Canadian Imperial Bank of Commerce v. The Queen

Canadian Imperial Bank of Commerce v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-07-12
Neutral citation
2018 TCC 109
File numbers
2015-1845(GST)G, 2015-4539(GST)G
Judges and Taxing Officers
Eugene P. Rossiter
Subjects
Part IX of the Excise Tax Act (GST)
Notes
A correction was made on July 18, 2018.
Decision Content
Dockets: 2015-1845(GST)G
2015-4539(GST)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on February 6, 8, 21 and 22, 2018, at Toronto, Ontario
Before: The Honourable Eugene P. Rossiter, Chief Justice
Appearances:
Counsel for the Appellant:
Al Meghji
Alexander Cobb
Al-Nawaz Nanji
Counsel for the Respondent:
Marilyn Vardy
Kelly Smith-Wayland
AMENDED JUDGMENT
The appeals from the assessments made under the Excise Tax Act, notices of which are dated:
March 31, 2015 with respect to the period from April 1, 2012 to November 30, 2013;
March 25, 2011 with respect to the period from September 20, 2003 to October 31, 2004;
June 22, 2011 with respect to the period from November 3, 2004 to July 14, 2006;
June 22, 2011with respect to the period from October 7, 2006 to July 29, 2008; and
March 31, 2014 with respect to the period from October 21, 2009 to July 22, 2011;
are dismissed in accordance with the attached Amended Reasons for Judgment.
This Amended Judgment and Amended Reasons for Judgment are issued in substitution for the Judgment and Reasons for Judgment issued June 22, 2018.
Signed at Ottawa, Canada, this 12th day of July, 2018.
“E.P. Rossiter”
Rossiter C.J.
Citation: 2018 TCC 109
Date: 20180712
Dockets: 2015-1845(GST)G
2015-4539(GST)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Rossiter C.J.
[1] This appeal involves determining whether the supply provided to Canadian Imperial Bank of Commerce (“CIBC”) by Visa satisfies the definition of a financial service under section 123 of the Excise Tax Act (“ETA”). For the reasons that follow, I am of the opinion that the supply provided by Visa is not a financial service and is accordingly not an exempt supply for the purposes of the ETA.
I. Executive Summary
[2] The CIBC issues Visa credit cards and utilizes a credit card payment system operated and managed by Visa Canada Corporation and its affiliates. As part of the process, fees are paid to Visa. CIBC paid the Goods and Services Tax (“GST”) on the fees and seeks a rebate as the provision of services is an exempt supply for the purposes of the ETA. As part of this supply, Visa provided a number of services for CIBC in exchange for financial consideration provided by CIBC of fees.
[3] The issue before the Court is whether or not these services constitute a taxable or exempt supply for the purposes of the ETA, specifically whether these services meet the definition of a financial service under section 123 of the ETA. The Appellant’s position is that the services provided by Visa meet the definition of a financial service, specifically paragraphs (a), (i) and (l) of the definition in subsection 123(1), and is not excluded by the exceptions found at paragraphs (q.1), (r.3), (r.4), (r.5) and (t) of the definition. The Respondent asserts that the services are not included in the financial services definition and if they are included are kicked out of the definition in subsection 123(1) by virtue of paragraphs (q.1), (r.3), (r.4), (r.5) and (t).
[4] After hearing the evidence and considering the submissions of the parties, this Court concludes that the fees and services are in respect of a taxable supply for GST purposes and are not exempt from GST, as provided in the reasons hereafter.
II. Facts
(1) Partial Agreed Statement of Facts and Evidence
[5] A Partial Agreed Statement of Facts has been filed. I believe these facts fairly and accurately set out the facts which are relevant to the consideration of this appeal. The Partial Agreed Statement of Facts are as follows:
Canadian Imperial Bank of Commerce (“CIBC”)
1. CIBC is a Schedule I bank pursuant to the Bank Act (Canada) that is, and was at all material times, resident in Canada and registered under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the “Act”) for purposes of the goods and services tax (“GST”) and harmonized sales tax (“HST”).
2. At all material times, CIBC operated branches in provinces in which the HST applied and in provinces in which the HST did not apply. CIBC thus qualified as a “selected listed financial institution” as defined by subsection 123(1) of the Act.
