President's Choice Bank v. Canada

President's Choice Bank v. Canada
Court (s) Database
Federal Court of Appeal Decisions
Date
2024-08-21
Neutral citation
2024 FCA 135
File numbers
A-199-22
Decision Content
Date: 20240821
Docket: A-199-22
Citation: 2024 FCA 135
CORAM:
WEBB J.A.
LASKIN J.A.
GOYETTE J.A.
BETWEEN:
PRESIDENT’S CHOICE BANK
Appellant
and
HIS MAJESTY THE KING
Respondent
Heard at Toronto, Ontario, on March 6, 2024.
Judgment delivered at Ottawa, Ontario, on August 21, 2024.
REASONS FOR JUDGMENT BY:
GOYETTE J.A.
CONCURRED IN BY:
LASKIN J.A.
DISSENTING REASONS BY:
WEBB J.A.
Date: 20240821
Docket: A-199-22
Citation: 2024 FCA 135
CORAM:
WEBB J.A.
LASKIN J.A.
GOYETTE J.A.
BETWEEN:
PRESIDENT’S CHOICE BANK
Appellant
and
HIS MAJESTY THE KING
Respondent
REASONS FOR JUDGMENT
GOYETTE J.A.
I. Overview [1] President’s Choice Bank (PC Bank) offers financial services. Together with related corporations, PC Bank also participates in a loyalty program whose main purpose is to drive retail traffic to the Loblaws stores. The program involves PC Bank issuing credit card points, which cardholders obtain whenever they use their cards. Cardholders can only use these points at Loblaws stores to get discounts on their purchases. PC Bank reimburses Loblaws for the discount that customers receive when they redeem their points at Loblaws stores (Redemption Payment).
[2] The issue in this appeal is whether PC Bank can claim notional input tax credits (NITCs) for the Redemption Payment. The Minister of National Revenue concedes that the Redemption Payment fulfills all but one of the criteria for NITCs: that the payment be made “in the course of a commercial activity”. The Tax Court held in favour of the Minister (2022 TCC 84), concluding that the Redemption Payment is made in the course of a financial services activity. PC Bank appeals.
[3] For the following reasons, I would allow the appeal. The Redemption Payment meets the criteria for NITCs under subsection 181(5) of the Excise Tax Act, R.S.C. 1985, c. E-15 (Act). Unless otherwise indicated, all legislative references are to the Act.
II. Background A. Legislative Background [4] Part IX of the Act imposes a tax on most supplies of goods and services (GST): subsections 123(1) definition of “taxable supply”, 165(1). The GST is a tax on consumption: it is paid by the end consumer. It is also a value-added tax because each business in the supply chain pays GST on the value it adds to the property or service. The mechanism for ensuring the GST operates in this way is the input tax credit (ITC): City of Calgary v. Canada, 2012 SCC 20 at para. 16; Bank of Montreal v. Canada (Attorney General), 2020 FC 1014 at para. 10.
[5] This mechanism is illustrated by the following example, which assumes a 15% combined federal provincial rate of GST and Harmonised Sales Tax (HST). A supplier sells a bottle of shampoo to a retailer for $6.00, and the retailer pays $0.90 GST/HST. The retailer then sells the shampoo for $10.00 to a customer in Canada, adding $4.00 of value and charging $1.50 GST/HST to the customer. To the extent that the retailer supplies the shampoo in the course of its commercial activities, it is entitled to an ITC of $0.90, corresponding to the GST/HST it paid the supplier: subsection 169(1). Thus, the retailer only remits $0.60 GST/HST to the government, corresponding to the tax on the $4.00 value it added to the shampoo.
[6] When the retailer accepts that the customer pays a portion of the $10.00 price for the shampoo using a $1.00 coupon or $1.00 of redeemable points (equivalent to a coupon for purposes of the Act), and expects that a particular person will reimburse it (the retailer) the $1.00, the rules in section 181 apply.
[7] Paragraphs 181(2)(a) and (b) deem the tax collectible and collected by the retailer to be the tax that would have been collected without the coupon. In the example above, and as explained at paragraph 17 of the Tax Court’s reasons, the retailer is deemed to have collected and must remit $1.50:
Price of the shampoo
$10.00
GST/HST at 15%
$1.50
Subtotal
$11.50
Less coupon
($1.00)
Customer pays
$10.50
[8] Paragraphs 181(2)(a) and (b) create an overpayment of tax: the government collects $1.50, whereas normally, a $9.00 purchase would yield $1.35 of GST/HST.
