The Toronto-Dominion Bank v. The King

Toronto-Dominion Bank v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-04-30
Neutral citation
2024 TCC 50
File numbers
2018-4823(GST)G
Judges and Taxing Officers
David E. Graham
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2018-4823(GST)G
BETWEEN:
THE TORONTO-DOMINION BANK,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeals heard on December 11, 12, 13 and 14, 2023, at Toronto, Ontario
Before: The Honourable Justice David E. Graham
Appearances:
Counsel for the Appellant:
Al Meghji Pooja Mihailovich Mark Sheeley Roger Smith
Counsel for the Respondent:
Craig Maw Natasha Tso Natasha Mukhtar
JUDGMENT
The appeals of the reassessments of the Appellant’s reporting periods ended between January 1, 2014 and October 31, 2016 are dismissed.
Costs are awarded to the Respondent. The parties shall have until May 30, 2024 to reach an agreement on costs, failing which the Respondent shall have until July 2, 2024 to serve and file written submissions on costs and the Appellant shall have until July 12, 2024 to serve and file a written response. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing time limits, costs shall be awarded to the Respondent as set out in the Tariff.
Signed at Fredericton, New Brunswick, this 30th day of April 2024.
“David E. Graham”
Graham J.
Citation: 2024 TCC 50
Date: 20240430
Docket: 2018-4823(GST)G
BETWEEN:
THE TORONTO-DOMINION BANK,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1] This appeal concerns the proper characterization of an agreement involving the supply of Aeroplan Miles. It is, at its heart, a re-litigation of the same issues that were dealt with by this Court and by the Federal Court of Appeal in Canadian Imperial Bank of Commerce v. The Queen.[1] The result is the same, but for different reasons.
I. Overview [2] In the periods in question, Aimia Canada Inc. (“Aeroplan”) operated the Aeroplan loyalty reward program. The program offered active members the ability to accumulate points called Aeroplan Miles by purchasing products and services from Aeroplan’s accumulation partners. Those partners included various credit card brands, grocery stores, airlines and retailers.
[3] The Aeroplan Miles could be redeemed by members through Aeroplan, subject to certain terms and conditions.
[4] The Toronto-Dominion Bank (“TD”) entered into an Affinity Program Agreement with Aeroplan (the “Agreement”).[2] The Agreement allowed TD to add the Aeroplan Miles reward feature to certain of its TD Visa cards.
[5] Aeroplan invoiced TD for various amounts under the Agreement. Aeroplan applied GST/HST to those invoices. TD paid the invoices. Later, TD decided that it had paid the GST/HST in error and applied for rebates.
[6] Adjusting for certain concessions made by TD, the total rebate in issue for the reporting periods ended between January 1, 2014 and October 31, 2016 is $141,060,608.
[7] In order to determine whether TD is entitled to the rebates that it is requesting, I will first have to first determine what Aeroplan supplied to TD under the Agreement and then determine how that supply should be taxed.
[8] TD takes the position that Aeroplan supplied it with Aeroplan Miles and that Aeroplan Miles are “gift certificates”. Since section 181.2 of the Excise Tax Act (the “Act”) deems there not to have been a supply when a gift certificate is sold, TD says that Aeroplan should not have charged GST.
[9] The Respondent takes the position that Aeroplan made a taxable supply of marketing services. In the alternative, the Respondent argues that Aeroplan Miles are not gift certificates.
II. Issues [10] There are two main issues in this appeal:
(a)Was the predominant element of the supply that Aeroplan made to TD promotional and marketing services or the right to allocate Aeroplan Miles to its cardholders?
(b)If the predominant element was the right to allocate Aeroplan Miles, is an Aeroplan Mile a “gift certificate” within the meaning of section 181.2?
[11] There is also an ancillary issue regarding a series of payments that TD made to the Canadian Imperial Bank of Commerce (“CIBC”).
III. Test to Be Applied When More Than One Good or Service Supplied [12] Aeroplan did not just supply one good or service to TD. Under the Agreement, Aeroplan supplied a number of different goods and services.
[13] In River Cree Resort Limited Partnership v. The Queen, I set out the tests that the case law has established should be used when determining the nature of a supply consisting of more than one element:[3]
1)What was provided: Determine what goods and/or services the supplier provided for the consideration received (O.A. Brown Ltd. v. The Queen; Global Cash Access (Canada) Inc. v. The Queen; Great‑West Life Assurance Co. v. The Queen; SLFI Group v. The Queen; CIBC v. The Queen).