3. At all material times, as part of its retail banking business, CIBC issued Visa-branded credit cards (each, a “CIBC Visa Credit Card”) to its customers.
4. A CIBC Visa Credit Card generally permitted the cardholder to pay for purchases with credit granted by CIBC, as described below.
Visa Canada Corporation
5. Visa Canada Association (“VCA”) was a member-owned corporation without share capital whose members consisted of several Canadian financial institutions, including CIBC.
6. Visa Canada Corporation (“VCC”) is a corporation organized under the laws of Nova Scotia, by way of amalgamation on October 27, 2007 between Visa Canada Inc. and 3222171 Nova Scotia Limited, a subsidiary of Visa Inc. Visa Canada Inc. was the successor to VCA, as part of the restructuring of the global Visa enterprise in October 2007 (the “2007 Restructuring”).
7. VCC is an indirect subsidiary of Visa Inc., a public corporation incorporated under the laws of Delaware.
8. As part of the 2007 Restructuring, CIBC entered into a services agreement with VCA dated October 1, 2007 and entered into an amended and restated services agreement with VCC dated January 1, 2013 (collectively, the “Services Agreement”). Hereinafter, “Visa Canada” refers to VCA or to VCC, as applicable.
9. Visa Canada was at all material times resident in Canada and registered under Part IX of the Act for GST/HST purposes.
10. Visa Canada, in conjunction with its affiliates, (collectively, “Visa”) develops, operates, manages, and promotes a proprietary global retail electronic payments network that facilitates global commerce through the transfer of value and information among system users or “participants”, which include financial institutions, merchants and consumers, businesses and other organizations that use Visa-branded payment instruments.
11. Visa Canada is not a Schedule 1 bank pursuant to the Bank Act (Canada). Neither Visa Canada, nor any of the Visa affiliates: (i) issue credit or debit cards or other payment instruments; (ii) extend credit to cardholders; or (iii) determine interest rates or fees charged to cardholders or merchants.
12. Visa Canada charged fees to CIBC and other customers (also referred to as its “Members”), which are “Acquirers” and “Issuers” (as described below). Prior to the Services Agreement, these fees were imposed under the Visa Rules (as defined below) and thereafter were imposed under the Services Agreement.
13. The part of the Visa payments network that this case is concerned with involves the use of the CIBC Visa Credit Card as a payment instrument for payment transactions (hereinafter, the “Visa Payment System”).
The Visa Payment System
14. The Visa Payment System is the set of instruments, procedures, rules and technology by which transaction information and funds are transferred among system participants such that a Visa Credit Card holder can purchase goods and services from a participating merchant by immediately accessing, at the point-of-purchase, credit granted by the cardholder’s card-issuing financial institution.
15. The essential participants involved in a typical Visa Credit Card payment transaction are:
(a) The cardholder, who uses the Visa Credit Card to pay for goods and services.
(b) The merchant, who accepts the Visa Credit Card as payment for goods and services.
(c) The Issuer, who issues the Visa Credit Card to the cardholder, assigns the associated line of credit to the cardholder and provides the lending services to the cardholder that arise from the cardholder’s use of the Visa Credit Card.
(d) The Acquirer, who enters into the agreement with the merchant (the “Merchant Agreement”) under which the merchant agrees to accept Visa Credit Cards as payment for goods and services. The Acquirer effects payments to merchants.
(e) Visa, which develops, operates and manages the Visa Payment System.
16. The following are the essential steps involved in a typical Visa Credit Card payment transaction.
(a) The cardholder presents the Visa Credit Card to the merchant in payment for goods or services.
(b) The merchant’s point-of-sale device reads, and transmits to the Acquirer, the cardholder’s Visa Credit Card account number and other data encoded on the card, as well as the necessary transaction information, including the amount that the cardholder wishes to charge to the Visa Credit Card account (the “Credit Amount”).
(c) The Acquirer combines the cardholder account and transaction information into an authorization request and transmits it to Visa.
(d) Visa routes the authorization request to the Issuer for review.
(e) The Issuer checks the status of the cardholder’s account, including the available credit limit, and returns either an approval message or a decline message to Visa.