[9] Paragraph 181(2)(c) and subsection 181(5) relieve this overpayment.
[10] First, paragraph 181(2)(c) deems the tax payable by the recipient (the purchaser of the goods/services) to be the tax collectible less the tax fraction of the coupon value. Subsection 181(1) defines the tax fraction of the coupon value as the fraction A/B where:
A is the total rate set out in subsection 165(1) (5%) and the tax rate for that participating province (10% in this example) (5% + 10% = 15%), and
B is the total of 100% and the amount determined for A (100% + 15% = 115%).
Thus, the tax fraction of the $1.00 coupon in the example above is 15/115 = 0.13 (13%), and the tax deemed payable by the recipient is $1.37, that is, $1.50 minus $0.13.
[11] Second, subsection 181(5) relieves the overpayment of tax “[b]y allowing the [person redeeming the coupon] an input tax credit [and ensuring] that the correct overall net amount of tax is remitted to the government in respect of the supply by the vendor”: Canada, Department of Finance, Draft Legislation to Amend the Excise Tax Act (GST) and Related Statutes, Explanatory Notes (September 1992) at 106 [1992 Explanatory Notes]. Paragraph 181(5)(c) achieves this result by granting the person redeeming the coupon an NITC equal to the tax fraction of the coupon value. In the example discussed above, the person paying for the $1.00 of points would be entitled to claim an NITC of $0.13.
[12] Crucial to this appeal is the fact that subsection 181(5) only applies where the person redeeming the coupon does so in the course of its commercial activity: Canada, Department of Finance, Technical Notes re s. 181(5), (February 1993). More precisely, subsection 181(5) provides that a particular person may claim an ITC when it “pays, in the course of a commercial activity of the particular person, an amount to the supplier for the redemption of the coupon.”
B. Factual Background [13] The Tax Court’s reasons set out the facts in some detail. The following summary is sufficient for the purposes of this appeal.
[14] PC Bank, Loblaws Inc. (Loblaws), and President’s Choice Services Inc. (PCSI) are directly or indirectly wholly-owned subsidiaries of Loblaw Companies Limited.
[15] PC Bank is a financial institution for the purposes of the Act. It is also registered for the purposes of Part IX of the Act.
[16] PC Bank issues President’s Choice branded MasterCard credit cards (PC MasterCards) to its customers (cardholders). Cardholders can use their PC MasterCard to make purchases at stores that accept PC MasterCards and obtain credit card points (PCB Points). Every time a PC MasterCard is used, PC Bank receives interchange fees.
[17] PC Bank is also a party to three agreements, rectified by order of the Ontario Superior Court: (1) a Licence Agreement with PCSI, (2) a Loyalty Services Agreement, also with PCSI, and (3) a Loyalty Expense Agreement with PCSI and Loblaws. These agreements form the Loyalty Program. For the Loblaws corporate group, a key purpose of the Loyalty Program is to drive retail traffic to Loblaws, whose revenue far exceeds PC Bank’s MasterCard revenue.
[18] Pursuant to the Loyalty Program,
a) PC Bank has a royalty-free license to issue PCB Points to its PC MasterCard cardholders. PC Bank issues PCB Points to cardholders whenever they use their PC MasterCard. However, cardholders earn more PCB Points for purchases made at a Loblaws store, and they can only use their points at stores owned or controlled by Loblaws;
b) Loblaws pays to PC Bank:
0.75¢ for every $1.00 of purchases cardholders make at Loblaws stores using their PC MasterCard where PC Bank issues PCB Points to the cardholder; and
$0.35 for every $1.00 of PCB Points cardholders use at Loblaws stores; and
c) PC Bank reimburses/pays Loblaws $1.00 for every $1.00 worth of PCB Points cardholders use at Loblaws stores (the Redemption Payment).
[19] As mentioned, the parties agree on all but one of the criteria for NITCs. Their disagreement turns on whether PC Bank makes the Redemption Payment “in the course of a commercial activity”.