2)Single compound supply or multiple supply: Determine whether the goods and/or services provided should be characterized as “a single supply comprised of a number of constituent elements or multiple supplies of separate goods and/or services” (O.A. Brown Ltd.; Hidden Valley Golf Resort Association v. The Queen; City of Calgary v. The Queen; SLFI Group; Global Cash Access; CIBC v. The Queen).
3)Determine how the resulting supply should be treated: Determine whether that supply was or those supplies were taxable supplies or exempt supplies:
(a)Single Compound Supply: For a single compound supply, determine what the predominant element of the supply was. This analysis should focus on the purchaser’s perspective of the supply. The supply will be taxed in the same manner as that predominant element (Global Cash Access; Great-West Life; SLFI Group).
(b)Multiple Supply: For multiple supplies, determine whether each of those individual supplies was a taxable supply or an exempt supply.
If one of the multiple supplies was, itself, a single compound supply, apply the test in paragraph (a) to that supply (Jema International Travel Clinic Inc. v. The Queen).
If there was a single consideration paid for the multiple supplies, consider whether sections 138 (incidental supplies) or 139 (financial services in mixed supply) apply to nonetheless deem there to have been a single compound supply (Camp Mini-Yo-We Inc. v. The Queen; 9056-2059 Québec v. The Queen; Canada Trustco Mortgage Co. v. The Queen; Maritime Life Assurance Co. v. The Queen; Jema International; CIBC v. The Queen).
[14] I will apply those tests to the supply that Aeroplan made to TD.
IV. What Was Provided? [15] The first step is to determine what goods and/or services were provided for the consideration received. I will first describe which goods and services were provided and then discuss which ones were not.
A. Elements of the Supply [16] The following goods and services were supplied under the Agreement.
Aeroplan Miles [17] Customers who used TD’s Aeroplan cards earned Aeroplan Miles for purchases that they made on their cards. The number of Aeroplan Miles that they earned depended on which card they had.
[18] TD established four types of Aeroplan co-branded cards: an entry-level card, a premium card, a high net-worth card and a business card. The cards had different annual fees. Cards with higher annual fees offered a higher number of Aeroplan Miles for each dollar spent.
[19] In order to fulfil its obligation to its customers to provide them with these Aeroplan Miles, TD had to cause Aeroplan to issue Aeroplan Miles to those customers. Every month, TD would tell Aeroplan how many Aeroplan Miles each of its customers had earned. Aeroplan would then deposit those Aeroplan Miles into those customers’ Aeroplan accounts.
[20] TD did not actually acquire the Aeroplan Miles. It acquired the right to cause Aeroplan to issue Aeroplan Miles. For the purposes of the issues before me, it makes no difference whether Aeroplan supplied TD with Aeroplan Miles or the right to cause Aeroplan to issue Aeroplan Miles. Therefore, for simplicity, in the rest of these Reasons for Judgment, I will refer to TD as having purchased Aeroplan Miles.
Welcome Bonuses [21] New TD Aeroplan cardholders received welcome bonuses of additional Aeroplan Miles. If the new cardholder was an existing TD customer, then Aeroplan supplied these welcome Aeroplan Miles at no cost to TD. If the new cardholder was not an existing TD customer, then TD purchased the welcome Aeroplan Miles from Aeroplan. There were also situations where Aeroplan and TD would share the cost.
Bonus Miles [22] Aeroplan offered cardholders bonus Aeroplan Miles if they purchased certain goods or services. The bonus Aeroplan Miles available for purchases with Air Canada were particularly appealing to cardholders.[4] TD and Aeroplan agreed that TD, Aeroplan and Air Canada would each provide a certain portion of these bonus Aeroplan Miles. Aeroplan supplied TD with the Aeroplan Miles that TD needed to provide.
Exclusive Issuer [23] Prior to TD’s involvement with Aeroplan, Aeroplan had an agreement with CIBC under which CIBC issued co-branded Aeroplan Visa credit cards. When the CIBC agreement came to an end, Aeroplan looked for a new credit card provider to partner with.
