President's Choice Bank v. The Queen

President's Choice Bank v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2022-07-19
Neutral citation
2022 TCC 84
File numbers
2017-3925(GST)G, 2017-3931(GST)G
Judges and Taxing Officers
Robert James Hogan
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Dockets: 2017-3925(GST)G
2017-3931(GST)G
BETWEEN:
PRESIDENT’S CHOICE BANK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard virtually on January 31 and February 1, 2, 9 and 14, 2022 at Ottawa, Ontario
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Chia-yi Chua
Anu Koshal
Pierre-Gabriel Grégoire
Counsel for the Respondent:
Justine Malone
Lindsay Tohn
JUDGMENT
The appeals from the reassessments made under the Excise Tax Act, notices of which are dated March 26, 2014 and June 23, 2015, are allowed in part only and on agreed terms, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons for judgment.
The parties will have until September 19, 2022 to agree on costs, failing which they are directed to file their written submissions on costs no later than September 19, 2022. Such submissions should not exceed 10 pages.
Signed at Magog, Québec, this 19th day of July 2022.
“Robert J. Hogan”
Hogan J.
Citation: 2022 TCC 84
Date: 20220719
Dockets: 2017-3925(GST)G
2017-3931(GST)G
BETWEEN:
PRESIDENT’S CHOICE BANK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. INTRODUCTION
[1] President’s Choice Bank (“PC Bank”) appeals reassessments made by the Minister of National Revenue (the “Minister”) pursuant to the Excise Tax Act (the “Act”). [1] There are two appeals.
[2] The first appeal concerns the Notice of Reassessment dated March 26, 2014, which reassessed PC Bank’s net tax for the annual reporting period commencing December 31, 2008 and ending December 30, 2009 (the “2009 Appeal”). [2] The second appeal concerns the Notice of Reassessment dated June 23, 2015, which reassessed PC Bank’s net tax for the annual reporting periods ending December 30, 2010, December 30, 2011 and December 30, 2012 (the “2010—2012 Appeal”). [3] There are three main issues addressed in the 2009 Appeal and the 2010—2012 Appeal (collectively, the “PC Bank Appeals”).
[3] The first issue is whether PC Bank’s supply to the Canadian Imperial Bank of Commerce (“CIBC”) is an exempt “financial service” or a taxable supply (the “PCF Supply Issue”). [4] The PCF Supply Issue is common to the PC Bank Appeals. This issue is also raised in the appeal of Canadian Imperial Bank of Commerce v Her Majesty the Queen (the “CIBC Appeal”), which I released concurrently with this Judgment. The parties to the PC Bank Appeals and the CIBC Appeal agreed that the evidence in the CIBC Appeal be treated as evidence in relation to the PCF Supply Issue in the PC Bank Appeals. [5] Therefore, the PC Bank Appeals in respect of that issue are dismissed in accordance with the CIBC Appeal, which I have attached as Appendix I.
[4] The second issue in the PC Bank Appeals is whether PC Bank is entitled to claim notional input tax credits (“NITCs”) pursuant to subsection 181(5) for payments it made to Loblaws Inc. (“Loblaws”) when clients redeemed loyalty points at Loblaws stores (the “NITC Issue”). [6] The parties agree that the NITC Issue turns on whether or not PC Bank pays the redemption amounts to Loblaws in the course of a “commercial activity” as defined in subsection 123(1).
[5] The third issue in the PC Bank Appeals is whether the services provided by Total Systems Services Inc. (“TSYS”) [7] and First Data Resources Inc. (“FDR”) [8] to PC Bank for use in PC Bank’s credit card business are exempt supplies (the “FDR/TSYS Issue”).
[6] The material facts are set out below, followed by the analysis of the NITC Issue and the FDR/TSYS Issue.
II. MATERIAL FACTS
[7] The parties filed a partial agreed statement of facts (“PASF”). [9] I have reproduced the relevant parts below for ease of reference:
President’s Choice Bank (“PC Bank”)
1. PC Bank is a Schedule I bank pursuant to the Bank Act, S.C. 1991, c. 46 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 the harmonized sales tax (“HST”).
2. PC Bank is, and was at all material times, a listed financial institution for purposes of the Act. Effective December 31, 2009, PC Bank was a selected listed financial institution for purposes of the Act.