III. Tax Court Decision [20] The Tax Court stated that it needed to determine whether the “Redemption Payment [is] linked to the making of exempt or taxable supplies by PC Bank”: TCC Reasons at para. 66. The Tax Court concluded that PC Bank makes the Redemption Payment “in the course of [its] MasterCard activity, which involves the provision of exempt supplies of financial services to [c]ardholders”: TCC Reasons at paras. 65, 67, 75. The Tax Court reached this conclusion because:
a)PC Bank’s core business is the provision of financial services to its customers: TCC Reasons at paras. 70–71;
b)PC Bank’s revenue earned from Loblaws pales in comparison to the substantial revenue it earns from interchange fees: TCC Reasons at paras. 67, 73;
c)It is inconceivable and irreconcilable with normal commercial and business practices that PC Bank would accept to make a Redemption Payment of $1.00 to earn $0.35 and lose money: TCC Reasons at paras. 67, 73, 77; and
d)PC Bank makes the Redemption Payment for the PCB Points as consideration for having issued the PCB Points: TCC Reasons at para. 82.
IV. Issue and Standard of Review [21] In their memoranda of fact and law, both parties acknowledge that the issue relates to the phrase “in the course of a commercial activity” in subsection 181(5). The appellant says the issue is whether the Tax Court made an error of law in interpreting that phrase. The respondent says the issue is whether the Tax Court made a palpable and overriding error in concluding that PC Bank does not make the Redemption Payment “in the course of a commercial activity.”
[22] Ultimately, the appellate standard of review applies: Housen v. Nikolaisen, 2002 SCC 33 at paras. 8, 37. Questions of law are subject to correctness review, and questions of fact are only reviewable for palpable and overriding error. Findings of mixed fact and law are reviewable for palpable and overriding error unless they contain an extricable error of law. Extricable errors of law are reviewable on a correctness standard.
[23] The issue of whether PC Bank makes the Redemption Payment in the course of its commercial activity is a question of mixed fact and law. Thus, correctness review applies insofar as the Tax Court committed any extricable error of law in deciding this issue.
V. Analysis [24] In my opinion, the Tax Court committed two extricable errors of law. First, it considered that the phrase “in the course of a commercial activity” entails an either/or test. Second, it considered profitability in determining the existence of a commercial activity. If one extricates these two legal errors, one finds that the Tax Court’s factual findings lead to the conclusion that PC Bank makes the Redemption Payment in the course of its commercial activity of driving customers to Loblaws. The following analysis demonstrates the Tax Court’s legal errors, then illustrates how extricating those errors impact this case’s outcome.
A. There Is No Either/Or Test [25] The Tax Court based its analysis on the premise that it needed to determine whether PC Bank makes the Redemption Payment in the course of a financial services activity or in the course of a commercial activity. The Tax Court adopted this premise in saying that it needed to examine the evidence to determine whether the “Redemption Payment [is] linked to the making of exempt or taxable supplies”: TCC Reasons at para. 66 [emphasis added]. Yet analyzing the text, context, and purpose of subsection 181(5) reveals that it is not an either/or test: it allows a person to pay an amount in the course of a commercial activity and in the course of an activity that is not commercial.
(1) Text [26] Subsection 181(5) provides that a particular person may claim an ITC when it “pays, in the course of a commercial activity of the particular person, an amount to the supplier for the redemption of the coupon.” The text of subsection 181(5) does not require that the amount be paid “exclusively” in the course of a commercial activity, nor does it require that the amount be paid “primarily” in the course of such an activity. Unlike the words exclusively and primarily, the phrase “in the course of” has a broad meaning; it means “incidental to” or “connected to” directly or indirectly: Attorney General of Canada v. Metropolitan Toronto Hockey League, [1995] F.C.J. No. 944 at para. 14, n 1; The Queen v. Blanchard, 1995 CanLII 18940 (FCA); M.N.R. v. Yonge Eglinton Building Ltd., 1974 CanLII 2476 (FCA), [1974] 1 F.C. 637 at 644–645.
[27] Reading subsection 181(5) as stating that a person can only pay an amount in the course of one activity would add words to the Act. Similarly, it would add words to the Act to read subsection 181(5) as requiring that an amount have a primary connection with a commercial activity.
(2) Context [28] The context of subsection 181(5) supports the above textual interpretation.
(a) A payment can be made in the course of more than one activity [29] Subsections 169(1), 141(2) and (4), 202(2), as well as paragraphs 199(2)(a), 217.1(6)(c), and 217.1(7)(c) show that the Act contemplates that a payment can be made in the course of doing one thing and in the course of doing another. More specifically, the Act contemplates that a payment can be made in the course of a commercial activity and in the course of an activity that is not commercial.