[24] Under the Agreement, TD obtained the exclusive right to issue Aeroplan Visa cards. The only exception to this exclusivity was that CIBC would continue to be able to issue Aeroplan Visa cards to its banking customers if those customers asked for such a card in a CIBC branch.
[25] The flip side of this exclusivity was that TD was not allowed to be involved in any other rewards programs with the exception of its pre-existing in-house program.
Most Favoured Nation [26] TD obtained what it called “most favoured nation” status. This meant that ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||| |||||||||||||||||| This was important as |||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||| ||||||||||||||||||||||||||||||
Marketing [27] TD and Aeroplan agreed that they would each commit a specific amount of money to marketing each year. TD’s share would be used to promote the co‑branded credit cards. Aeroplan’s share would be used to promote both the Aeroplan program and the co-branded cards. Aeroplan’s marketing included marketing aimed at its existing members who did not have Aeroplan credit cards.
[28] The Agreement placed certain restrictions on both parties’ marketing. TD was not allowed to market the co-branded credit cards alongside its other credit cards and had limits on the amount of money that it could spend promoting its in-house reward points program. Aeroplan was not allowed to market towards CIBC customers and had restrictions on how it could market Amex Aeroplan cards.
Licence to Use Trademarks [29] Aeroplan granted TD a royalty-free licence to use the Aeroplan trademark on its cards and in its advertising. TD granted Aeroplan a similar licence for the use of its trademarks in Aeroplan’s advertising.
Preferred Card Status [30] Aeroplan was required to position TD’s Aeroplan cards as Aeroplan’s preferred cards.
Avoiding Expiration of Aeroplan Miles [31] In the periods in question, Aeroplan Miles expired if an Aeroplan member did not either accumulate new Aeroplan Miles or redeem existing Aeroplan Miles in a 12-month period. Knowing that its cardholders would be upset if their Aeroplan Miles expired before they had the chance to use them, TD had Aeroplan agree that TD would automatically purchase one Aeroplan Mile for any TD cardholder whose Aeroplan Miles would otherwise expire.
Member Enrollment and Account Management [32] Aeroplan agreed to enroll TD cardholders who were not Aeroplan members in the Aeroplan program and to administer those members’ Aeroplan accounts, including dealing with any member disputes.
Cooperation [33] TD and Aeroplan agreed to form a Joint Marketing Committee and a Joint Steering Committee.
[34] The Joint Marketing Committee coordinated the promotion of the program. The purpose of this committee was to review what each party was doing in terms of marketing to avoid, for example, duplicating the same message in the same medium at the same time.
[35] The Joint Steering Committee coordinated the operation of the program. The committee looked at the full business relationship between the parties, not just the marketing aspects. The committee reviewed an overall business plan each year. Through the committee, Aeroplan told TD how its customers (as a whole) were using their points. The parties also used this committee to try to resolve any disputes.
Data Analytics and Sharing [36] Aeroplan provided TD with data analytics to help TD increase credit card spending and better target its marketing. TD and Aeroplan also shared certain customer data through a third party anonymization process.
Aeroplan 2.0 [37] Aeroplan agreed to upgrade its program to make it more appealing to members. TD referred to the upgraded program as “Aeroplan 2.0”.
[38] Prior to Aeroplan 2.0, an Aeroplan member who wanted to redeem their Aeroplan Miles for a flight would determine the number of Aeroplan Miles that they would have to spend by consulting a redemption chart. The chart set out the number of Aeroplan Miles needed for short-haul, long-haul and international flights in both economy and business class. Only a certain number of seats were available for redemption on any given flight. This meant that an Aeroplan member might not be able to purchase a flight in busy seasons or when travelling to popular destinations. This could be a considerable irritant to Aeroplan members.
[39] Aeroplan 2.0 introduced the idea of market fare redemptions. This type of redemption allowed an Aeroplan member to redeem Aeroplan Miles for a flight based on the market price of the flight. Market fare redemptions were available for any seat on any Air Canada flight. This improvement to the Aeroplan program ensured that members could purchase the flight that they wanted so long as they were willing to redeem more Aeroplan Miles to do so. TD saw this as a significant improvement to the program that would remove a major customer irritant.
[40] Aeroplan 2.0 also involved the creation of a number of tiers of Aeroplan membership, with additional benefits for members at higher tiers.