(f) Visa routes the approval or decline message to the Acquirer.
(g) The Acquirer transmits the approval or decline message to the merchant’s point-of-sale device.
(h) If the transaction is approved, the merchant proceeds to conclude the transaction with the cardholder.
(i) The merchant transmits to the Acquirer a record of the completed transaction, typically as part of a file of such records that includes account numbers and transaction amounts.
(j) The Acquirer formats the transaction information into a clearing record and combines all such records into a single daily batch file that it sends to Visa.
(k) Visa sorts the clearing records it receives from all Acquirers according to the responsible Issuers and, in the case of each Issuer,
(i) provides the Issuer with all clearing records for the transactions for which the Issuer is responsible, stated in the currency in which the Issuer bills the cardholders, and
(ii) calculates and advises the Issuer of the net settlement amount payable by the Issuer in respect of those transactions, being the amount required to cover the total of the Credit Amounts for the transactions, net of certain applicable fees and charges.
(l) The Issuer sends funds to Visa’s designated settlement bank for deposit to Visa’s settlement account in the amount of the Issuer’s net settlement obligation.
(m) Visa calculates the settlement amount payable to each Acquirer in respect of the transaction clearing records submitted by the Acquirer, being the Credit Amounts for those transactions, net of certain applicable fees and charges.
(n) Visa directs its settlement bank to transfer funds due to the Acquirer from Visa’s settlement bank account to the Acquirer’s designated settlement bank account.
(o) The Acquirer deposits or credits to the merchant’s designated bank account funds due to the merchant in respect of the transaction records that were submitted by the merchant to the Acquirer, to cover the Credit Amounts for those transactions net of any fees the merchant is required to pay to the Acquirer in accordance with their Merchant Agreement.
(p) The Issuer provides the cardholder with a statement of account detailing the Credit Amounts charged to the cardholder’s Visa Credit Card account during the period covered by the statement and specifying a balance due date.
(q) The cardholder pays the Issuer the Credit Amounts, and any interest thereon, according to the terms of the agreement between the Issuer and the cardholder (the “Cardholder Agreement”). The Issuer typically charges the cardholder interest if the balance shown on the account statements is not paid in full by the specified due date.
17. With respect to a Visa Credit Card payment transaction, there are fees paid by the Acquirer to the Issuer, fees paid by the merchants to Acquirers, and fees paid by the cardholder to CIBC, as well as fees paid by CIBC to Visa Canada in respect of the bundle of rights and services provided by Visa Canada to CIBC (the “Visa Supply”). The only fees at issue in this appeal are the fees paid by CIBC to Visa Canada.
18. There are situations where a Visa Credit Card payment transaction is reversed. For example, in a case where there has been fraudulent use of a Visa Credit Card, the Issuer has the right to reverse the transaction (or “return” it to the Acquirer) by initiating what is called a “Chargeback”. In these situations, the amount initially paid by the Issuer in respect of the Credit Amount of the transaction is “charged back” to the Acquirer. The Acquirer may, within a certain period of time, dispute or challenge the Issuer’s Chargeback. Visa establishes and enforces rules relating to Chargebacks and maintains a dispute resolution process with respect to Chargeback disputes.
The Visa Rules
19. Visa establishes, monitors compliance with, and enforces a common set of standards, rules, policies, processes and procedures (collectively, the “Visa Rules”) that govern all aspects of the Visa Payment System.
20. For a Member to be entitled to participate in the Visa Payment System, Visa requires that the Member comply with the Visa Rules.
21. The Visa Rules are comprised of the Visa by-laws, Visa International Operating Regulations and Visa Regional Operating Regulations, and include guides and other forms of directives supplementary to the foregoing.
22. The Visa Rules are voluminous, covering everything from the fundamental policies governing the Visa Payment System (referred to by Visa as is “Core Principles”), to detailed specifications for data and money transfers.
Establishing standards for participation in the Visa Payment System
23. Visa generally require persons that wish to participate in the Visa Payment System as Issuers or Acquirers to be regulated or organized under the applicable laws relating to financial institutions or to be wholly-owned by such an institution.