(i) Subsection 169(1) [30] Subsection 169(1) provides the general rule for ITCs. It contains a formula, which grants an ITC for tax paid in respect of a property or service to the extent that the registrant acquires the property or service for use in the course of its commercial activities. This formula results in the registrant being entitled to an ITC according to the percentage of use of the property or service in the course of commercial activities. The inclusion of the formula presupposes that a property or service can be acquired for use in the course of more than one activity. This was the case in Midland Hutterian Brethren v. Canada, 2000 CanLII 16725 (FCA) [Midland] where a colony purchased cloth for its members. The members could use the cloth to make two types of clothing: working clothes for the colony’s commercial activity (farming) and clothes for their personal activities. Our Court rejected the Minister’s argument that any personal use of clothing disqualified the work cloth from any ITC, and concluded that the colony was entitled to an ITC pursuant to the formula in subsection 169(1).
[31] Midland does not address whether the colony paid for the cloth in the course its commercial activity or in the course of its non-commercial activity of providing cloth to its members for personal use. Nevertheless, from the moment that the cloth was acquired for use in the course of more than one activity, it stands to reason that the colony paid for the cloth in the course of two activities.
(ii) Subsections 141(2) and (4) [32] Subsection 141(2) provides that, where “substantially all” the consumption or use for which a person acquires a property or service is in the course of the person’s commercial activities, all of the use or consumption is deemed to be in the course of those commercial activities. Similarly, subsection 141(4) provides that, where substantially all the consumption or use for which a person acquires a property or service is in the course of activities that are not commercial, all of the use or consumption is deemed to be in the course of those non-commercial activities. This wording demonstrates that Parliament considers that an acquisition can be made substantially—but not totally—in the course of one activity and, to a smaller extent, in the course of another activity. Again, this entails that the payment for the property or service is made in the course of more than one activity.
(iii) Subsection 202(2) [33] Subsection 202(2) provides that a registrant is not entitled to an ITC in respect of a vehicle or aircraft unless the vehicle or aircraft “was acquired […] for use exclusively in commercial activities of the registrant” [emphasis added]. The fact that Parliament requires that the vehicle or aircraft be acquired for exclusive use in commercial activities presupposes that a vehicle or aircraft can be acquired—and hence the payment made for that vehicle or aircraft—in the course of both commercial and non-commercial activities.
(iv) Paragraph 199(2)(a) [34] Similarly, paragraph 199(2)(a) provides that a registrant is not entitled to an ITC in respect of capital property “unless the property was acquired (…) for use primarily in commercial activities of the registrant” [emphasis added]. Again, the requirement that the capital property be acquired for use primarily in commercial activities presupposes that the property can be acquired, and its payment made, in the course of more than one activity.
(v) Paragraphs 217.1(6)(c) and 217.1(7)(c) [35] Paragraphs 217.1(6)(c) and 217.1(7)(c) provide rules for computing ITCs and rebates that financial institutions can claim in the context of the Division IV Tax on Imported Taxable Supplies. These paragraphs call for a determination of the extent to which an outlay or expense was made or incurred “in the course of commercial activities” of the financial institutions. If one talks about the “extent to which” an expense is incurred in the course of a commercial activity, then there must be an extent to which the expense was incurred in the course of a non-commercial activity. Therefore, Parliament presupposes that the payment of a single expense can be simultaneously in the course of a commercial activity and in the course of a non-commercial activity. This reinforces the interpretation that Parliament, in drafting subsection 181(5), presupposed that the payment redeeming a coupon could be simultaneously in the course of a commercial activity and in the course of a non-commercial activity.
[36] In drafting subsection 181(5), Parliament did not include explicit language that the credit be allocated only “to the extent” that the person made the payment in the course of a commercial activity. The absence of this allocative language indicates that Parliament intended to grant an NITC on the entire amount of a coupon redemption payment from the moment the payment was made in the course of a commercial activity.
