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
2022-07-19
Neutral citation
2022 TCC 83
File numbers
2019-3197(GST)G
Judges and Taxing Officers
Robert James Hogan
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2019-3197(GST)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard virtually on common evidence with the appeals of President’s Choice Bank (2017-3925(GST)G and 2017-3931(GST)G)
on January 24, 25, 26, and 27, 2022 and February 11, 2022
at Ottawa, Canada
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Al Meghji
Alexander Cobb
Al-Nawaz Nanji
Counsel for the Respondent:
Justine Malone
Lindsay Tohn
JUDGMENT
The appeal from the assessments made under the Excise Tax Act, notices of which are dated January 30, 2017, November 22, 2016, January 23, 2017, and January 27, 2017, is dismissed with costs in favour of the Respondent 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 83
Date: 20220719
Docket: 2019-3197(GST)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. INTRODUCTION
[1] Canadian Imperial Bank of Commerce (“CIBC” or the “Appellant”) and Loblaw Companies Limited (“LCL”) entered into two agreements, the Financial Services Agreement (the “FSA”) and the Loyalty Services Agreement (the “LSA”). The FSA and the LSA (collectively, the “PCF Agreements”) were assigned by LCL to its indirectly wholly‑owned subsidiary President’s Choice Bank (“PC Bank”). Initially, PC Bank did not charge CIBC Goods and Services Tax (“GST”) on the consideration that it received for the supply it made under the PCF Agreements. PC Bank believed that the supply was exempt from GST on the basis that it was the supply of a financial service under subsection 123(1) of Part IX of the Excise Tax Act (the “ETA”). [1]
[2] PC Bank was subsequently reassessed GST by the Minister of National Revenue (the “Minister”) for failure to collect and remit GST on the basis that the supply was taxable in nature. While PC Bank appealed the Minister’s reassessments to this Court, it began to collect and remit GST on behalf of CIBC. Following PC Bank’s success in President’s Choice Bank v The Queen [2] (the “2009 Decision”), the definition of “financial service” in subsection 123(1) of the ETA was amended to add, among other things, paragraphs (r.4) and (r.5). These paragraphs were enacted in 2010 with retroactive effect to December 17, 1990 and expanded the types of supplies that are excluded from the “financial service” definition in subsection 123(1).
[3] CIBC filed six rebate claims for GST paid in error on the basis that the supply it received from PC Bank remained a supply of an exempt financial service notwithstanding the expansion of the exclusions in the “financial service” definition. CIBC’s rebate claims were denied by the Minister. In addition, the Minister assessed PC Bank in respect of certain periods on the basis that PC Bank failed to collect and remit some of the GST on the consideration that it received from CIBC. [3] PC Bank appealed the Minister’s reassessments.
[4] PC Bank has two separate appeals regarding the Minister’s reassessments (the “PC Bank Appeals”). CIBC’s appeal and the PC Bank Appeals were heard together, in part, because the appeals raise a common issue: the characterization of a supply made by PC Bank to CIBC (the “PCF Supply Issue”). The parties have agreed that I can dispose of CIBC’s and PC Bank’s appeals as they pertain to the PCF Supply Issue based on the present reasons for judgment.
[5] While I have dismissed the Appellant’s earlier motion to have the matter determined based on the outcome of the 2009 Decision (“Reasons for Order”) [4] , the Appellant insists that I must give weight to the earlier factual findings in the 2009 Decision because the retroactive amendments to the “financial service” definition which added significant exclusions do not change the essence or substance of the supply made by PC Bank to CIBC (the “PC Bank Supply”).
[6] A careful read of the 2009 Decision reveals that my former colleague, Lamarre J., was tasked with examining the evidence presented at that trial through an entirely different legal prism. In short, I am of the opinion that the factual findings made by Lamarre J. were influenced by the old version of the definition of a “financial service”, which was narrowed by virtue of the addition of new exclusions. At best, we are left to speculate about what factual findings Lamarre J. would have made had she been tasked, like me, with determining whether either paragraph (r.4) or paragraph (r.5) of the “financial service” definition applies to exclude the PC Bank Supply as an exempt supply.