24. The Visa Rules allow Members to contract with third-parties to facilitate issuing or acquiring activities, subject to certain conditions. Such third-parties must be registered with Visa. The contracting Members are responsible for all errors, acts and omissions of the third-parties, including their agents and vendors.
25. The Visa Rules require Acquirers to make investigations to screen prospective merchants before entering into Merchant Agreements in order to determine that the prospective merchant is financially responsible and to ensure that the prospective merchant will comply with the substance of the Visa International Operating Regulations as well as applicable law.
Defining the respective financial responsibilities of the participants
26. The Visa Rules govern the respective financial responsibilities of the participants in the Visa Payment System towards each other.
27. Issuers are financially responsible for transactions that are accepted by merchants in accordance with the Visa Operating Regulations, and properly processed by the relevant Acquirers. Acquirers are obligated to pay or credit each merchant’s settlement account the amounts due to the merchant promptly after the merchant has properly submitted the related records of authorized transactions to the Acquirer.
Setting certain minimum cardholder service standards
28. The Visa Rules require Merchants to comply with certain minimum Visa Card acceptance standards.
29. The Visa Rules also impose certain minimum service standards with which Issuers must comply. The Visa Rules require that all Visa Credit Cards issued by an issuer must entitle the cardholders to make purchases of goods and services and to obtain cash disbursements, and that the Issuer is responsible for accepting and attempting to honour all Visa Credit Card transactions, subject to the Issuer’s Chargeback rights. Other examples are: (i) requirements that particular premium card plans include certain minimum benefits to the cardholder; (ii) common standards for how Issuers must deal with transactions disputed by cardholders; and (iii) prohibitions against imposing a minimum cardholder liability amount with regard to unauthorized Visa Credit Card payment transactions. However, neither Visa Canada, nor any of its affiliates enter into agreements with cardholders.
Fulfilling the Authorization Function where Necessary
30. In circumstances where an Issuer’s systems (or those of its third-party agent) are temporarily unavailable to respond to authorization requests, Visa is available to perform the authorization function on behalf of the Issuer (referred to as “stand-in authorization”), based on parameters that are provided to Visa by the Issuer for that purpose.
31. During the relevant period, CIBC utilized the stand-in authorization service on an as-needed basis when its systems, or those of its third-party processor, were temporarily unavailable to respond to authorization requests, which occurred relatively infrequently.
Establishing Default Interchange Fee Rates for Issuers and Acquirers
32. Visa sets default interchange fee rates for Acquirers and Issuers to use where they choose not to negotiate those fees bilaterally.
33. During the relevant period, CIBC chose to use the default interchange fee rates established by Visa.
Enforcement and Risk Protection
34. Visa regularly monitors its customers, especially those with significant settlement exposure, to assess their risk, which can threaten the integrity of the Visa Payment System. Visa applies, as it deems necessary, a variety of risk control measures, which may include imposing requirements on a customer to post collateral or provide other guarantees in respect of the customer’s settlement obligations, blocking the authorization and settlement of certain transactions, limiting a customer’s use of certain types of agents, prohibiting initiation of acquiring relationships with certain high-risk merchants and suspending or terminating a customer’s right or a merchant’s right to participate in the Visa Payment System.
35. Visa monitors participants’ compliance with the Visa Rules and can deny, suspend or terminate participation in the Visa Payment System (including by merchants) for non-compliance with the Visa Rules or to guard against suspected violations of laws, including money-laundering or financing of terrorist activities.
Visa Canada’s Supply to CIBC
36. At all material times, Visa Canada provided a bundle of rights and services to CIBC (i.e. the Visa Supply).
37. Prior to the effective date of the Services Agreement dated October 1, 2007, VCA provided the Visa Supply to CIBC pursuant to CIBC’s membership in VCA and VCA’s By-laws, various trade-mark licence agreements and the various documents that comprised the Visa Rules at that time (collectively, the “Original Agreement”).
38. After the effective date of the Services Agreement, VCC provided the Visa Supply to CIBC pursuant to the terms of the written Services Agreement (hereinafter a reference to the “Visa Supply Agreement” is a reference to the Original Agreement or the Service Agreement, as applicable), which incorporated by reference the continued trade-mark licence agreements and the Visa Rules, also as amended from time to time.
