Credit Card Rewards Program Expenses: Tax Court Of Canada Doesn't Buy $13.97 Million GST/HST Input Tax Credit Claim

• Published date: 10 August 2023
• Subject Matter: Finance and Banking, Tax, Financial Services, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: Stikeman Elliott LLP
• Author: Mr Jean-Guillaume Shooner, Vanessa Clusiau and Antonin Lapointe

On June 27, 2023, the Tax Court of Canada ("TCC") dismissed the appeal of a Schedule II bank (the "Bank") regarding its entitlement to input tax credits ("ITCs") for GST/HST payable on expenses incurred in connection with the operation of a membership rewards program ("MRP") that the Bank offered to certain credit cardholders ("MRP Cardholders").

• The TCC concluded that all of the elements or components of the MRP are integrated and intertwined components of a composite supply of exempt financial services made by the Bank to the MRP Cardholders and therefore had to be considered components of a single composite supply.
• The TCC also determined that the predominant element of this single composite supply was a financial service (namely the extension of credit by the Bank to the MRP Cardholders), which under the applicable doctrine, entailed that the single composite supply took on the exempt nature of that predominant element.

BACKGROUND

Between 2002 and 2012, the Bank issued charge cards and credit cards (collectively, "Cards") to members of the public ("Cardholders"). It also operated the MRP, a loyalty program made available only to its Cardholders. Subscription to the MRP would be automatic and free for some Cards, while being optional and subject to an additional fee (the "Enrollment Fee") for other Cards. A Cardholder enrolled in the MRP (i.e, an MRP Cardholder) was credited with a specific number of points (the "") for each dollar charged to a Card for the purchase of goods or services. Upon accumulating a certain number of Points, an MRP Cardholder was entitled to claim a reward (the "Reward").

In the course of operating the MRP, the Bank collected GST/HST on:

• the MRP membership fee charged to Cardholders of certain Cards and on
• the MRP accelerator fee charged to an MRP Cardholder in order to earn a higher ratio of Points per dollar charged to a Card.

In light of this, the Bank claimed ITCs with respect to the GST/HST it paid on expenses incurred with respect to the operation of the MRP. It took the view that such expenses were incurred in the course of making taxable supplies, which were separate and distinct from the other exempt supplies made by the Bank to its Cardholders.

The tax authorities disagreed with the Bank's position, taking the position that the Bank made a single composite supply to the MRP Cardholders and that the predominant element of such composite supply was an exempt financial service. The Bank's ITC claims were accordingly disallowed and it was reassessed on this basis.

ANALYSIS

Pursuant to subsection 169(1) of the Excise Tax Act ("ETA"), a GST/HST registrant may generally only claim ITCs with respect to taxable expenses incurred for consumption, use or supply in the course of its commercial activities, which excludes the...