[7] For the reasons that follow, I am of the opinion that the essence of the single compound supply made by PC Bank to CIBC in the relevant periods falls within the exclusion provided for under paragraph 123(1)(r.5) of the “financial service” definition in the ETA.
II. MATERIAL FACTS
A. Partial Agreed Statement of Facts
[8] The parties filed a partial agreed statement of facts (“PASF”). [5] I have reproduced it in its entirety below for ease of reference:
PARTIES
1. Canadian Imperial Bank of Commerce (CIBC) is a Canadian chartered bank with its head office in Toronto, Ontario.
2. Loblaw Companies Limited (LCL) is a diversified retailer of groceries and other merchandise operating across Canada.
3. President’s Choice Bank (PC Bank) is a subsidiary of LCL and is a Canadian chartered bank.
AGREEMENTS
Financial Services Agreement
4. LCL decided to provide financial products to its customers. LCL requested that CIBC provide financial products to its customers.
5. On November 1, 1997, CIBC and LCL entered into a Financial Services Agreement (FSA).
6. The parties to the FSA established, inter alia, a steering committee (Steering Committee) that met to discuss and make certain decisions about the financial products (PCF Products).
7. Other than as set out in the FSA and its amending agreements, CIBC would be the exclusive provider of financial services under the name “President’s Choice Financial” and other trademarks identified in the FSA. These financial services included: (i) mutual funds sales, (ii) credit products, (iii) securities brokerage, (iv) financial planning, (v) debit cards, (vi) check cards, (vii) bill payment services, (viii) person to person payment services, (ix) ABM services, (x) insurance products relating only to credit products and home warranties, and (xi) credit cards.
8. Until April 1, 2005, CIBC was obliged to pay to LCL (and then PC Bank), fees calculated by reference to each new account, or other financial products opened, as well as a fee calculated by reference to the average funds and assets under management by CIBC under the PCF program (FSA Fees).
9. Effective April 1, 2005, the FSA Fees were replaced with a revenue share payment, calculated in accordance with the terms of an amending agreement dated April 1, 2005.
Loyalty Services Agreement
10. Contemporaneously with the execution of the FSA, CIBC and LCL also entered into a Loyalty Services Agreement (LSA), which, in part, provided for a loyalty program to be offered to PCF customers (Loyalty Program).
11. The Loyalty Program provided for the award of “Loyalty Points” (PC Points). The PC Points were issued to the customers as a reward for making eligible LCL purchases and eligible PCF purchases and as part of any other offer made available through the Loyalty Program.
12. The redemption of the PC Points was available at any participating LCL location as well as any other location as agreed to by the parties. The PC Points could be redeemed, subject to certain terms and conditions, against the purchase of any eligible products.
13. CIBC initially administered the Loyalty Program until 2001, after which LCL (subsequently PC Bank or an affiliate) became the administrator of the Loyalty Program. CIBC was obligated to pay LCL (then PC Bank or an affiliate), on a monthly basis, consideration in respect of the PC Points awards and administration costs.
14. On April 17, 2006, CIBC and PC Bank agreed that the administration costs payable by CIBC would be a flat amount of $20,000 per month effective January 2006.
Trademark Agreements
15. On November 1, 1997, CIBC and Loblaws Inc., a subsidiary of LCL, entered into two trademark license agreements.
Assignment to PC Bank
16. On October 1, 2000, LCL assigned its rights and obligations under both the LSA and the FSA to the President’s Choice Financial Trust Company, the predecessor to PC Bank. The LSA provided [that] either party could assign the rights and obligations to an affiliate.
Amendments of Agreements and Letter Agreements
17. The FSA and LSA were amended by the following agreements:
(a) a letter agreement dated January 17, 2001;
(b) a letter agreement dated March 14, 2003;
(c) a letter agreement dated May 25, 2004;
(d) a letter agreement dated October 27, 2004;
(e) a letter agreement dated October 27, 2004;
(f) an amending agreement dated April 1, 2005;
(g) a letter agreement dated March 8, 2006;
(h) an agreement dated April 17, 2006;
(i) an amending agreement dated March 2, 2010;
(j) amended and restated letter agreement dated May 1, 2011;
(k) an amended and restated letter agreement dated November 1, 2012;
(l) an amending agreement dated January 7, 2013;
(m) an amending agreement dated August 30, 2013; and
(n) an amending agreement dated October 8, 2014.