3. PC Bank is a wholly-owned subsidiary of Loblaw Financial Holdings Inc. and an indirect wholly-owned subsidiary of Loblaws Inc. (“Loblaws”). Loblaws is a wholly-owned subsidiary of Loblaw Companies Limited (“LCL”).
PC Bank MasterCards
4. MasterCard International Incorporated operates the MasterCard Worldwide Network, which processes payment transactions made under its payment brands, including MasterCard credit cards. A typical MasterCard transaction is described in Appendix “A” to this Partial Agreed Statement of Facts.
5. Since 2011, PC Bank has been a licensee of MasterCard and an issuer of President’s Choice branded MasterCard credit cards (“PC MasterCards” or in the singular a “PC MasterCard”) to its customers (the “Cardholders”).
6. Cardholders may use their PC MasterCards to make purchases at merchants that accept MasterCard-branded credit cards and to obtain cash advances.
The Points Program
7. Prior to March 1, 2008, PC Bank owned and operated a loyalty points program (the “Points Program”) which provided for the rewards of loyalty points (“PC Points”).
8. Effective March 1, 2008, PC Bank transferred the Points Program to President’s Choice Services Inc. (formerly President’s Choice Financial Inc.) (“PCSI”), an indirect subsidiary of Loblaws. To effect the transfer, PC Bank and PCSI entered into a Transfer Agreement, General Conveyance agreement, and Assignment Agreement each dated March 1, 2008. The Transfer Agreement was amended on July 31, 2008.
9. PC Bank and PCSI entered into a Loyalty Services Agreement (the “Services Agreement”) made effective March 1, 2008 and a Licence Agreement (“Licence Agreement”) dated July 31, 2008.
10. PC Bank, PCSI, and Loblaws entered into a Loyalty Expense Agreement (the “Expense Agreement”) made effective March 1, 2008.
11. The Licence Agreement, Services Agreement, and Expense Agreement were the subject of a rectification order granted by the Ontario Superior Court of Justice on August 16, 2016 (the “Rectification Order”).
12. Pursuant to the Rectification Order, the Licence Agreement, Services Agreement, and Expense Agreement were rectified nunc pro tunc in the form attached to the Order.
Cardholders as members of the Points Program
13. All Cardholders are automatically members of the Points Program. PC Bank issues PC Points to Cardholders whenever they use their PC MasterCard (points issued by PC Bank referred to herein as “PCB Points”).
14. All members of the Points Program are subject to the terms and conditions of the Points Program.
15. At all material times, for purchases made on the PC MasterCard, Cardholders automatically earned:
a. 20 PCB Points for every $1 spent using their PC MasterCard at a Loblaw‑banner store where President’s Choice products are sold; and
b. 10 PCB Points for every $1 spent using their PC MasterCard anywhere else.
Issuance and Redemption of PC Points
16. Pursuant to the Licence Agreement (as rectified), amongst other things:
a. PCSI granted, for the duration of the term as set out therein, a non-exclusive, royalty-free license to PC Bank the right to issue PC Points to members of the PC Points loyalty program (as defined therein) who are PC Bank’s customers subject to the terms and conditions of the Licence Agreement and the Loyalty Terms and Conditions; and
b. PC Bank acknowledged that, by virtue of being a Licensee, it will be liable for the redemption for all PCB Points.
17. PC Points were redeemable at certain supermarkets within Canada owned or controlled by Loblaws or a subsidiary, or that were operated by Loblaws franchises under a trademark owned or controlled by Loblaws, and any other locations as may be agreed to by Loblaws or PCSI, as applicable, or against any reward that may be offered as part of the Loyalty Program from time to time.
18. Pursuant to the Expense Agreement (as rectified), amongst other things:
a. for every $1.00 of purchases made by Cardholders using their PC MasterCard at Loblaw Stores where PC Bank issues PCB Points to the Cardholder, Loblaws will pay $0.0075 to PC Bank;
b. for every $1.00 of notional value of PCB Points accumulated by a Cardholder using a PC MasterCard and redeemed by such Cardholder, Loblaws will pay $0.35 to PC Bank; and
c. for every $1.00 of notional value of PCB Points accumulated by a Cardholder using a PC MasterCard and redeemed by such Cardholder, PC Bank will reimburse/pay Loblaw Inc. $1.00 (the “Redemption Payment”).
First Data Resources LLC (“FDR”)
19. At all material times, FDR was a corporation not resident in Canada and not registered under Part IX of the Act for GST/HST purposes.