B. Elements That Were Not Part of the Supply [41] There were certain supplies made under the Agreement or in different agreements that were not part of the supply.
Credit Card Operations [42] Under the Agreement, TD maintained full responsibility for its actual credit card operations. This was not a service that Aeroplan provided.
Air Canada Benefits [43] Aeroplan provided TD with certain Air Canada benefits that it could offer to its customers, such as lounge access, complementary checked baggage and priority boarding. The parties agree that those were separate taxable supplies.
Acquisition of CIBC Cardholders [44] When TD took over from CIBC as the exclusive provider of Aeroplan Visas, something had to be done with CIBC’s existing Aeroplan Visa cardholders. TD, CIBC and Aeroplan agreed that those cardholders would be divided into two groups. Cardholders who had other banking relationships with CIBC would be allowed to continue to use their CIBC Aeroplan Visa cards. Cardholders who did not have other banking relationships with CIBC would be transitioned to TD Aeroplan Visa cards.
[45] The cardholders that TD acquired from CIBC significantly increased TD’s annual volume of credit card transactions. Acquiring these cardholders was undoubtedly a huge part of what made the overall deal attractive to TD. It could even have been the most attractive part of the overall deal for TD. However, acquiring these cardholders was not an element of the supply that Aeroplan made to TD. TD acquired the cardholders from CIBC, not Aeroplan. It paid CIBC for their accounts, not Aeroplan.
V. Single Compound Supply or Multiple Supply [46] Having established what goods and services Aeroplan supplied, I now turn to the second step, which is to determine whether those goods and services should be characterized as a single compound supply or as multiple supplies of separate goods and services.
A. General
[47] Subject to the issue described below regarding Aeroplan 2.0, the parties agree that the goods and services supplied were part of a single compound supply. I agree.
B. Aeroplan 2.0 Payment [48] Under the Agreement, TD paid Aeroplan a significant amount of money up front for what the Agreement describes as a “compensation for expenditures to be incurred by Aeroplan” to move to the Aeroplan 2.0 program (the “Aeroplan 2.0 Payment”).[5] Aeroplan charged GST on this payment. The rebate that TD has claimed includes that GST.
[49] TD takes the position that the Aeroplan 2.0 Payment was part of the consideration for the single compound supply. The Respondent disagrees. The Respondent also raised two preliminary objections in respect of this issue. TD has raised one of its own.
Specified Person Objection [50] First, the Respondent argues that TD did not properly identify the Aeroplan 2.0 Payment in its notice of objection and is therefore precluded by the specified person rule in section 306.1 from raising it in its appeal. I disagree.
[51] TD is a specified person. Subsection 306.1(1) states that a specified person may only raise issues and seek relief in this Court if the person has complied with subsection 301(1.2).
[52] Subsection 301(1.2) requires a notice of objection filed by a specified person to reasonably describe each issue to be decided, to specify the relief sought in respect of each issue and to provide the facts and reasons relied upon for each issue.
[53] While subsection 301(1.2) requires a specified person to set out the facts and reasons in respect of each issue, so long as the specified person raises the issue in their notice of objection, they are not precluded from adding new facts or reasons in support of that issue (British Columbia Transit v. The Queen).[6]
[54] In its notice of objection, TD raised the issue of its entitlement to a rebate in respect of amounts paid to Aeroplan in error. The relief sought in respect of that issue included a rebate of the GST that TD had paid on the Aeroplan 2.0 Payment. While TD did not specifically identify the Aeroplan 2.0 Payment or explain why it viewed the Aeroplan 2.0 Payment to be part of a single compound supply under the Agreement, I consider those to be facts and reasons supporting the issue that it raised, not new issues. Accordingly, I find that TD is not precluded from arguing that the Aeroplan 2.0 Payment was part of the single compound supply.
Pleadings [55] In the alternative, the Respondent argues that TD did not properly identify this issue in its pleadings or plead the material facts and reasons with respect to this issue and was therefore precluded from arguing it at trial. Again, I disagree.
[56] While TD should have pled this issue more clearly and the Respondent may not have been fully aware of this issue at the outset, the Respondent became aware of it and, in fact, addressed it in the Amended Reply and dealt with it on discovery.
Respondent Has Not Conceded the Issue [57] TD argues that the Respondent agreed in paragraph 26 of the Amended Reply that the Aeroplan 2.0 Payment was part of the single compound supply. I disagree.