PCF FINANCIAL OFFERINGS
18. Customers obtained PCF Products mainly through kiosks/pavilions at certain LCL stores.
19. A pamphlet entitled “Legal Stuff” was provided to PCF customers of personal banking financial products.
REVENUE SHARE PAYMENTS
20. Monthly calculations computing the revenue share payments were prepared.
21. Summaries of the calculations of the 2009, 2010, 2011 and 2012 revenue share payments show the breakdown payable to PC Bank for those periods.
CIBC’S REBATE CLAIMS
First Rebate Claim
22. The Minister of National Revenue (Minister) assessed PC Bank for GST for the period January 2003 to September 2007 in the amount of $10,195,817, which PC Bank invoiced to CIBC.
23. For the period October 2007 to November 2008, PC Bank invoiced CIBC for GST in the amount of $2,108,754.
24. CIBC filed a rebate claim for GST paid in error dated January 16, 2009 (First Rebate Claim) in the amount of $12,304,571.
25. The parties agree that the correct amount of the First Rebate Claim is $12,302,079 and that CIBC paid the amount of $12,302,079. The correct amount removes an error of $2,492.
Second Rebate Claim
26. For the period December 2008 to March 2009, PC Bank invoiced CIBC for GST in the amount of $490,001.
27. CIBC filed a rebate claim for GST paid in error dated May 11, 2010 (Second Rebate Claim) in the amount of $490,001.
28. The parties agree that the correct amount of the Second Rebate Claim is $490,001 and that CIBC paid the amount of $490,001.
Third Rebate Claim
29. For the period July 2010 to July 2012, PC Bank invoiced CIBC for fees under the FSA, as amended, and an affiliate of PC Bank invoiced CIBC for fees under the LSA, as amended. The invoices included the federal portion of HST in the amount of $2,798,787.
30. CIBC filed a rebate claim for HST paid in error dated October 31, 2012 (Third Rebate Claim) in the amount of $17,018,959.
31. The parties agree that the correct amount of the Third Rebate Claim is $2,798,787 in respect of the federal portion of HST, subject to an adjustment for ITCs, and that CIBC paid the amount of $2,798,787. The correct amount of the federal portion of HST claimed in the Third Rebate Claim removes: (a) an amount of $192,479 relating to errors, (b) an amount of $8,785,355 that was already included in the First Rebate Claim, and (c) an amount of $764,278 that was self‑assessed by CIBC; and (d) an amount of $4,478,060 of provincial value‑added tax.
Fourth Rebate Claim
32. For the period August 2012 to May 2014, PC Bank invoiced CIBC for fees under the FSA, as amended, and an affiliate of PC Bank invoiced CIBC for fees under the LSA, as amended. The invoices included the federal portion of HST in the aggregate amount of $2,513,226.
33. CIBC filed a rebate claim for the federal portion of HST paid in error dated June 24, 2014 (Fourth Rebate Claim) in the amount of $2,518,146.
34. The parties agree that the correct amount of the Fourth Rebate Claim is $2,513,226 and that CIBC paid the amount of $2,513,226. The correct amount removes an error of $4,920.
Fifth Rebate Claim
35. For the period June 2014 to June 2015, PC Bank invoiced CIBC for fees under the FSA, as amended, and an affiliate of PC Bank invoiced CIBC for fees under the LSA, as amended. The invoices included the federal portion of HST in the aggregate amount of $1,600,795.
36. CIBC filed a rebate claim for the federal portion of HST paid in error dated September 4, 2015 (Fifth Rebate Claim) in the amount of $1,600,795.
37. The parties agree that the correct amount of the Fifth Rebate Claim is $1,600,795 and that CIBC paid the amount of $1,600,795.
Sixth Rebate Claim
38. For the period December 2008 to February 2016, PC Bank invoiced CIBC for fees under the FSA, as amended, and an affiliate of PC Bank invoiced CIBC for fees under the LSA, as amended. The invoices included the federal portion of HST in the aggregate amount of $2,657,990.