20. PC Bank and FDR entered into a Service Agreement dated January 31, 2001 (the “FDR Agreement”), pursuant to which FDR made a single compound supply to PC Bank (the “FDR Supply”).
21. The FDR Agreement was amended on January 1, 2002 (the “First FDR Amendment”) and March 1, 2003 (the “Second FDR Amendment”).
22. Pursuant to the FDR Agreement and FDR Amendments, PC Bank paid FDR for the FDR Supply. FDR invoiced PC Bank for the FDR Supply. A sample invoice from FDR is available.
23. FDR did not collect GST/HST in respect of the FDR Supply pursuant to the FDR Agreement. In its annual reporting period ending December 30, 2009, PC Bank did not self-assess GST/HST on the consideration paid to FDR pursuant to Division IV of the Act.
Total Systems Services, Inc. (“TSYS”)
24. TSYS is a global payment solutions provider that provides services to financial and nonfinancial institutions.
25. At all material times, TSYS was a corporation not resident in Canada and not registered under Part IX of the Act for GST/HST purposes.
26. PC Bank and TSYS entered into a Processing Services Agreement dated December 10, 2009 (the “TSYS Agreement”).
27. Pursuant to the TSYS Agreement, TSYS provided a single compound supply to PC Bank (the “TSYS Supply”). PC Bank paid TSYS for the TSYS Supply. A sample invoice from TSYS is available.
28. PC Bank self‑assessed and remitted GST/HST in respect of the TSYS Supply totaling $267,866, $703,411, and $934,234 in its annual reporting periods ending December 30, 2010, December 30, 2011, and December 30, 2012, respectively. PC Bank claimed and was allowed input tax credits of $4,840, $14,730, and $19,574 in its annual reporting periods ending December 30, 2010, December 30, 2011, and December 30, 2012, respectively.
Financial Statements
29. KPMG LLP prepared an Auditors’ Report to the Shareholder in respect of PC Bank as at December 31, 2009 and 2008, dated January 28, 2010, as at December 31, 2010 and 2009, dated February 22, 2011, and as at December 31, 2011 dated April 3, 2012 (the “Financial Statements”).
The December 31, 2008 to December 14, 2009 Period
30. PC Bank charged, collected, and remitted GST/HST on the CIBC Payments, as defined below, inter alia, by way of an invoice dated August 27, 2007 in respect of the 2003 to 2006 periods.
Assessments Under Appeal
2009 Period
31. On February 19, 2010, PC Bank filed a GST return for the annual reporting period ending December 30, 2009 (the “2009 Period”), which, amongst other things:
a. did not claim any operational input tax credits (“ITCs”) pursuant to subsection 169(1) of the Act;
b. did not claim any notional ITCs pursuant to subsection 181(5) of the Act;
c. did not include any self‑assessed GST/HST collectible on the consideration paid for the FDR Services pursuant to Division IV of the Act; and
d. did not include any self‑assessed GST/HST collectible on the consideration paid for supplies from MCII, a non-resident, pursuant to Division IV of the Act.
32. By way of a Notice of (Re)Assessment dated March 26, 2014 (the “2009 Reassessment”), the Minister of National Revenue (the “Minister”) reassessed PC Bank’s net tax, including an increase to tax payable under Division IV of the Act, for the annual reporting period commencing December 31, 2008 and ending December 30, 2009 (the “2009 Period”). The 2009 Reassessment, amongst other things:
a. assessed PC Bank for tax payable under Division IV of the Act pursuant to paragraph 296(1)(b) of the Act on the consideration paid for the FDR Services;
b. assessed PC Bank for tax payable under Division IV of the Act pursuant to paragraph 296(1)(b) of the Act on the consideration paid for the MasterCard Services; and
c. increased PC Bank’s GST/HST collectible on the consideration paid for supplies made by PC Bank to the CIBC (the “CIBC Payments”).
33. PC Bank filed a Notice of Objection dated June 23, 2014 to a portion of the 2009 Reassessment. The Notice of Objection raised, amongst other things, whether:
a. the CIBC Payments were in respect of taxable or exempt supplies;
b. the Minister properly assessed Division IV tax on the consideration paid for the services provided by MCII (the “MCII Service”);
c. the Minister properly assessed Division IV tax on the consideration paid for the FDR Supply; and
d. PC Bank is entitled to additional ITCs pursuant to subsection 296(2) of the Act.