(vi) The specific context of subsection 181(5) [37] Many of the provisions discussed above refer to tax paid in the context of an acquisition of property or service. This makes sense because an acquisition of property or service, or an equivalent transaction (e.g. importation), is ordinarily the triggering event for GST to become payable. In the case of a coupon, the particular person who pays for the coupon or makes the redemption payment does not acquire a property or service—the customer does. In the example discussed above, the customer acquires the shampoo, and the particular person pays for the coupon. Accordingly, subsection 181(5) could not use the same language as that used in ss. 169(1), 141(2) and (4), 202(2), 199(2)(a), 217.1(6)(c), and 217.1(7)(c). That said, from the moment that the Act contemplates that a payment for property or service can be made in the course of more than one activity, there is no reason why a redemption payment cannot be made in the course of more than one activity.
(b) There is no requirement for a special connection between the payment for the redemption of the coupon and the commercial activity [38] Subsections 169(1), 202(2) as well paragraphs 199(2)(a), 217.1(6)(c), and 217.1(7)(c) also show that when Parliament wants a property or service acquired to have a special connection with a commercial activity, its states so expressly.
[39] For example, ss. 169(1), 217.1(6)(c), and 217.1(7)(c) provide that an ITC will only be allowed to “the extent” that the property or service is acquired or the outlay or expense is made or incurred for use in the course of commercial activities. Subsection 202(2) requires that a vehicle or aircraft be acquired for “use exclusively in the course of commercial activities of the registrant”. As for paragraph 199(2)(a), it requires that a capital property be acquired for “use primarily in the commercial activities of the registrant”. The absence of a similar constraint in subsection 181(5) indicates that Parliament did not intend to require a higher degree of connection between the amount paid for the redemption of the coupon and the registrant’s commercial activity.
(c) The Act’s structure indicates that one cannot extrapolate subsection 169(1)’s apportionment methodology to subsection 181(5) [40] It may be tempting to interpret subsection 181(5) in light of the general rule for ITCs in subsection 169(1), which provides a formula that only awards ITCs to the extent that a good or service was used in the course of a commercial activity. More specifically, one may be tempted to infer from subsection 169(1)’s apportionment methodology that Parliament did not contemplate that the whole redemption payment in subsection 181(5) could be made in the course of a commercial activity and in the course of a financial services activity. Yet the structure of the Act suggests that one cannot extrapolate subsection 169(1)’s apportionment methodology to subsection 181(5).
[41] Subsection 169(1) is in Subdivision B of Division II of Part IX. Subdivision B is entitled “Income Tax Credits” and contains general rules about ITCs. Subdivision C, which contains section 181, is entitled “Special Cases”. Subdivision C comprises a plethora of rules to address “special” cases where applying the general rules in Subdivision B would lead to incongruous results undesirable to Parliament: CWAY Logistics Ltd. v. The Queen, 2017 TCC 225 at para. 24. This structural distinction suggests that Parliament intended to give separate or “special” treatment to input tax credits for the redemption of coupons. Consequently, one should be wary of extrapolating subsection 169(1)’s apportionment methodology to subsection 181(5) and concluding that a redemption payment can only be made in the course of either a commercial activity or in the course of a non-commercial activity.
(3) Purpose [42] The purpose of subsection 181(5) is to ensure that the “correct overall net amount of [tax] is remitted to the government in respect of the supply to the vendor”: 1992 Explanatory Notes at 106 [emphasis added].
[43] In the example of the bottle of shampoo discussed above, the retailer is deemed to have collected, and must report and remit GST/HST of $1.50—that is, 15% of $10.00 (price of the shampoo before applying the coupon). Yet the customer did not pay the full price of the shampoo; it only paid $9.00. If the person redeeming the coupon paid the other portion of the price of the shampoo—the remaining $1.00—in the course of a commercial activity, then that person is entitled to claim an NITC equal to the tax fraction of the portion it paid. Without the NITC, the government would over-collect tax.
[44] There is an overpayment, and the purpose of subsection 181(5) is to relieve that overpayment. This purpose concords with Parliament’s choice of a broad phrase like “in the course of”, which merely requires a payment to be “connected to” or “incidental to” a commercial activity. Insofar as imposing an either/or test would restrict NITCs for payments connected to commercial activities, such an imposition would contravene Parliament’s purpose.
[45] Additionally, the fact that the person redeeming the coupon is a financial institution is of no consequence if its redemption payment is in the course of a commercial activity. When Parliament intends to exclude financial institution from claiming an ITC, it does so expressly: see ss. 141, 199(1), 200(1). Subsection 181(5) contains no such exclusion.