39. CIBC filed a rebate claim for the federal portion of HST paid in error dated May 16, 2016 (Sixth Rebate Claim) in the amount of $2,657,990.
40. The parties agree that the correct amount of the Sixth Rebate Claim is $2,657,990 and that CIBC paid the amount of $2,657,990.
Other Adjustments
41. The correct amount of the above rebate claims must be further reduced by the amount of any input tax credits that CIBC was allowed by the Minister in respect of GST claimed in the rebate claims.
42. The Minister takes the position that CIBC is entitled to the provincial portion of HST of $4,478,059.84 claimed in the Third Rebate Claim. The amount of the allowable provincial portion of HST must be adjusted to remove erroneously claimed amounts as well as the provincial portion of HST in respect of input tax credits allowed by the Minister and to otherwise account for the adjustments to CIBC’s net tax made under subsection 225.2(2) in respect of the amounts to which the Rebate Claims relate.
Summary of Fees and Rebate Claims
43. The following is a summary of the fees invoiced to and paid by CIBC:
FEES PAID
Revenue Share
Points
Admin
Total
First Rebate Claim
139,343,482
50,158,645
2,056,971
191,559,098
Second Rebate Claim
7,234,153
2,485,878
80,000
9,800,031
Third Rebate Claim
49,028,265
6,447,484
500,000
55,975,749
Fourth Rebate Claim
46,850,118
2,974,395
440,000
50,264,513
Fifth Rebate Claim
28,512,253
3,343,651
160,000
32,015,904
Sixth Rebate Claim
43,458,075
9,241,740
460,000
53,159,815
44. The following is a summary of the GST/federal portion of HST invoiced to and paid by CIBC:
GST PAID
Revenue Share
Points
Admin
Total
First Rebate Claim
8,872,744
3,292,947
136,388
12,302,079
Second Rebate Claim
361,708
124,294
4,000
490,001
Third Rebate Claim
2,451,413
322,374
25,000
2,798,787
Fourth Rebate Claim
2,342,506
148,720
22,000
2,513,226
Fifth Rebate Claim
1,425,613
167,183
8,000
1,600,795
Sixth Rebate Claim
2,172,904
462,087
23,000
2,657,990
MINISTER’S DENIAL OF CIBC’S REBATE CLAIMS
45. The Minister denied each of the rebate claims by way of notices of assessment.
46. The Minister’s reasons for the denials are set out in proposals letters dated August 25, 2016 and decision letters denying each rebate claim.
NOTICES OF OBJECTION
47. CIBC filed notices of objection on February 16, 2017 in respect of the denial of the First Rebate Claim, Second Rebate Claim, Third Rebate Claim, Fourth Rebate Claim, Fifth Rebate Claim and Sixth Rebate Claim.
OTHER MATTERS
48. The parties agree that the supply in issue in this appeal is a single compound supply.
[Emphasis added and footnotes omitted.]
[9] It should be noted that hereinafter, LCL and its affiliates are defined as the “LCL Group” and that all the defined terms have the meaning given to them in the PASF unless otherwise indicated.
[10] The parties submitted a joint book of documents [6] that includes, inter alia, PC Bank’s Financial Statements, the relevant agreements between PC Bank and CIBC, President’s Choice Financial documents, CIBC’s rebate claims, the notices of assessment, letters from the Minister, and LCL documents.
[11] In addition, CIBC called two witnesses to testify: Mr. Rob Ward and Mr. Kevin Lengyell.
