tax Court found that the Saving Provision was not applicable, and the Visa Supply was indeed a “prescribed service” excluded from the definition of “financial service” in subsection 123(1) of the ETA. Therefore, according to the Tax Court, it was fully taxable from a GST/HST standpoint. 

The Issues

The issues in this case, as argued by the Bank, are whether the “Tax Court committed reversible errors both in concluding that the service Visa supplied to [the Bank] was an administrative service, and in determining that Visa was not a person at risk.” (FAC, para. 3). 

The Ruling

The FCA first analyzed the Visa payment system, typical Visa transactions involving cardholders, the economic risks assumed by Visa as well as the benefits derived from the Visa Supply.

The characterization of the Visa Supply and the determination that it was indeed included in at least three of the Inclusions of the definition of “financial services” (i.e., paragraphs (a), (l), and (i)) were not challenged by the parties and therefore not analyzed by the FCA.

Instead, the FCA focused on whether the Visa Supply constituted the supply of an “administrative service” within the meaning of paragraph 4(2)(b) of the Regulations (that is potentially subject to the Saving Provision for a “person at risk,”) that is part of the Exclusions and therefore a taxable supply. Where the Tax Court had determined that the benefit derived from the Visa Supply was merely administrative in nature and the Visa system had involved minimal decision making, the FCA was of the opposite view. The FCA determined that, while the Tax Court had not erred in its interpretation of the term “administrative services”, it had made a palpable error in concluding that the Visa Supplies were qualified as such, given that it had also concluded that such services “form[ed] an essential part of the ability for [the Bank] to offer credit card based services to their clients” (TCC, para. 92) and “[gave the Bank's] customers the ability to purchase goods and services anywhere in the world without [the Bank] having to individually contact each merchant to set up payment arrangements with them” (TCC, para. 95 and FCA, para. 56).

Based on the testimonial evidence provided by the Bank and an analysis of the Visa payment system, the FCA ruled that, unlike the services supplied by Emergis in the Great-West Life decision⁴, the Visa Supply added value that exceeded a simple “cost saving and logistical simplification” services (FCA, para. 63). In addition, despite the Tax Court's conclusion that the “minimal decision making” involved in the Visa system supported the determination that the Visa Supplies were administrative in nature, the FCA was of the view that this factor alone could not support the Tax Court's conclusion.

Further to this conclusion, based on the FCA's determination that the Exclusions did not apply, it did not consider the merits of the Tax Court's decision pertaining to the Saving Provision and the interpretation of “person at risk” in the Regulations.

Conclusion

Based on the foregoing, the FCA ruled that the Visa Supply was an exempt financial service and the Bank was entitled to the rebates for GST/HST paid in error. The appeal was accordingly allowed with costs.

Key Takeaways

• This landmark decision overturns the Tax Court's decision that credit card transaction processing services are GST/HST-taxable administrative services excluded from the definition of “financial service” under the ETA.
• Unless the Crown successfully applies to the Supreme Court of Canada for leave to appeal, it remains to be seen how credit card processing companies will react to this decision. In the absence of an application for leave to appeal, GST/HST should no longer be collected from banks and credit unions on credit card transaction processing services. Therefore, it is expected that rebate claims to recover the GST/HST will not need to be filed anymore by such entities.

Footnotes

1 Canadian Imperial Bank of Commerce v Her Majesty the Queen, 2018 TCC 109.

2 Canadian Imperial Bank of Commerce v Her Majesty the Queen, 2021 FCA 10.

3 In the Regulations, a “person at risk” is defined as, in respect of an instrument in relation to which a service referred to in subsection (2) is provided, means a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument.

4 Great-West Life Assurance Company v. The Queen, 2015 TCC 225.

Originally Published by Stikeman Elliott, January 2021

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