(4) Conclusion: First extricable error of law [46] The above textual, contextual, and purposive analysis reveals that subsection 181(5) is not an either/or test: a payment can be made in the course of a commercial activity and in the course of a non-commercial activity. Subsection 181(5) does not require a court to determine in the course of which of two activities an amount for the redemption of a coupon is paid. Moreover, subsection 181(5) does not require that the amount paid have a “primary” or “exclusive” connection with a commercial activity. Accordingly, the Tax Court erred in law by basing its analysis on the premise that it needed to determine whether the Redemption Payment is made in the course of a financial services activity or in the course of a commercial activity.
[47] In fairness to the Tax Court, the case was seemingly presented to it as an either/or test: “Appellant’s written submissions to the Tax Court in respect of the NITC Issue”, Supplemental Appeal Book, Vol. 8, Tab 16, at 2529 at para. 90; see also “Transcript of Opening Statements, dated January 31, 2022”, Supplemental Appeal Book, Vol. 8, Tab 14 at 2480–81. However, given that 1) this new argument relates to an issue of statutory interpretation, 2) the appellant’s new argument does not prejudice the respondent who had the opportunity to adduce evidence that could defeat this argument, and 3) the respondent does not take issue with this new argument being raised, I am of the view that the interests of justice require that this new argument be considered: Koch v. Borgatti Estate, 2022 FCA 201 at para. 67; Quan v. Cusson, 2009 SCC 62 at paras. 36–37; Eli Lilly Canada Inc. v. Teva Canada Limited, 2018 FCA 53 at para. 45, leave to appeal to SCC refused, 38077 (8 November 2018). This is why I proceeded with a statutory analysis of subsection 181(5).
[48] I will now examine the Tax Court’s second error of law.
B. The Existence of a Commercial Activity Does Not Depend on Profitability [49] The Tax Court said that PC Bank did not establish the nature of the alleged commercial activity for which it claims NITCs: TCC Reasons at paras. 72–77. PC Bank alleged that the commercial activity was driving customer traffic to Loblaws in connection with its participation in the Loyalty Program: TCC Reasons at para. 72; “Appellant’s written submissions to the Tax Court in respect of the NITC Issue”, Supplemental Appeal Book, Vol. 8, Tab 16, 2505, 2508–10, 2529 at paras. 2, 15–21, 32, 89. The Tax Court refused to find that this constituted a commercial activity: it found such a proposition irreconcilable with “normal commercial and business practices” because it was “unimaginable” that “the [a]ppellant would accept to pay $1.00 to earn $0.35”: TCC Reasons at para. 77. By contrast, PC Bank’s credit card business is profitable: TCC Reasons at paras. 73–76. At first glance, the Tax Court’s reasoning appears satisfactory. But on closer inspection, it contains an extricable error of law. In sales tax, unlike in income tax, profitability is extraneous to determining whether a corporation has a commercial activity. Relying on factors extraneous to a legal test is an error of law: Smith v. Canada, 2019 FCA 173 at para. 30.
[50] The definitions of “business” and “commercial activity” in subsection 123(1) make clear that a corporation’s activity need not be profitable to qualify as a “commercial activity”:
business includes […] [an] undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit […]
commercial activity of a person means […] 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 adventure or concern involves the making of exempt supplies by the person […]
[51] In the definition of commercial activity in subsection 123(1), corporations are conspicuously absent from the list of entities that must have a reasonable expectation of profit. The Canada Revenue Agency and the Tax Court have acknowledged that, in sales tax, for corporations, a commercial activity does not require a reasonable expectation of profit: Traitement de déchets JRG Inc. v. The Queen, 2009 TCC 67 at para. 82; Canada Revenue Agency, Policy Statement P-176R, “Application of Profit Test to Carrying on a Business” (30 September 1998).
[52] Thus, the Tax Court erred in law by finding that PC Bank’s participation in the Loyalty Program could not be a commercial activity simply because that participation did not provide PC Bank any reasonable expectation of profit.
C. PC Bank Makes the Redemption Payment in the Course of a Commercial Activity [53] If one extricates the two legal errors identified above, one finds that the Tax Court’s factual findings lead to the conclusion that PC Bank makes the Redemption Payment in the course of a commercial activity of driving customers to Loblaws.