[58] It is clear to me that paragraph 26, read in the context of paragraph 32 of the Amended Reply, was not referring to the Aeroplan 2.0 Payment. The Respondent specifically identifies the Aeroplan 2.0 Payment in a number of places and argues that that payment did not involve the supply of Aeroplan Miles. I take this to mean that the Respondent did not consider it to be part of the single compound supply.
[59] In addition, I do not interpret the read-in provided by TD from its examination for discovery of the Respondent’s representative to amount to a concession.
Merits [60] Having dealt with the preliminary objections, I can now consider whether the Aeroplan 2.0 Payment was in respect of a separate supply of an upgraded Aeroplan 2.0 program or was part of the single compound supply. I find that it was part of the single compound supply.
[61] TD’s desire to have the Aeroplan program upgraded to Aeroplan 2.0 was inextricably linked to its desire to participate in the program. TD was concerned about the flexibility of the Avion program offered by the Royal Bank of Canada and wanted to be able to compete with that program. Aeroplan 2.0 would make it easier for cardholders to use their Aeroplan Miles and would reward cardholders who spent more money.
[62] Had the Aeroplan 2.0 Payment been made several years into TD’s involvement in the program, I may have viewed it differently. However, as it was an up‑front payment that was a part of the Agreement, I have difficulty conceiving of it as anything other than part of the single supply. TD did not just want to buy Aeroplan Miles, it wanted to buy more valuable Aeroplan Miles. Aeroplan 2.0 allowed that to happen.
[63] Having determined that Aeroplan made a single compound supply that included the Aeroplan 2.0 Payment, I can now move on to determining the predominant element of that supply.
VI. Predominant Element [64] For years, the Federal Court of Appeal has held that, where there is a single compound supply composed of a number of elements, one must determine what the predominant element of the supply was. The supply will then be taxed in the same manner as that predominant element. This test has been described as determining the “commercial efficacy” of the arrangement (Global Cash Access (Canada) Inc. v. The Queen;[7] SLFI Group v. The Queen;[8] Great-West Life Assurance Co. v. The Queen[9]).
[65] However, the recent decision in CIBC (FCA) has cast doubt on this test.
[66] I will first apply the test set out in Global Cash Access, SLFI and Great‑West Life. I will then consider whether CIBC (FCA) affects my conclusion.
A. The Traditional Test [67] The Respondent says that the predominant element was the supply of promotional and marketing services. TD says that the predominant element of the single compound supply made under the Agreement was the supply of Aeroplan Miles. I agree with TD.
No Commercial Efficacy Without Aeroplan Miles [68] TD wanted to grow its credit card business. To do that, it needed to acquire new customers and retain existing customers. TD was particularly interested in having customers who spent large amounts on their credit cards and paid their balances when due. It believed that customers who were frequent fliers with Air Canada would be likely to fit their desired profile. It knew that those types of customers were interested in accumulating Aeroplan Miles. Therefore, to attract those customers, TD wanted to be able to offer a credit card with Aeroplan Miles.
[69] TD called Jason Rasmussen as a witness. In the reporting periods in question, Mr. Rasmussen was an Associate Vice President dealing with TD Aeroplan credit card relationships. I found Mr. Rasmussen to be credible.
[70] Mr. Rasmussen testified that the primary thing that TD obtained under the Agreement was the ability to give Aeroplan Miles to its customers.
[71] Mr. Rasmussen stated that there were approximately 3,000,000 Aeroplan members in 2013 and that approximately 1,200,000 of those members had Aeroplan-branded credit cards. TD wanted to be part of that business.
[72] Mr. Rasmussen explained that customers love Aeroplan Miles and that a credit card that helped them to accumulate more Aeroplan Miles was very attractive to them. Aeroplan was a premier loyalty rewards program. It had access to the dominant airline in Canada. Its customer base consisted of premium customers who were very appealing to TD. They tended to have higher-than-normal incomes and higher-than-normal spending. Since TD earned income on each dollar spent on its credit cards, it valued higher-spending customers.
[73] The Respondent called Michael Rhodes as a witness. In the reporting periods in question, Mr. Rhodes was the Executive Vice President, North American Credit Cards & Merchant Services at TD. Mr. Rhodes was responsible for negotiating the Agreement with Aeroplan. I found him to be generally credible. Mr. Rhodes testified that he had been involved with credit card programs since the 1990s and that, in his experience, frequent flyer points are the premium product that a credit card provider can attach to its cards.