34. Subsequent to the commencement of the audit, PC Bank claimed operational ITCs totaling $88,674.09 and notional ITCs totaling $1,583,615.65.
35. PC Bank filed an appeal to the Tax Court of Canada in respect of the 2009 Reassessment on October 4, 2017, being court file no. 2017-3925(GST)G (the “2009 Appeal”).
2010—2012 Periods
36. On June 24, 2013, PC Bank filed its Selected Listed Financial Institution GST/HST returns for the annual reporting periods ending December 30, 2010 (the “2010 Period”), December 30, 2011 (the “2011 Period”), and December 30, 2012 (the “2012 Period”) (and collectively, the “2010—2012 Periods”). The returns for the 2010-2012 Periods, amongst other things:
a. reported GST/HST collectible on a portion of the CIBC Payments;
b. claimed ITCs regarding the CIBC Payments;
c. did not claim any notional ITCs pursuant to subsection 181(5) of the Act;
d. self‑assessed GST/HST pursuant to Division IV of the Act in the amounts of $267,866, $703,411, and $934,234, respectively, in respect of the TSYS Supply; and
e. did not include any self-assessed GST/HST collectible on the consideration paid for supplies from MCII, a non-resident, pursuant to Division IV of the Act (the above defined MCII Service).
37. On June 30, 2014, PC Bank filed amended returns for the 2010-2012 Periods reporting notional ITCs of $2,496,144, $3,220,667, and $3,503,561, respectively.
38. By way of Notices of (Re)Assessment dated June 23, 2015 (the “2010—2012 Reassessments”), the Minister reassessed PC Bank’s net tax, including an increase to tax payable under Division IV of the Act, for the 2010—2012 Periods. The 2010—2012 Reassessments, amongst other things:
a. increased PC Bank’s GST/HST collectible on the CIBC Payments;
b. allowed notional ITCs of $45,101, $67,445, and $73,405, respectively; and
c. assessed PC Bank for tax payable under Division IV of the Act pursuant to paragraph 296(1)(b) of the Act on the consideration paid for the MCII Service.
39. PC Bank filed Notices of Objection dated September 18, 2015 to a portion of the 2010‑2012 Reassessments. The Notices of Objection raised, amongst other things, whether:
a. the CIBC Payments were in respect of taxable or exempt supplies;
b. the Minister properly assessed Division IV tax on the consideration paid for the MCII Service;
c. PC Bank is entitled to additional notional ITCs;
d. PC Bank is entitled to a refund of tax self‑assessed in respect of the TSYS Supply on the basis that it was assessed in error;
e. PC Bank is entitled to a rebate for tax paid in error to PCSI in the 2011 Period only.
40. PC Bank filed an appeal to the Tax Court of Canada in respect of the 2010—2012 Reassessments on October 3, 2017, being court file no. 2017- 3931(GST)G (the “2010—2012 Appeal”).
[8] The defined terms used hereinafter have the meaning assigned to them in the PASF unless otherwise provided.
III. THE NITC ISSUE
[9] The parties agree that the NITC Issue centres on whether the Redemption Payment was made by PC Bank “in the course of a commercial activity” pursuant to subsection 181(5). If PC Bank made the Redemption Payment in the course of an exempt “financial service”, then the Redemption Payment could not have been made “in the course of a commercial activity” because the “commercial activity” definition specifically excludes exempt supplies. PC Bank is only entitled to claim an NITC pursuant to subsection 181(5) if the Redemption Payment was made in the course of a “commercial activity” of PC Bank.
A. Position of the Parties: The NITC Issue
[10] PC Bank’s position is that it made the Redemption Payments in the course of its operation of the Loyalty Program, which it states is a commercial activity. [10] According to PC Bank, the three payments set out in the Expense Agreement (as rectified) are all related to its operation of the Loyalty Program. [11] Therefore, PC Bank paid the Redemption Payment in the course of a commercial activity and is entitled to claim NITCs under subsection 181(5). [12] For PC Bank, there is no basis to conclude that the Redemption Payment was made in the course of a different activity (i.e. the PC Bank MasterCard business). [13] PC Bank acknowledges that the PC Bank MasterCard activities on their own are exempt in nature. [14]
[11] The Respondent’s position is that PC Bank issued PCB Points to Cardholders to entice them to acquire and then use their PC MasterCards. [15] PC Bank was required to reimburse Loblaws by means of the Redemption Payment when PC Bank customers redeemed the PCB Points in the Loblaws‑affiliated stores. [16] According to the Respondent, in this context, the Redemption Payments were made by PC Bank to Loblaws in the course of making exempt supplies of a “financial service” to Cardholders. [17] Since a financial services business is excluded from the definition of a “commercial activity” in subsection 123(1), PC Bank is not entitled to claim NITCs for the redemption price paid in relation to the PCB Points under subsection 181(5). [18]
B. Legislation
[12] Subsection 165(1) provides that GST is payable by recipients of taxable supplies:
165 (1) Imposition of goods and services tax—Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply.