39. Pursuant to the Visa Supply Agreement, CIBC paid to Visa Canada, on a periodic basis, various fees for the Visa Supply. CIBC also paid to Visa Canada amounts as GST/HST calculated on those fees.
CIBC’s Rebate Claims
40. During the period from September 1, 2003 to November 30, 2013, CIBC paid amounts as GST/HST calculated on fees paid for the Visa Supply that was received by CIBC for each of the billing periods to which the fees related.
41. The total amount paid as GST/HST (the “Total Tax”) included amounts paid as tax under subsection 165(1) of the Act (the “Federal Component Tax”) and also, in respect of periods after June 2010, amounts paid as tax under subsection 165(2) of the Act (the “Provincial Component Tax”).
42. CIBC filed applications for rebates under section 261 of the Act in respect of the Total Tax (collectively, the “Rebates”).
43. CIBC claimed the Rebates on the basis that, in its view, the Visa Supply constituted a GST/HST exempt supply of a “financial service”, as defined in subsection 123(1) of the Act and, therefore, CIBC had paid the Total Tax in error.
Assessments under Appeal
44. The Minister of National Revenue (the “Minister”) denied the Rebates by way of the following assessments that CIBC appeals (collectively, “the Assessments”):
(a) assessment dated March 25, 2011 (the “First Assessment”) in respect of the period from September 30, 2003 to October 31, 2004, denying CIBC’s rebate claim in the amount of $2,032,567.36 (which amount claimed was, on objection, subsequently reduced by CIBC to $1,909,509.22), comprised entirely of Federal Component Tax (the “First Rebate Claim”);
(b) assessment dated June 22, 2011 (the “Second Assessment”) in respect of the period from November 3, 2004 to July 14, 2006, denying CIBC’s rebate claim in the amount of $3,532,473.69, comprised entirely of Federal Component Tax (the “Second Rebate Claim”);
(c) assessment dated June 22, 2011 (the “Third Assessment”) in respect of the period from October 7, 2006 to July 29, 2008, denying CIBC’s rebate claim in the amount of $3,189,275.02, comprised entirely of Federal Component Tax (the “Third Rebate Claim”);
(d) assessment dated March 31, 2014 (the “Fourth Assessment”) in respect of the period from October 21, 2009 to July 22, 2011, denying CIBC’s rebate claim in respect of Tax in the amount of $6,388,523.47, of which $3,100,320.42 consisted of Federal Component Tax (the “Fourth Rebate Claim”); and
(e) assessment dated March 31, 2015 (the “Fifth Assessment”) in respect of the period from April 1, 2012 to November 30, 2013, denying CIBC’s rebate claim in the amount of $3,105,338.66, consisting only of the Federal Component Tax portion of the total Tax paid in respect of that period (the “Fifth Rebate Claim”).
45. CIBC served the Minister with the following notices of objection to the Assessments:
(a) a notice of objection dated June 20, 2011 to the First Assessment;
(b) a notice of objection dated August 22, 2011 to the Second Assessment;
(c) a notice of objection dated August 22, 2011 to the Third Assessment;
(d) a notice of objection dated June 18, 2014 to the Fourth Assessment (the “Fourth Objection”); and
(e) a notice of objection dated June 8, 2015 to the Fifth Assessment.
46. The Minister confirmed the First, Second and Third Assessments in separate notices of confirmation dated January 20, 2015.
47. CIBC filed its appeal of the Fourth Assessment to this Court after more than 180 days had elapsed since CIBC had served the Fourth Objection without the Minister having made a reassessment or having notified CIBC that the Fourth Assessment had been vacated or confirmed.
48. The Minister confirmed the Fifth Assessment in a notice of confirmation dated July 17, 2015.
(2) Other Findings of Fact
[6] In addition to the Partial Agreed Statement of Facts, I also make the following findings of fact based upon the evidence presented.
[7] Visa has more branded credit and debit cards in circulation, more transactions and greater total volume than any of its competitors.