[54] The Act’s definition of “business”, reproduced in paragraph [50], refers to an “undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit”.
[55] No one disputes that PC Bank’s activity of providing financial services is a business.
[56] The Tax Court’s factual findings concerning the agreements that form the Loyalty Program reveal that PC Bank has another business. By virtue of being a party to the agreements that form the Loyalty Program, PC Bank participates in a program that aims to drive retail traffic to Loblaws: TCC Reasons at paras. 7 (citing paragraphs 7–18 of the partial agreed statement of facts), 78–80, 84. The Licence Agreement grants PC Bank a licence to issue PCB Points to its cardholders: TCC Reasons at para. 43. The Licence Agreement also says that PC Bank “acknowledges that by virtue of being a Licensee, it will be liable for the [Redemption Payment]”: TCC Reasons at para. 7, citing paragraph 16b of the partial agreed statement of facts. The Tax Court found that PC Bank earns revenue from participating in the Loyalty Program: TCC Reasons at para. 67. It earns 0.75¢ for PCB Points it issues when cardholders make $1.00 of purchases at Loblaws, and $0.35 for every $1.00 of PCB Points cardholders use at Loblaws stores: TCC Reasons at para. 7, citing paragraphs 18a–b of the partial agreed statement of facts. In this context, I can only conclude that by virtue of being party to the agreements that form the Loyalty Program, PC Bank has a business of participating in driving customers to Loblaws (the driving customers business).
[57] This conclusion is further supported by the Tax Court’s comparison of the revenue PC Bank earns from its financial activities with the revenue it earns from the Loyalty Program. This comparison indicates the Tax Court’s recognition PC Bank has two businesses.
[58] There is no denying that PC Bank makes the Redemption Payment in the course of its financial services activity.
[59] That said, and as discussed above, subsection 181(5) does not require that redemption payments be made “exclusively” or “primarily” in the course of a commercial activity. PC Bank also makes the Redemption Payment in the course of its commercial activity—namely, its business of driving customers to Loblaws. Indeed, the Loyalty Expense Agreement provides that PC Bank must make the Redemption Payment to Loblaws for every $1.00 worth of PCB Points cardholders use. It follows that, when PC Bank makes the Redemption Payment, it does so pursuant to its driving customers business, and consequently, in the course of a commercial activity as required by subsection 181(5). To that effect, our Court has previously held that promotional or marketing services that drive more customers to a business constitute a taxable supply—i.e., services that drive increased customers to a business are in the course of a commercial activity: Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 96 at paras. 15, 30, 67.
[60] Because PC Bank makes the Redemption Payment in the course of its commercial activity, it is entitled to claim NITCs. This outcome is concordant with Parliament’s purpose of correcting over-collection of tax where redemption payments are made in the course of a commercial activity.
VI. Conclusion [61] In light of the above, I would allow the appeal with costs in this Court and the Court below, and set aside the judgment of the Tax Court. Rendering the judgment that the Tax Court should have rendered, I would allow PC Bank’s appeal from the notices of reassessment dated March 26, 2014 (for the annual reporting period commencing December 31, 2008 and ending December 30, 2009) and June 23, 2015 (for the annual reporting periods ending December 30, 2010, December 30, 2011 and December 30, 2012) and refer the reassessments back to the Minister for reassessment on the basis that PC Bank is entitled to claim the notional input tax credits in respect of the Redemption Payment that it makes.
“Nathalie Goyette”
J.A.
“I agree.
J.B. Laskin J.A.”
WEBB J.A. (Dissenting Reasons)
[62] The issue in this appeal is whether President’s Choice Bank (PC Bank) was entitled to the notional input tax credit (NITC) as provided in subsection 181(5) of the Excise Tax Act, R.S.C. 1985, c. E-15 (ETA) when it reimbursed Loblaws Inc. (Loblaws) as a result of PC Bank’s credit card customers redeeming the points awarded to them by PC Bank, as payment towards a taxable supply (that is not a zero-rated supply) made by Loblaws.
[63] In order to qualify for the NITC, PC Bank must have paid the reimbursement payment referred to above in the course of a commercial activity of PC Bank. The Tax Court found that PC Bank did not make the payment as contemplated by subsection 181(5) of the ETA in the course of a commercial activity of PC Bank and, therefore, PC Bank was not entitled to this NITC (2022 TCC 84, per Hogan J.).