[13] Section 181 sets out special rules for the treatment of coupons redeemed on purchases. The relevant parts of section 181 read as follows:
181 (1) Definitions – The definitions in this subsection apply in this section.
“coupon” includes a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit (within the meaning of section 181.3).
“tax fraction” of a coupon value or of the discount or exchange value of a coupon means
(a) where the coupon is accepted in full or partial consideration for a supply made in a participating province, the fraction
A/B
where
A is the total of the rate set out in subsection 165(1) and the tax rate for that participating province, and
B is the total of 100% and the percentage determined for A; and
(b) in any other case, the fraction
C/D
where
C is the rate set out in subsection 165(1), and
D is the total of 100% and the percentage determined for C.
(2) Acceptance of reimbursable coupon – For the purposes of this Part, other than subsection 223(1), where at any time a registrant accepts, in full or partial consideration for a taxable supply of property or a service (other than a zero‑rated supply), a coupon that entitles the recipient of the supply to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon (in this subsection referred to as the “coupon value”) and the registrant can reasonably expect to be paid an amount for the redemption of the coupon by another person, the following rules apply:
(a) the tax collectible by the registrant in respect of the supply shall be deemed to be the tax that would be collectible if the coupon were not accepted;
(b) the registrant shall be deemed to have collected, at that time, a portion of the tax collectible equal to the tax fraction of the coupon value; and
(c) the tax payable by the recipient in respect of the supply shall be deemed to be the amount determined by the formula
A–B
where
A is the tax collectible by the registrant in respect of the supply, and B is the tax fraction of the coupon value.
…
(5) Redemption of coupon – For the purposes of this Part, where, in full or partial consideration for a taxable supply of property or a service, a supplier who is a registrant accepts a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and a particular person at any time pays, in the course of a commercial activity of the particular person, an amount to the supplier for the redemption of the coupon, the following rules apply:
(a) the amount shall be deemed not to be consideration for a supply;
(b) the payment and receipt of the amount shall be deemed not to be a financial service; and
(c) if the supply is not a zero‑rated supply and the coupon entitled the recipient to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon (in this paragraph referred to as the “coupon value”), the particular person, if a registrant (other than a registrant who is a prescribed registrant for the purposes of subsection 188(5)) at that time, may claim an input tax credit for the reporting period of the particular person that includes that time equal to the tax fraction of the coupon value, unless all or part of that coupon value is an amount of an adjustment, refund or credit to which subsection 232(3) applies.
[14] Subsection 181(2) applies to “coupons” that entitle the recipient of the supply to a reduction of the price of the property or service for a fixed dollar amount (“Fixed Value Coupon”). Under subsection 181(2), a Fixed Value Coupon redeemed by a customer in a store is treated like cash. This means that the GST/HST is not reduced on the purchase price.
[15] For subsection 181(2) to apply, certain conditions must be met. First, there must be a “registrant”. A “registrant” is defined in subsection 123(1) as a person who is GST‑registered (e.g. a retailer). Second, the registrant must accept the “coupon”. A “coupon”, which is defined in subsection 181(1), includes “a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit … .” Third, this “coupon” must be accepted in full or partial consideration for a taxable supply of “property” or “a service”. Fourth, the supply cannot be a “zero‑rated supply”. A “zero‑rated supply” is defined in subsection 123(1) as a supply included in Schedule VI. Fifth, there must be a “recipient” of the supply. A “recipient” of a supply of property or a service is defined in subsection 123(1) to mean a person. Generally, a “recipient” of a supply means a person contractually obligated to pay for the supply, such as a customer. Sixth, the “coupon” is a Fixed Value Coupon. Lastly, the “registrant” can reasonably expect to be paid an amount for the redemption of the Fixed Value Coupon by another person.