[12] The Respondent intended to call Ms. Sarah Davis, as the former president of Loblaw. However, the Respondent attempted to serve Ms. Davis and was unsuccessful. An adverse inference should not be drawn from this fact. [7]
III. THE PCF SUPPLY ISSUE
A. Position of the Parties
[13] The Appellant submits that the issue is whether the supply in issue made by PC Bank to CIBC pursuant to the FSA and the LSA was a taxable supply or an exempt financial service. [8] The Appellant argues that “CIBC was paying PC Bank for acting as an intermediary to bring the financial products to customers and PC Bank’s major role in the process of providing financial services by CIBC to customers.” [9] The Appellant relies on the 2009 Decision and Lamarre J.’s conclusion that “the substance of the PC Bank Supply was PC Bank’s major role in selling attractive financial products to customers and by acting as an intermediary to bring financial products to customers” of the LCL Group. [10] The Appellant submits that the amendments to the PCF Agreements do not alter the substance of the PC Bank Supply, nor do the legislative amendments to the “financial service” definition under subsection 123(1). [11]
[14] The Respondent submits that the “bundle of rights and services supplied [by PC Bank] to CIBC does not fall within the statutory definition of “financial service.” [12] While the Respondent has put forth alternative arguments, the Respondent acknowledged during oral arguments that the Respondent’s main argument is that the PC Bank Supply is excluded under paragraph (r.5). [13] One of the Respondent’s alternative argument is that the PC Bank Supply is excluded by virtue of paragraph (r.4). [14]
[15] I begin with an analysis of the exclusionary paragraphs relied on by the Respondent because if one of them applies, that would bring an end to this matter. This, in my opinion, is the most efficient way to deal with this matter. For now I will assume that the supply at issue is included in paragraph (1) of the definition of “financial service” under subsection 123(1) of the ETA. If I determine that none of the exclusionary paragraphs apply, I will return to this matter and decide whether the supply is captured by the inclusionary paragraphs relied on by the Appellant.
B. Legislation
[16] The language used in the definition of a “financial service” in subsection 123(1) before and after the 2010 amendments is key to understanding the purpose of the amendments. Before the amendments, the relevant parts of the definition of “financial service” read as follows:
(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise,
(b) the operation or maintenance of a savings, chequing, deposit, loan charge or other account,
(d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument,
...
(f) the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument,
...
(g) the making of any advance, the granting of any credit or the lending of money,
...
(l) the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i), ...
but does not include
...
(t) a prescribed service.
[Emphasis added.]
[17] After the 2010 amendments, the relevant parts of the “financial service” definition read as follows:
...
(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise,
...
(d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument,
...
(i) any service provided pursuant to the terms and conditions of any agreement relating to payments of amounts for which a credit card voucher or charge card voucher has been issued,
...
(l) the agreeing to provide, or the arranging for, a service that is
(i) referred to in any of paragraphs (a) to (i), and
(ii) not referred to in any of paragraphs (n) to (t) …
but does not include
...
(r.3) a service (other than a prescribed service) of managing credit that is in respect of credit cards, charge cards, credit accounts, charge accounts, loan accounts or accounts in respect of any advance and is provided to a person granting, or potentially granting, credit in respect of those cards or accounts, including a service provided to the person of
(i) checking, evaluating or authorizing credit,
(ii) making decisions on behalf of the person in relation to a grant, or an application for a grant, of credit,
(iii) creating or maintaining records for the person in relation to a grant, or an application for a grant, of credit or in relation to the cards or accounts, or
(iv) monitoring another person’s payment record or dealing with payments made, or to be made, by the other person,
(r.4) a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l), or that is provided in conjunction with a service referred to in any of those paragraphs, and that is
...
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service,
(r.5) property (other than a financial instrument or prescribed property) that is delivered or made available to a person in conjunction with the rendering by the person of service referred to in any o paragraphs (a) to (i) and (l),
...
(t) a prescribed service; (service financier)
[Emphasis added.]
[18] The definition of “financial service” in subsection 123(1) lists activities that are included in that definition—paragraphs (a) to (m) (the “Inclusionary Paragraphs”)—and activities that are excluded from that definition—paragraphs (n) to (t) (the “Exclusionary Paragraphs”). It is clear that the addition of the Exclusionary Paragraphs (r.4) and (r.5) intend to limit the scope of Inclusionary Paragraphs, such as paragraph (l).