[74] Mr. Rhodes testified that TD’s primary objective in negotiating the Agreement was to get access to Aeroplan Miles. While he may have over‑emphasized this point in his testimony to the point of slipping into advocacy, I nonetheless accept that he viewed the ability to provide customers with Aeroplan Miles as the single most important element of TD’s agreement with Aeroplan.
[75] I acknowledge that the other elements of the supply had value. TD went to great lengths to include them in the Agreement. However, there would have been no point in obtaining marketing services from Aeroplan, exclusive rights to use the Aeroplan logo, and data analytics about existing and potential customers if TD could not provide those customers with Aeroplan Miles.
[76] The method of calculating payments under the Agreement strongly supports the idea that the predominant element of the supply was Aeroplan Miles. The amount that TD paid Aeroplan every month under the Agreement was calculated based on the number of Aeroplan Miles that Aeroplan credited to TD cardholders in the month. There was a set price per Aeroplan Mile. The price did not vary with the amount of marketing or data analytics provided by Aeroplan.
[77] TD’s most favoured nation status ensured that |||||||||||||||||||||||| |||||||||||||||||||||||| ||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||. If TD had been paying for marketing, given the restrictions that the Agreement imposed on Aeroplan’s ability to market in respect of |||||||||||||| ||||||||||||||, I would have expected TD to be paying far more ||| ||| ||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||.
[78] In summary, there would have been no commercial efficacy to the Agreement if TD could not provide Aeroplan Miles to its cardholders. Whether those Aeroplan Miles came from credit card spending, bonus miles or welcome bonuses, the fact was that TD’s cardholders wanted them. Offering a credit card under the Aeroplan brand that did not actually provide Aeroplan Miles would have misled, annoyed and ultimately alienated those cardholders.
Promotional and Marketing Services Were Not the Predominant Element [79] The Respondent submits that marketing and promotional services were the predominant element of the supply. I disagree.
[80] Mr. Rasmussen testified that TD did not pay Aeroplan anything for the marketing that Aeroplan did. There is nothing in the Agreement or the invoices that would suggest otherwise. The money that each side was required to spend on marketing was something that they contributed to further their joint business interests.
[81] TD marketed TD Aeroplan cards. That benefited TD by attracting more cardholders. However, it also benefited Aeroplan. Aeroplan makes money selling Aeroplan Miles. The more people use Aeroplan-branded credit cards, the more Aeroplan Miles Aeroplan sells.
[82] In some of its advertising, Aeroplan marketed the Aeroplan program. That clearly benefited Aeroplan but it also benefited TD by increasing awareness of the benefits of earning Aeroplan Miles. In other types of advertising, Aeroplan marketed TD Aeroplan cards alongside the Aeroplan program. Again, this benefited both parties.
[83] At no point did Aeroplan do any marketing that was exclusively for TD’s benefit. It did not, for example, market TD’s banking, lending or investing services.
[84] The Agreement specified how much each side was to spend each year. TD was required to spend |||||||||||||| |||||||||||||| what Aeroplan had to spend in the first year of the Agreement. Thereafter, |||||||||||||||||||||||||||||| ||||||||||||||||||||||||||||||. This sharing of marketing costs is completely inconsistent with the idea that Aeroplan was providing marketing services to TD.
[85] The amount that TD paid Aeroplan each month bore no relation to the amount that Aeroplan spent on marketing each year. In fact, the typical amount that Mr. Rasmussen testified TD spent on Aeroplan Miles each month was || |||| |||||| |||| the amount that the Agreement required Aeroplan to spend on marketing for the entire year. This clearly indicates that TD was paying for something other than marketing.[10]
[86] Mr. Rasmussen testified that, in his view, Aeroplan’s marketing was not that effective as very few cardholders came in through Aeroplan. On cross‑examination, it became clear that Mr. Rasmussen’s conclusion was based on the faulty assumption that the 65% to 70% of cardholders who opened an account at a TD branch had come to the branch because of TD’s marketing. As a result, I give no weight to Mr. Rasmussen’s views of the effectiveness of Aeroplan’s marketing.