[16] If the conditions in subsection 181(2) are met, the deeming rules under that provision apply. Paragraph 181(2)(a) provides that the tax applies as if the coupon was not accepted. This means that GST/HST is added to the purchase price before the amount of the Fixed Value Coupon is deducted. Paragraph 181(2)(b) provides that the registrant is deemed to have collected a portion of the tax equal to the tax fraction of the value of the Fixed Value Coupon. Paragraph 181(2)(c) provides that the tax payable by the recipient (e.g. customer) in respect of the supply is deemed to be (1) the amount of the tax collectible by the registrant (e.g. retailer) in respect of the supply less (2) the “tax fraction” of the coupon value. Subsection 181(1) defines a “tax fraction”.
[17] To illustrate the operation of subsection 181(2), the Respondent provided the following useful example:
38. Consider, for example, a customer who uses a reimbursable coupon for $1.00 off of a $10 bottle of shampoo, before HST of 15%, at a retailer:
Price of the shampoo
$10.00
HST at 15%
$1.50
Subtotal
$11.50
Less coupon
(1.00)
Customer pays
$10.50
39. In this example, the registrant (retailer) is deemed to have collected HST of $1.50 pursuant to subsection 181(2). It must report and remit $1.50 of HST.
40. Pursuant to paragraph 181(2)(c), however, the recipient (customer) cannot claim an ITC of $1.50. The recipient’s tax payable is deemed to be the tax collectible by the registrant (in this case, $1.50) less the tax fraction of the coupon value (in this case, $1.00/1.15 = $0.13). Therefore, the recipient may claim an ITC, if the purchase satisfies subsection 169(1) of the Act, in the amount of $1.37. [19]
[18] Subsection 181(5) entitles a particular person to an NITC for the tax fraction equal to the coupon value if certain conditions are met. First, a registrant (e.g. a retailer) must accept as full or partial consideration for a taxable supply of property or a service a “coupon” from a recipient (e.g. a customer). This coupon may either be exchanged for property or a service or entitles the recipient to a reduction of the price of the property or service. Second, a particular person (e.g. a manufacturer) pays an amount to the supplier (e.g. a retailer) for the redemption of the “coupon”. Third, this redemption payment is made in the course of a “commercial activity” of a particular person (e.g. the manufacturer). A “commercial activity” is defined in subsection 123(1). Unlike subsection 181(2), subsection 181(5) may apply to “zero‑rated supplies”.
[19] If the conditions in subsection 181(5) are met, the deeming rules under that provision apply. Paragraph 181(5)(a) provides that the redemption payment is deemed not to be consideration for a supply. Paragraph 181(5)(b) provides that the payment and receipt of the redemption payment shall be deemed not to be a financial service. Paragraph 181(5)(c) provides that the particular person (e.g. a manufacturer), who is a registrant, may claim an NITC equal to the tax fraction of the value of the Fixed Value Coupon. [20] This paragraph only applies if the supply is not zero‑rated and the coupon entitled the recipient (e.g. a customer) to a reduction of the price of the property or service equal to the value of the Fixed Value Coupon.
[20] As noted, one of the conditions that must be met for subsection 181(5) to apply is that the redemption payment made by the particular person to the supplier must be made “in the course of a commercial activity” of that particular person. The term of “commercial activity” is defined under subsection 123(1) as follows:
123(1) Definitions
…
“commercial activity” of a person means
(a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person.
…
“exempt supply” means a supply included in Schedule V.
[Emphasis added.]
[21] An “exempt supply” is defined in Part VII of Schedule V to include:
1. A supply of a financial service . . . .
[22] A “financial service” is defined in subsection 123(1). Thus, the making of an “exempt supply” of a “financial service” does not constitute a “commercial activity” and does not fall within the definition of a “taxable supply” for which NITCs would be available.
C. Review of the Case Law
[23] To understand NITCs, one must begin with subsection 169(1). Generally, input tax credits under subsection 169(1) are available for GST paid in relation to the acquisition of property or services by a person to the extent that such property or services are acquired for consumption or use in the course of commercial activities of that person. In City of Calgary v Canada, [21] the Supreme Court of Canada described the basic structure of the GST regime as follows:
[16] … The GST is designed to be a tax on consumption, and as such, the ETA contemplates three classes of goods and services: (1) taxable supplies; (2) exempt supplies; and (3) zero‑rated supplies. Taxable supplies currently attract a goods and services tax of 5% (7% at the relevant time) each time they are sold. To the extent that the purchaser of a taxable supply uses that good or service in the production of other taxable supplies, that is, in the course of commercial activities, the purchaser is entitled to an ITC and can recover the tax it has paid from the government. This is to prevent the cascading of GST, and to allow the obligation to pay GST to flow through to the ultimate consumer. The other two classes of goods and services, exempt supplies and zero‑rated supplies, do not attract GST from the ultimate consumer. Vendors of exempt supplies, while paying the GST on their purchases, are not entitled to ITCs. In consequence, GST is paid to the federal government at the penultimate stage in the production chain rather than by the ultimate consumer.