[8] Visa’s business consists primarily of:
i) a family of well-known, widely accepted payment brands which Visa licenses to customers for use in their payment program;
ii) management and promotion of its brand for the benefit of its customers through advertising, promotional and sponsorship initiatives and by encouraging card usage and merchant acceptance;
iii) a wide range of branded payments product platforms which Visa’s customers use to develop and offer credit, debit, prepaid and cash access programs for the cardholders;
iv) transaction processing services (primarily authorization, clearing and settlement) to its customers through Visa Net, its secure, centralized and global processing platform;
v) various other value-added services including inter alia, risk management, dispute resolution management and information processing services;
vi) development of new products and services to enable its customers to offer efficient and effective payment methods to its cardholders and merchants; and adoption and enforcement of a common set of rules adhered to by its customers to ensure the efficient and secure function of its payments network and maintenance and promotion of the Visa brands.
[9] In Visa International’s 10-K filing with the SEC, Visa values its risk from possible settlement losses (estimated using their proprietary model) as being less than 1 million dollars as of September 30th, 2009. Included on Visa’s balance sheet is collateral of $812 million and a brand valued at $2.6 billion (listed under intangible assets). Advertising and marketing in 2009 totalled $918 million dollars, with total operating expenses being $3.373 billion dollars.
[10] Attached hereto as Schedule “A” is a diagram of how a typical credit card payment transaction would occur.
(3) Witnesses
(a) Appellant
[11] Steven Webster was the Appellant’s first witness. He was employed by CIBC for 26 years and testified that the consumer obtains a credit card from CIBC by first submitting an application to CIBC. CIBC assesses the application based on the credit profile of the individual to determine if CIBC will issue a credit card, and if so, what would be the appropriate limit. Visa has no involvement in this process and no role in issuing the credit card. Visa is however involved in consenting to the credit card design.
[12] Mr. Webster indicated that Visa is important for CIBC’s business as it gives CIBC clients the ability to purchase goods and services at a wide array of possible merchants by enabling the transfer of money from their clients to the merchant. Visa does this by setting up the rules and regulations that govern the Visa system, which among other benefits creates trust in the Visa platform so that merchants believe that when the credit card is presented and they get an authorization, they will get paid. Visa also provides the physical infrastructure and network systems which allows for transactions to be authorized by CIBC.
[13] Mr. Webster estimated that the credit division at CIBC is fairly small with only 150 employees but that other operating groups that are comprised of roughly 1,500 employees provide support for the credit card group, including the contact centre, the fraud group and the back office operations group. When asked about the degree of interaction between CIBC and Visa, Mr. Webster stated that the two are in constant contact, with the example being given of chargebacks, with thousands of such transactions being processed a day, and the credit card group at CIBC talking to Visa on a daily basis. CIBC’s agreement is with Visa Canada.
[14] In terms of the revenue that is earned from Visa, Mr. Webster indicated that CIBC earns money from its credit card business in three principle ways:
Net interest income, which is the difference between the interest CIBC charges clients who do not pay their bill in full at the end of the month and the cost to CIBC of funding these receivables. The risk of non-payment is born by CIBC.
Interchange, which is a percentage of the purchase volume that goes through the Visa network which is the price that acquirers pay issuers for the services that the issuer provides. Visa establishes the default interchange rates, with the interchange rate being deducted from the amount that is reimbursed to the merchant. These default rates set by Visa are what is used by CIBC, though CIBC does have the option of deviating from these default rates by negotiating a different rate with individual acquirers separately.
Annual fees charged to users of the credit card.
[15] Mr. Webster described the role of an acquirer as being to sign agreements with merchants to participate in the VISA payment system, with Visa deciding on who can become an acquirer. The acquirers will then sign up individual merchants and provide them with point of sale terminals. The acquirers will charge their own fee on each transaction that is in addition to the interchange fee charged by CIBC. During cross-examination, Mr. Webster stated that he regarded the service being provided in exchange for the interchange fees as being the providing of authorization and the taking on the risk in the transaction that the client would not pay CIBC back.