[64] For the reasons that follow, I would dismiss this appeal.
VII. Background [65] The Tax Court decision includes several excerpts from the partial agreed statement of facts submitted by the parties at the Tax Court hearing. Although there were a number of issues raised before the Tax Court, the only issue raised in this appeal relates to the NITC as provided in subsection 181(5) of the ETA. Therefore, only the facts relevant to this issue will be recited.
[66] PC Bank is indirectly a wholly-owned subsidiary of Loblaws. PC Bank is listed in Schedule I to the Bank Act, S.C. 1991, c. 46 and is a listed financial institution for the purposes of the ETA. PC Bank is also registered for the purposes of Part IX of the ETA.
[67] PC Bank issues President’s Choice branded MasterCard credit cards to its customers (Cardholders). The Cardholders use these credit cards to make purchases and to obtain cash advances.
[68] President’s Choice Services Inc. (PCSI), an indirect subsidiary of Loblaws, acquired the points program from PC Bank, effective March 1, 2008. PCSI granted PC Bank, under the rectified Licence Agreement, a non-exclusive, royalty-free licence to issue points to PC Bank’s customers (PCB Points). PC Bank acknowledged that it would be liable for the redemption of PCB Points. Under the points program, PC Bank’s Cardholders are awarded PCB Points whenever they use their PC Bank MasterCard — 20 PCB points for every $1 spent at a Loblaw-banner store where President’s Choice products are sold and 10 PCB points for every $1 spent at other places (paragraph 15 of the partial agreed statement of facts as set out in paragraph 7 of the reasons of the Tax Court Judge).
[69] The PCB Points can be redeemed as payments towards purchases made at Loblaws stores (including certain stores owned by a subsidiary of Loblaws and certain franchises operating under a trademark owned or controlled by Loblaws).
[70] The Loyalty Expense Agreement entered into by PC Bank, PCSI and Loblaws, as rectified, provided for the following payments, as set out in paragraph 18 of the partial agreed statement of facts:
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 [Loblaws] $1.00 (the “Redemption Payment”).
[71] The NITC in issue in this appeal arises as a result of the redemption payments (Redemption Payments) as set out in paragraph c. above.
VIII. Subsections 181(1), (2) and (5) of the ETA [72] Subsection 181(1) of the ETA sets out definitions for certain terms used in section 181. Subsection 181(2) of the ETA sets out the rules for determining the tax when a coupon is used. The NITC that is available to a person who reimburses a retailer for accepting a coupon is payable under subsection 181(5) of the ETA. The full text of these provisions is set out in the Appendix to these reasons.
[73] At paragraph 17, the Tax Court Judge recited the following example, provided by the Crown and also adopted by PC Bank, to illustrate the operation of subsection 181(2) of the ETA:
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 [input tax credit], if the purchase satisfies subsection 169(1) of the Act, in the amount of $1.37.
[74] Although the example produces the correct result for the monetary amount for the tax fraction of the coupon value ($0.13), this result is not obtained by dividing $1.00 by 1.15 (which would be $0.87). Rather, the tax fraction, as determined in accordance with the definition of tax fraction as set out in subsection 181(1) of the ETA, is determined by dividing
(a)the total of the rate set out in subsection 165(1) (currently 5%) and the tax rate for the participating province (10% in this example)
by
(b)the total of 100% and the amount determined under paragraph (a):
(5% + 10%) / (115%) = 15/115 = 0.13 (or 13%)
[75] The result of the calculation of the tax fraction, as set out in the definition of tax fraction, is a fraction, not a monetary amount. Since the coupon in the above example is a $1 coupon, the monetary amount of the tax fraction of the coupon value would be 13% of $1 or $0.13.
[76] Subsection 181(5) of the ETA allows the person who reimburses the retailer for the amount of the coupon to recover the monetary amount of the tax fraction of the coupon value ($0.13 in the example provided above) as a NITC, provided that the conditions imposed by subsection 181(5) of the ETA are satisfied.
[77] The only dispute in this appeal relates to the entitlement of PC Bank to the NITCs. The calculation of the total amount of NITCs is not in dispute.
IX. The Tax Court Decision [78] The only condition imposed by subsection 181(5) of the ETA that was in issue in the appeal to the Tax Court was whether PC Bank made the Redemption Payments to Loblaws in the course of a commercial activity of PC Bank (paragra