[24] There is limited case law on subsection 181(5). President’s Choice Bank v R (the “2009 Decision”) [22] is the main case that addresses subsection 181(5) and whether or not in the context of that provision, an input was made “in the course of a commercial activity”. In that case, one of the issues before this Court was whether PC Bank was entitled to NITCs pursuant to subsections 181(2) and 181(5) in respect of reimbursements made by PC Bank to Loblaw on the redemption of PC Points during the 2001 and 2002 taxation periods. [23] In addressing that issue, Lamarre J., as she then was, determined that in the context of subsection 181(5), “[i]t is at the time of redemption of the coupon that we have to determine whether that coupon has a fixed dollar value.” [24]
[25] Although Lamarre J found that the coupons had a fixed dollar value at the time of redemption, she held that PC Bank was not entitled to NITCs on PC Points awarded on President’s Choice Financial products and subsequently redeemed. [25] This conclusion was based on the finding that the supply of the PC Points in accordance with the agreement in effect at that time, was part of the exempt supplies—financial services—offered by PC Bank through CIBC. These supplies were not subject to GST. [26] Because financial services are exempt supplies, PC Bank did not make them in the course of a commercial activity. [27] However, Lamarre J. stated that for PC Points awarded on taxable supplies, PC Bank would be entitled to NITCs when it pays for the redemption of those points. [28]
[26] In Nestlé Canada Inc. v R, [29] the Tax Court made some observations in respect of subsections 181(2) and (5). The main issue in that case was whether instant rebate coupons (“IRCs”) issued by the taxpayer, Nestlé Canada Inc. (“Nestlé”), fit within the requirements for a coupon set out in section 181 or whether the IRCs should be characterized as promotional allowances. [30] If the IRCs qualified as coupons pursuant to subsection 181, “Nestlé would be entitled to its ITCs for any excess GST/HST paid by the consumer when that consumer purchased a Nestlé product at Costco [Wholesale Canada Ltd.].” [31] In addressing whether the IRCs qualified as coupons, Lamarre J. made the following observations on the operation of subsections 181(2) and (5):
[38] Under subsection 181(2), Costco is required to collect GST/HST on the pre‑discount price of the Nestlé products.
[39] Subsection 181(2) thus requires the customer to overpay GST/HST on the Nestlé products and then deems the customer to have paid only the GST/HST attributable to the post‑discount price. The reason for implementing this practice was explained by counsel for the Respondent in his oral submissions, in which he referred the Court to the policy underlying the treatment of discount coupons. The object of the practice was to simplify the treatment of coupons for small grocers, who, in the 1990s, did not have easy access to cash registers that, for the purpose of the application of the GST/HST, could distinguish between coupons for taxable supplies and coupons for non‑taxable (or zero‑rated) supplies.
[40] This excess GST/HST does not go to the government however. Instead, subsection 181(5) allows the provider of the coupon, here Nestlé, to obtain an input tax credit for the excess GST/HST paid by the Costco customer.
[41] The benefit represented by this additional input tax credit, received at the customer’s expense, is why Nestlé is claiming that its transactions fit within the section 181 coupon regime, instead of the section 232.1 promotional allowance regime.
[27] No further analysis was provided in respect of subsection 181(2) or (5) because Lamarre J. concluded that the IRCs were not coupons pursuant to section 181. [32]
[28] Neither the 2009 Decision nor Nestlé Canada provides significant guidance for the NITC Issue in this appeal. In the context of other provisions of the Act, including subsection 169(1), the courts have considered on a number of occasions whether an input was made “in the course of” a “commercial activity”. The meaning of these phrases as described by the courts is outlined below.
(i) The phrase “in the course of” has a wide meaning.