[16] Mr. Webster also testified that CIBC settles its accounts with Visa on a daily basis, but that Visa bills CIBC on a monthly basis based on a calculation of all the transactions that have occurred involving CIBC clients who are Visa card holders. On a Visa credit card, the first six numbers on the card are referred to as the BIN number, which identifies the card as a Visa and also which bank issued the card; this allows Visa to identify where to route the transaction. Once the transaction information has been received by CIBC, it will go through their authorization system, which involves checking if the transaction is fraudulent and if the client has sufficient credit to make the purchase. The authorization practice is outsourced by CIBC to Total Systems. They act on CIBC’s instructions with CIBC setting out the parameters of the authorization. There is a service agreement between Total Systems and CIBC stipulating that CIBC bears the risk. The acquirer has no say whether the transaction is authorized or not, nor does Visa. In the event that the verification systems are not operational, Visa can stand in for the acquirer and can authorize the transaction based upon a set of criteria given to them by the acquirer. For CIBC, this was estimated by Mr. Webster to happen a hand full of times per year. Authorization for a transaction only takes a second or two. After the authorization, the cardholder completes the payment to the merchant and the merchant is registered in the system as having been paid, with authorization being received by the merchant.
[17] At the end of the day, the merchant will settle all of the day’s transactions with the acquirer who then settles with Visa. In the event the acquirer does not pay the merchant, Visa will pay the merchant as Visa guarantees payment for valid authorized transactions. Visa then sorts through the transaction records by issuer and routes all CIBC transactions to CIBC for the day. CIBC would then reconcile these claims with their records and deduct the interchange fees and charge backs that they are owed, after which point they will send the remaining outstanding balance to Visa for all of the day’s transactions that involved CIBC issued cards. CIBC settles with Visa before it gets paid by the cardholder, with CIBC issuing a monthly statement to the cardholder and setting a period of time for payment, with Visa having no participation in the billing and collection process, or in the ongoing management of the creditor’s accounts (such as adjustments made to the customer’s credit limit based on changes to their risk profile).
[18] Mr. Webster confirmed that once the monies are wired to Visa it is Visa’s money. If the transaction is in a foreign currency, the transaction is settled in Canadian dollars and CIBC would bear the foreign exchange risk.
[19] When asked about what would happen in the event that a customer was charged twice when there was only supposed to be one charge, Mr. Webster explained that the customer would first call CIBC and then CIBC would follow the Visa rules on charge-backs and assuming it wasn’t a valid charge, would reverse the charge. If the merchant alleges that the second charge was a valid charge, CIBC can accept or challenge it, usually by consulting with the customer, while the merchant in turn would consult with the acquirer. If the issue has not been resolved, the matter will go to arbitration where Visa will step in, adjudicate the dispute and decide who is accountable for the transaction. Arbitration was admitted to be relatively rare in practice, with Mr. Webster estimating that only 2 percent of disputes proceed to arbitration. In the event that the chargeback is found to be legitimate, the charge would come off the cardholders account and CIBC would net that amount from its settlement obligation with Visa, with the acquirer being responsible for collecting the outstanding amount from the merchant.
[20] In discussing the importance of Visa to CIBC, it was acknowledged by Mr. Webster that although CIBC might be able to create their own payment platform in Canada, such a platform would not allow CIBC customers to purchase goods and services anywhere in the world to a degree that would rival Visa’s.
[21] Mr. Webster identified the importance of the Visa trademark brand to CIBC as being:
i) Visa spends money on advertising to build their brand, the end result of which is that clients are able to recognize the utility of the card and that it can be used around the world;
ii) Its brand has global recognition; and
iii) The client trusts the card.
[22] Mr. Webster also testified that Visa’s promotion of the Visa brand is not specifically for CIBC and that it is entirely Visa’s decision as to who participates in the Visa payment system and how that system operates. The Visa rules are described as being relatively static, with the system changing very slowly over time. When rule changes do occur, permission from CIBC is not required.
[23] During cross-examination, Mr. Webster agreed with the suggestion that before 2007, Visa Canada was a not for profit association with 11 members, of which CIBC was one. Voting rights were determined based on purchase volume, so CIBC, in conjunction with other financial institutions, were admitted to have had the bulk of the voting rights. Mr. Webster also admitted that he is not aware of any instances where Visa had to make good on its guarantee because an acquirer went bankrupt, or for any other reason.