[19] Prior to the 2010 amendments, the term “arranging for” as used in Inclusionary Paragraph (l) was construed expansively in a number of court decisions. [15] In some cases, a supplier to a financial services provider could be considered as arranging for a “financial service” without playing a direct intermediary role in the delivery of a financial service to a client of a financial institution. [16] For example, a supplier to a financial institution that performs a credit check or promotes the sale of a financial service or participates in its design might fall within the ambit of that language. [17]
[20] Parliament addressed the courts’ expansive interpretation of Inclusionary Paragraph (l) of the “financial service” definition with legislative proposals intended to clarify that definition. [18] These proposals resulted in the additions of the new Exclusionary Paragraphs, including paragraphs (r.4) and (r.5). Those Exclusionary Paragraphs are relevant to the PCF Supply Issue and read as follows:
(r.4) a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l), or that is provided in conjunction with a service referred to in any of those paragraphs, and that is
...
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service,
(r.5) property (other than a financial instrument or prescribed property) that is delivered or made available to a person in conjunction with the rendering by the person of a service referred to in any of paragraphs (a) to (i) and (l).
[21] Exclusionary Paragraph (r.5) is broad. For example, it could exclude from the “financial service” definition “property … that is delivered or made available to” CIBC “in conjunction with” CIBC selling PCF Products to new clients whom it recruited pursuant to the PCF Agreements (if we assume that such contractual rights are the predominant elements of the PC Bank Supply). The exclusion is also broad enough to cover a single compound supply consisting of a predominant element, which is the provision of property, and a secondary element, which consists of, for example, services excluded under paragraph (r.4). It is well established by the case law that in applying the Inclusionary Paragraphs and the Exclusionary Paragraphs, only the predominant elements of the supply are taken into account. [19]
[22] I explained to counsel for the Appellant during oral argument that I do not favour the approach that he urges me to follow. [20] He argued that I should determine first whether the PC Bank Supply is described in Inclusionary Paragraph (l) and then determine whether the PC Bank Supply can be excluded by virtue of being captured by Exclusionary Paragraphs (r.4) and (r.5). [21] I should do so first by determining the “substance of the supply” using the two‑step approach discussed later. [22] Respectfully, this approach seems to me to be placing the proverbial cart before the proverbial horse. I believe that I should start by defining the ambits of Exclusionary Paragraphs (r.4) and (r.5), provisions that were not in force when the 2009 Decision was rendered. This is typically how a judge goes about disposing of an issue. First, one determines the scope of application of a relevant provision, and then one determines the facts that allow one to conclude whether or not a provision applies. In short, factual determinations should not be made in a vacuum; fact‑finding should take place after the law has been properly interpreted. This places the proverbial cart properly behind the proverbial horse.
[23] The approach that I have chosen to follow is supported by the preamble to the exclusions in the “financial service” definition, which provides that a financial service “does not include” the supply of a service or property described in the Exclusionary Paragraphs.
[24] If an Exclusionary Paragraph applies, it becomes somewhat of a futile exercise for me to determine whether the supply would otherwise be described in an Inclusionary Paragraph. For the reasons that follow, it is unnecessary for me to answer the latter question because I believe that the predominant elements of the supply fall within Exclusionary Paragraph (r.5). Therefore, I will not address this issue despite the Appellant urging me to do so.
[25] At this point, I would like to acknowledge that I made a mistake in my reasons dismissing the Appellant’s preliminary motion. I stated that subparagraph (l)(ii) of the “financial service” definition under subsection 123(1) narrowed the types of supplies that constitute “the arranging for” a financial service. [23] I was wrong. It is the preamble to the Exclusionary Paragraphs that narrows the scope of application of all of the Inclusionary Paragraphs listed before the preamble. This is clearly expressed by the words “but does not include”. Stated differently, if the predominant elements of the PC Bank Supply are described in Exclusionary Paragraph (r.5), that supply is excluded despite the fact that it might otherwise fall within Inclusionary Paragraph (l) before consideration of paragraph (r.5). Nonetheless, the result of the preliminary motion remains the same.
[26] Before addressing the question of the predominant elements of the PC Bank Supply, I would like to make a few general observations on the scheme of the ETA.
[27] Under a value‑added tax system, like the GST, a guiding principle is that the tax should be paid by the final consumer of a supply. To ensure that this occurs, GST is collected and remitted throughout the process by which value is added to the final supply of goods or services. At each stage, GST is collected and remitted by the registrant supplier. The purchaser of the goods or services is entitled to claim an input tax credit (“ITC”) for the GST it paid provided that the purchaser used the goods or services in the course of a commercial activity. The GST is collected at each stage for a number of reasons. For example, the final goods or services may be exported; exported goods or services are exempted from the GST.