[87] Mr. Rasmussen also testified that the data analytics and sharing aspects of the Agreement had little value. His impressions of the value of these elements comes from his experiences with their value after the fact. He testified that he did not recall TD ever using the anonymized third party data. He explained that, since most cardholders came through TD’s own channels, TD already had the information about them that it needed.
[88] That said, Mr. Rasmussen was not directly involved in the negotiation of the Agreement so he does not know what value TD placed on the data analytics and sharing during negotiations. Whether it ultimately used the data or not, I find that TD must have attached some value to it or it would not have been included in the Agreement. However, that value was clearly insignificant compared to the value that TD placed on obtaining Aeroplan Miles for its cardholders.
The Reason for Acquiring a Good Does Not Change the Nature of the Good [89] The Respondent knows the relative amounts that TD and Aeroplan were required to spend on marketing under the Agreement. The Respondent also knows that TD paid Aeroplan sums so far in excess of Aeroplan’s actual marketing expenditures that the payments must have been for something else. Finally, the Respondent knows that it would be pointless to market a TD Aeroplan card if TD could not provide its customers with actual Aeroplan Miles. So why is the Respondent arguing that the predominant element of the supply was marketing services?
[90] While the Respondent does not expressly say so, what the Respondent is really doing is acknowledging that the predominant element was the purchase of Aeroplan Miles but asking me to re-characterize that purchase as a purchase of marketing services. That is not how the predominant element test works.
[91] It is a predominant element test, not a predominant purpose test. The test requires me to consider which of the actual elements of the supply was the predominant one and to tax the entire supply based on that predominant element. It does not require me to re-characterize the actual elements of the supply into something different based on the purpose for which they were acquired.
[92] Doing so would be a complete departure from the Act. Generally speaking, when dealing with taxable supplies, the Act imposes GST on what a person buys, not why they buy it. The purpose for buying a good or service is generally only relevant when considering whether there was an exempt supply, whether the person can claim an input tax credit or whether the person is entitled to certain rebates, such as the new housing rebate.
[93] There is no question that TD bought the Aeroplan Miles for marketing purposes. But that does not change the fact that what it bought was Aeroplan Miles. That is what it should be taxed on.
[94] Justice Stratas addressed this same argument in CIBC (FCA), albeit in dissent. I agree with and adopt his reasoning.[11]
Exclusivity Was Worthless Without Aeroplan Miles [95] Clearly, the exclusivity that Aeroplan provided to TD had significant value. It meant that TD did not have to compete with other financial institutions that offered Visa cards. It gave TD a premier market position. However, exclusivity would have been worthless without actual Aeroplan Miles. It was not enough for TD to be able to prevent other financial institutions from offering Aeroplan Visa cards. To succeed, TD needed to be able to give its customers Aeroplan Miles.
Other Elements Were Not Predominant [96] The remaining elements of the supply simply supported the predominant element. Member enrollment and account management were incidental to the operation of the program. The joint committees benefited both parties and were simply a way of ensuring that they met their joint business goals. Exclusivity simply ensured that competitors could not offer the same Aeroplan Miles that TD was offering. Finally, the Aeroplan 2.0 program was simply a means of ensuring that TD was buying more valuable Aeroplan Miles.
Other Witnesses [97] Before moving on, I need to quickly comment on three other witnesses whom the Respondent called: Riaz Ahmed, Matthew Hall and Edmund Clark.
[98] In the reporting periods in question, Mr. Ahmed was the Group Head – Insurance, Credit Cards and Enterprise Strategy at TD. I found Mr. Ahmed to be credible. The reason that I do not refer to his testimony elsewhere is not that I did not accept it, but rather that I found that it did not add much to the overall evidence.
[99] In the reporting periods in question, Mr. Hall was the General Manager, TD and MBNA Partnerships at Aeroplan. He was Mr. Rasmussen’s principal contact at Aeroplan. While I initially found Mr. Hall to be generally credible in his direct evidence, he became so evasive on cross‑examination in his attempts to pretend that Aeroplan was not in the business of selling Aeroplan Miles that I am left with no choice but to disregard his entire testimony. Except as specifically noted elsewhere in these Reasons for Judgment, I have not relied on anything that he said.
[100] In the reporting periods in question, Mr. Clark was the Group President and CEO of TD. I give no weight to any of Mr. Clark’s testimony. He was evasive and non-responsive. He clearly had a point that he wanted to make about buying Aeroplan Miles and he just kept returning to it over and over.