[24] The Appellant’s second witness was Paul Vessey, who among other roles, served as the director of Visa Canada’s board, an international director at Visa International, Chief Operating Officer at Visa USA and head of credit card operations at TD Bank. He indicated that Visa Canada had an IPO in 2007. He described Visa as being an electronic payments company that provides the infrastructure to allow for financial institutions to issue credit cards and for merchants to receive payment for products sold to customers that used the cards. Visa provides the mechanisms which facilitate the movement of funds and allow a seamless payment process to take place. Specifically, Visa provides its payment system, which is referred to as a dual message system, offering near instant verification followed by the movement of money in order to settle the account. Mr. Vessey admitted during cross-examination that in addition to the transfer of funds that Visa also transmits data and other information through its system. He also admitted that the three aspects of the Visa payment platform are transaction processing services, product platforms and payments network management, with clients being granted licenses to use the Visa brand and to gain access to the Visa network.
[25] When asked about the services which Visa provides to an issuer, Mr. Vessey listed the usage of their network for the purposes of authorization, clearing and settlement, a detailed set of rules and regulations, administrative services such as dispute resolution with merchants and promotional services to help them sell and market cards. For the rules and regulations, these are developed entirely by Visa and are meant to ensure a consistent customer experience, covering everything from designating where the brand should be affixed on the card that the issuer issues, to the manner in which they connect with VISA, how they settle, how authorization messages look, how they need to be delivered, the amount of time the acquirer has to pay the merchant and how cards are accepted.
[26] Mr. Vessey referred to one of the benefits of Visa as being the large size of their Merchant Acceptance Network, which refers to the network of merchants globally who will accept Visa cards. Between 2003 and 2013, Mr. Vessey was aware of a number of initiatives undertaken by Visa to increase its customer base including an attempt to increase Visa’s acceptance rate at grocery stores and sponsorships of various events such as the Olympics.
[27] Mr. Vessey also elaborated on what he thought were the benefits of Visa. Consumers benefit from the Merchant Acceptance Network as the greater the acceptance base is for Visa cards, the greater the amount of utility that the card has for them. Merchants benefit as giving customers the ability to make purchases using Visa gives them the opportunity to sell more goods. Financial institutions benefit as greater profit occurs when customers spend more, which the large size of the Visa network incentivizes them to do. Another benefit provided by Visa is the assurances that it provides to customers and merchants that it is a safe and secure method of payment. This is done in part by guaranteeing that when a transaction is authorized by an issuer, that the merchant will receive the agreed upon price from their acquirer.
[28] When asked about risks that Visa was exposed to, Mr. Vessey listed fraud risk, sovereign risk, merchant risk and foreign exchange risk. For fraud risk, which party bears the responsibility for the liability will vary based on the circumstances. If a merchant does not follow the rules, the merchant will bear the costs. An acquirer would be liable if, for example, they did not pass on the transaction record in an appropriate way. An issuer will normally bear the cost if all of the rules were complied with and an authorization was given, unless Visa has been found to have been at fault, in which case Visa would bear the cost. Mr. Vessey admitted that he could not think of any examples where Visa would be liable.
[29] Although the liability for fraud lies with the issuer, Visa is continually working on its network to ensure that losses from fraud remain low.
[30] Sovereign risk refers to the risk faced by Visa from countries where the solvency of their financial institutions is major concern (such as Venezuela); this poses a risk for Visa when customers of banks in these countries use Visa credit cards and Visa needs to collect the settlement amount from these banks. Steps that Visa takes to mitigate these risks include having a risk management division which monitors the solvency of financial institutions, and if necessary, taking collateral from these banks. This is important as in the event that an issuer does not settle with Visa on time, it is still Visa’s responsibility to settle with the acquirers.
[31] For merchant risk, Visa’s risk management division will actively monitor financially distressed merchants and consult with their acquirers, and if necessary, will ask for collateral from these acquirers. Although it is the merchant acquirer’s responsibility, under the Visa rules, for the merchants to get paid, Visa can be liable if, for example, a valid purchase was made by a Visa customer prior to that merchant going bankrupt and not delivering the good or service to the Visa customer. In such a case, if the transaction was authorized, Visa would be liable to this customer for the value of this good or service.
[32] With regards to foreign exchange risk, Visa is continually settling globally in multiple currencies. As a result, Visa is managing a very large foreign exchange position all over the world between settlements and i