[28] There are only two major exceptions. The first exception concerns zero‑rated supplies, which are food and other necessities. These goods are not subject to GST throughout the value‑added phase and on the final sale because these goods are viewed as essential products. Zero‑rated goods are excluded to counter the regressive effect of a value‑added tax; lower‑income individuals spend a larger portion of their income on food and other essentials than upper‑income earners.
[29] The other exception is financial services. This exception exists because it is difficult to properly price all of the individual inputs that go into a financial service and, therefore, apply tax on a value‑added basis. As a result, the GST system treats the provider of a financial service as the consumer. This treatment has an impact on the behaviour of providers of financial services. If such a provider uses internal staff to provide services, those internal inputs are not subject to GST (payroll, etc.). This creates a dilemma for financial institutions. From a cost standpoint, financial service providers often outsource part of their operations to benefit from economies of scale and, as a result, to save on costs. For example, marketing services are typically outsourced by financial institutions to marketing agencies. Call centre services are also frequently outsourced. If these services are outsourced, GST is due on the consideration paid for the supply because these supplies are often not a “financial service” as defined in subsection 123(1). If the impact of GST was the driving factor in the decision to outsource or not, economies of scale would be difficult to achieve. In most cases, services will be outsourced if the services can be outsourced efficiently at a lower cost (taking into account the impact of GST on the supply) or if the supply qualifies, in its own right, as an exempt financial service.
[30] With this context in mind, the ideal situation for a financial service supplier would be for the input from a third‑party supplier to be included under the “financial service” definition. If the supply qualifies as a financial service, there is no non‑recoverable GST due on the consideration paid for the supply. As the Respondent explained, the new exclusions (discussed above) were introduced because Parliament felt that the GST tax base was being eroded by services that were being found to be financial services but that in Parliament’s mind should have been taxable supplies in the first place. [24]
[31] During the Respondent’s oral submissions, counsel’s principal argument was that the predominant element of the supply made available by PC Bank to CIBC was the provision of what I refer to as a “bundle of rights” consisting of the right to solicit LCL’s clients in LCL’s stores, the right to use trademarks, the right to issue points under the Loyalty Program, and other rights acquired for the purpose of expanding CIBC’s nascent fintech banking operations (collectively the “Bundle of Rights”). [25] According to the Respondent, the secondary element of the compound supply consisted, inter alia, of marketing, product design, and promotional services provided by a small number of LCL/PC Bank employees (the “PC Bank employees”). [26]
[32] Counsel for the Appellant acknowledged that the arguments he put forward were substantially the same as those that he presented in the 2009 Decision that were favourably received at that time. [27] It is noteworthy that counsel spent little time addressing the scope of application of Exclusionary Paragraphs (r.4) and (r.5), which were not in force when the 2009 Decision was rendered. [28]
[33] Counsel for the Appellant argued that the relationship between LCL and then PC Bank and CIBC was more than a passive relationship of the provision of rights that allowed CIBC to sell financial products to LCL’s customers. He emphasized that the relationship of the parties was like a joint venture or partnership. [29]
[34] Counsel for the Respondent astutely pointed out that a “joint venture” or “a partnership‑type relationship” is not a supply. [30] These are labels used to define a legal relationship, but they cannot be applied here because the PCF Agreements expressly provide that the relationship between the parties was not a “joint venture” or “a partnership”. [31]
[35] Counsel for the Appellant emphasized that the relationship between the parties was based on “collaboration and working together to fulfill the multiple daily tasks undertaken in the course of selling PCF Products to LCL’s existing or future clients”. [32] Once again, the Respondent’s counsel noted that “collaboration, working together or as a joint venture” is not a description of a supply. [33] Rather, these terms define how the parties approach the exercise of their rights and the fulfillment of their obligations under the PCF Agreements, which govern commercial relationships. In other words, these terms are simply hallmarks of all types of successful commercial relationships and not a description of a supply of a “financial service”.