[29] The phrase “in the course of” has a wide meaning. [33] Courts have concluded that an ITC is available if an item directly or indirectly contributes to the production of articles or the provision of services that are taxable. For example, in Midland Hutterian Brethren v R, [34] at issue was whether the applicant could claim an ITC in respect of the cost of certain cloth purchased to make work clothing for use by its members in its commercial activity—farming operations. [35] The Federal Court of Appeal found that the cloth contributed to the applicant’s commercial activities and bottom line. [36] In arriving at this conclusion, the Federal Court of Appeal noted:
[23] … This Court has already interpreted these words to mean that, when a registrant incurs a GST expense in connection with its commercial activities, it is entitled to an ITC. As Stone J.A. explained in Metropolitan Toronto Hockey League decision:
The scheme of the Act allows a business to claim refund or credit of any tax paid on the purchase or services connected to its sale of taxable supplies. In this way the tax is ultimately paid only by the final non commercial purchaser of a taxable supply [emphasis added].
[24] When the phrase “connected to” was used by Justice Stone to explain the words in the statute, the meaning it conveyed was that the supplies must contribute to the production of articles or the provision of services that are taxable. It would not be enough to qualify as being connected to the business activity if something, like a cigarette, were merely consumed while engaged in the business activity, for that would not contribute to the commercial activity that will ultimately produce taxable supplies.
[25] There is no language in subsection 169(1) that requires the use in question to be exclusively commercial or that distinguishes between property acquired and used directly and property acquired and altered before its use in commercial activities. Once an item is found to be acquired and used in connection with the commercial activities of a GST registrant and that item directly or indirectly contributes to the production of articles or the provision of services that are taxable, then an ITC is available using the formula in that subsection. Any possible abuse is to be combatted by requiring evidence of intended use and an adjustment in the percentage of ITC allowed by the Minister.
[Emphasis added.]
[30] Courts have found that there must be a “sufficient nexus or connection” between the input and the commercial activity. For example, in General Motors of Canada Ltd. v R, [37] the Federal Court of Appeal upheld this Court’s conclusion that there was a “sufficient nexus or connection” between services provided by investment managers and the commercial activities of General Motors of Canada Ltd. (“GMCL”). In that decision, the Federal Court of Appeal noted that:
[44] The Tax Court Judge gave to the words “in the course of”, found in paragraph 169(1)(c), a wide meaning given by this Court in The Queen v. Blanchard, 95 D.T.C. 5479 (F.C.A.) and in M.N.R. v. Yonge Eglington Building Ltd., 74 D.T.C. 6180, at page 6184, where the words “in connection with”, or “incidental to”, or “arising from” were suggested. She held that GMCL’s responsibilities to properly manage the Pension Plan assets were derived not only through the agreements but also through its duties as administrator under the OPBA and its duties to provide pension benefits to its employees (her para. 65). She noted that pension benefits, like salaries, are part of the compensation package which is an integral component to the commercial activities of the corporation. She fully explains these considerations at paragraphs 66‑67. At paragraph 67 she stated:
… The only logical, common sense conclusion is that all of the functions of GMCL, in relation to these pension assets, are for the sole benefit of its employees, both the salaried and hourly employees and, consequently, they are an essential component to GMCL’s business activities. Therefore, GMCL acquired the services of the Investment Managers for use in its commercial activities. As such, while GMCL does not directly utilize the services in making GST supplies in its operations, those services are part of its inputs toward its employee compensation program, which is a necessary adjunct of its infrastructure to making taxable sales. The expenses are not personal in nature. They are ancillary to the primary business activities of GMCL and meet the need of attracting and maintaining an adequate employee base to support its primary business operations. Therefore these expenses, although indirect expenses to GMCL’s business, qualify as expenses paid for in the consumption or use in the course of the commercial activities of GMCL. Subsection 169(1) does not require that managing a pension plan be the sole commercial activity of a person, only that the supply be consumed or used “in the course of commercial activities”. To divorce the services of the Investment Managers from the commercial activities of GMCL, in the manner that the Respondent would have me do, ignores not only the contractual and statutory obligations of GMCL but also the commercial realities of a competitive marketplace.
[Emphasis in original.]
[31] At issue in General Motors, was whether GMCL was eligible for ITCs under subsection 169(1) of the Act in respect of GST paid to investment managers. [38] GMCL retained these investment managers in order to manage the investment funds held in the pension plans established by GMCL. Although it was GMCL that manufactured, assembled and sold vehicles, the services provided by the investment managers were found to be sufficiently connected to the commercial activities of GMCL.
(ii) The definition of “c