Preliminary Conclusion [101] On the basis of all of the foregoing, applying the test set out in Global Cash Access, SLFI and Great-West Life, I find that the predominant element of the single compound supply was the supply of Aeroplan Miles.
[102] I will now consider whether CIBC (FCA) forces me to change this conclusion.
B. The Test from CIBC (FCA) [103] CIBC involved very similar facts to the facts in this appeal. Pursuant to an agreement between Aeroplan and CIBC, CIBC issued Aeroplan‑branded credit cards to its customers. The agreement between Aeroplan and CIBC involved a single compound supply.
Tax Court Decision [104] At trial, Justice Visser found that there were a number of elements to the supply: providing all CIBC cardholders with Aeroplan membership, crediting Aeroplan Miles to such members and undertaking specified referral activities or services and marketing in respect of CIBC’s cards.[12]
[105] Justice Visser applied the test in Global Cash Access and Great-West Life and found that the raison d’être of the agreement between CIBC and Aeroplan was to market and promote applications for and increased use of participating CIBC credit cards.[13] He therefore concluded that the marketing and promotional services were the predominant element of the supply.[14] In reaching that conclusion, Justice Visser noted that the agreement between CIBC and Aeroplan “explicitly stipulates that the marketing and promotional services … are the predominant element” of the supply.[15]
Federal Court of Appeal – Majority Decision [106] On appeal, the majority upheld Justice Visser’s decision. However, in doing so, the majority went much further than Justice Visser did.
[107] While they acknowledged the law in Global Cash Access and Great-West Life, the majority specifically stated that it was not necessary to consider the predominant element of the agreement between CIBC and Aeroplan because the agreement explicitly identified the predominant supply and the supplies that were incidental thereto.[16]
[108] The majority emphasized that there was nothing in the agreements to indicate that CIBC was purchasing Aeroplan Miles, nor was there any direct statement that the amounts paid by CIBC had been paid as consideration for Aeroplan Miles.[17] The majority explained that oral testimony could not override the explicit statements in the agreement between CIBC and Aeroplan.[18]
Federal Court of Appeal - Dissent [109] Justice Stratas dissented. He stated that the majority had focused exclusively on the literal contractual language and that, in doing so, they had deviated from the test in Global Cash Access and Great-West Life, which encourages the court to get to the practical, commercial substance of the supply.[19]
[110] Justice Stratas stated that he feared that the majority’s reasoning would encourage parties to “add words not to change their contractual obligations or the practical, commercial substance of the supply but merely to trigger favourable GST treatment.”[20]
[111] Justice Stratas found that the predominant element of the supply between Aeroplan and CIBC was the right to allocate Aeroplan Miles. He stated that, “[b]ut for the right to allocate Miles, there would have been no point in the parties performing their other obligations.”[21] He went on to explain in detail why the “mere fact that CIBC plans to use its property, the rights to allocate Miles, to make money does not support the view that we are dealing with promotional and marketing services.”[22]
[112] With respect, I prefer Justice Stratas’ approach to that of the majority.
[113] I share Justice Stratas’ concern that the majority’s decision will lead to taxpayers inserting self-serving statements into agreements declaring the predominant element of the agreement to be whatever the parties want it to be.
[114] The majority referred to the Supreme Court of Canada’s decision in Shell Canada Ltd. v. The Queen[23] as confirming that the bona fide legal relationships of taxpayers must be respected in tax cases.[24] That is clearly the law, but I do not think that Justice Stratas was suggesting that the bona fide legal relationships between CIBC and Aeroplan should be altered. He was not suggesting that the agreement be re-characterized as a lease, licence, loan or some other type of transaction in order to better represent its true economic substance. That would be contrary to Shell.
[115] In fact, it does not appear to me that Justice Stratas was trying to re‑characterize the legal relationship at all. He was simply trying to establish (in accordance with Global Cash Access and Great-West Life) which of the many elements that CIBC was supplying was the predominant element. Looking for the predominant element of a supply, while still respecting the form of the supply, is very different from looking at economic substance over form.
How to Apply CIBC [116] Despite my support of Justice Stratas’ dissent, I am bound by the decision of the majority. However, I am also bound by the prior decisions of the Fed