C. 2009 Decision
[36] In his oral submissions, counsel for the Appellant urged me to apply the factual findings of the Court in the 2009 Decision because, according to counsel, the essence or nature of the supply has not changed and the factual findings of the Court in that decision are reasonable. [34]
[37] In my opinion, this argument misses an important point. In the 2009 Decision, the Court analyzed and established the factual matrix relevant to the disposition of the matter in reference to a broader definition of a financial service. The Court emphasized the following:
…I find that PC Bank was not a passive associate concerned only with promotion and doing no more than allowing access to its list of members. [35]
[Emphasis added.]
[38] On the basis of the previous text, the dividing line appeared to be active versus passive behaviour. If there was active involvement, the courts were more likely than not to view the supply as the “arranging for” an eligible “financial service”. In contrast, if the arrangement was passive and consisted of the rental of space for an ATM, for example, then the rent paid for the supply would likely be held to be an excluded “financial service”.
[39] One prong of the Appellant’s litigation strategy appears to me to be squarely aimed at convincing me to first examine and adopt the factual findings made by Lamarre J. in the 2009 Decision. I am reluctant to do so. First, I am not an appellate court judge who has access to the full record of the hearing. My role does not require me to determine whether or not Lamarre J. made a palpable and overriding error of fact in rendering her decision. Rather, I am a trial judge who has heard evidence directly on a supply that has been affected by retroactive amendments. As noted in my Reasons for Order, I am not bound to apply the factual findings of Lamarre J. because the doctrines of res judicata and/or abuse of process do not apply here. Accordingly, I believe that the best course of action is to limit my analysis of the 2009 Decision to commenting on clarifications of relevant principles identified in the case law subsequent to the 2009 Decision.
[40] In determining the essence or nature of the supply, the parties agree that the law requires one to take into account the perspective of the recipient of the supply. [36] This principle was specifically acknowledged by the Federal Court of Appeal in Canadian Imperial Bank of Commerce v Canada. [37]
[41] The relevant question is: What did CIBC receive under the key agreements? I observe that this clarification was made by the Federal Court of Appeal after the Tax Court rendered the 2009 Decision. In re‑reading the latter decision, it appears to me that the Court focused a great deal on why LCL entered into the key agreements. The case law subsequent to the 2009 Decision establishes that the determination of the predominant elements of the supply must be made while taking into account CIBC’s perspective of the matter. [38]
[42] Counsel for the Appellant argues that the supply provided by PC Bank was broader than so‑called rental arrangements. [39] In making this argument, I believe that counsel is mischaracterizing and/or ignoring the Respondent’s position. The Respondent’s position is that the predominant elements of the supply are captured by Exclusionary Paragraph (r.5) and that the secondary element of the supply constitutes services that are excluded under (r.4). [40] Services by definition require activity. The Respondent’s position is more nuanced than that described by the Appellant.
[43] I will now proceed to examine the evidentiary record relevant to the determination of the predominant elements of the single compound supply at issue in the present case.
D. Determination of the Elements of the Supply
[44] The parties agree, in large part, on how one goes about determining the predominant elements of a single compound supply.
[45] Briefly, in Global Cash Access (Canada) Inc v R, the Federal Court of Appeal mused as follows on how the definition of a financial service should be applied:
[26] To determine whether that single supply falls within the statutory definition of “financial service”, the questions to be asked are these: (1) Based on an interpretation of the contracts between the Casinos and Global, what did the Casinos provide to Global to earn the commissions payable by Global? (2) Does that service fall within the statutory definition of “financial service”? [41]
[46] In Great‑West Life Assurance Co v R, the Federal Court of Appeal noted that, following Global Cash, the first question is “simply to determine what services [are] provided for the consideration received.” [42] This first step identifies services that are also not the predominant elements, while the second step of the analysis requires:
[48] … a determination as to whether the supply is included in the definition of “financial service.” As part of this exercise, it is necessary to determine the predominant elements of the supply if it is a single compound supply. It is only the predominant elements that are taken into account in applying the inclusions and exclusions in the “financial service” definition.
[Emphasis added.]
[47] Therefore, what is clear from the case law is that the identification of the predominant elements of a single compound supply is based on a two‑step test