CIBC v The Queen: FCA Rules that Credit Card Supplies to Banks are a “Financial Service”

The Federal Court of Appeal (the “FCA”) recently released its decision on Canadian Imperial Bank of Commerce v The Queen, 2021 FCA 10 [CIBC]. The FCA overturned the lower court’s decision and allowed the Canadian Imperial Bank of Commerce (“CIBC”) to claim rebates on taxes that it accidentally paid on supplies made by Visa Canada (“Visa”). This case clarifies how tax and legal professionals can work with the definition of “financial service” in the context of the Excise Tax Act, R.S.C. 1985, c. E-15 (the “ETA”). Nevertheless, the Crown still has time to appeal the FCA’s decision to the Supreme Court of Canada (“SCC”).

The Facts

The supply of financial services is generally exempt from GST/HST as per the ETA (CIBC, para 5). “Financial service” has a complex definition pursuant to subsection 123(1) of the ETA, which includes 15 ways a service can be considered a “financial service.” There are also 13 categories of services excluded from the definition of “financial service” (CIBC, para 6). Thus, even if a service falls into one or more of the 15 inclusive parts of the “financial service” definition, it would not be considered a “financial service” if it also falls into one or more of the 13 excluded categories.

Excluded are “prescribed services” defined in Section 4 of the Financial Services and Financial Institutions (GST/HST) Regulations, SOR/91-26 (the “Regulations”). This includes “any administrative service, unless the service is supplied by a person at risk” (CIBC, para 8).

The central issue is whether Visa’s supply to CIBC met the definition of “financial service” and is thus exempt from GST/HST. In their relationship, CIBC issues Visa credit cards. Visa, in turn, charges CIBC a fee plus tax for CIBC’s participation in the Visa payment network. If Visa’s taxable services to CIBC (also known as Visa’s supply) meets the definition of “financial service,” then CIBC can claim a rebate on the taxes it paid on Visa’s supply (CIBC, para 1).

Relationship Between Visa and CIBC

The fees that CIBC pays to Visa ultimately allows the bank to access “instruments, procedures, rules, and technology by which money and transaction information are circulated among system participants” (CIBC, para 13). In essence, Visa credit card holders can purchase from participating merchants with immediate credit that is issued by the card (CIBC, para 13).

By allowing CIBC to participate in its system, Visa exposes itself to additional risks (CIBC, para 19). Visa cardholders usually make purchases throughout a billing period and pay for the sum of their purchases one or two weeks after the billing period. However, merchants instantly receive the money when a cardholder pays with a Visa card. Settlement risks occur due to the differences in timing between the date a Visa cardholder makes a purchase and the date in which they pay for that purchase (CIBC, para 20). Visa also has other risks such as (CIBC, para 23-24)

  • Sovereign risks: operating in countries with financial institutions of questionable solvency;
  • Foreign exchange risks: risk from working with multiple currencies; and
  • Merchant risk: Merchant becomes insolvent and can’t supply the goods or services after the cardholder has paid.

By participating in Visa’s system, CIBC receives numerous benefits (CIBC, para 27). First, CIBC earns interest income from customers who do not pay their credit card bills on time. Second, CIBC earns interchange fees from merchants whenever a Visa cardholder uses the Visa card to make a purchase. Third, CIBC earns revenue from the annual membership fee charged to cardholders. Moreover, merchants trust the Visa brand and knows that if a customer pays with a Visa card, they will receive their money. Visa credit cards are also accepted internationally due to their strong global reputation.

Tax Court of Canada

At the Tax Court of Canada (“TCC”), the parties and the Court agreed that Visa’s supply was a “single compound supply, comprising of several distinct but indivisible components” (CIBC, para 32). Of these components, the TCC judge found that Visa’s supply came within three of the inclusionary paragraphs of the definition of “financial service” as per 123(1) of the ETA — paragraphs (a), (l), and (i) (CIBC, para 34). However, the judge also found Visa’s services constituted an “administrative service” within the meaning of paragraph 4(2)(b) of the Regulation, which excludes Visa’s supply from the definition of “financial service” unless Visa is a “person at risk” (CIBC, para 37).

The TCC ultimately rejected that Visa was a “person at risk” citing that “the person at risk definition refers to a person providing a clearing or settlement service as not being a person at risk” (CIBC, para 46). The judge further reviewed the evidence of Visa’s risk-taking processes and noted that risk was “almost entirely non-existent” while also acknowledging that even Visa regarded its own risk exposure as “extremely low” (CIBC, para 47). Thus, the judge concluded that Visa’s “purely hypothetical remote risk” was insufficient to constitute a “person at risk” because the definition of “person at risk” was not meant to refer to a risk that had a remote chance of occurring (CIBC, para 47).

Federal Court of Appeal

On appeal, CIBC submitted that the TCC erred in interpreting “administrative service” as applying to Visa’s supply and that the lower court also erred in interpreting the definition of “person at risk.” The FCA found that Visa’s supply did not constitute “administrative service” and allowed the appeal. Whether Visa is a “person at risk” was never contemplated by the Court.

Laskin J. writing for the FCA determined that the TCC judge did not err in interpreting “administrative service” but did err in considering the term when applied to Visa’s supply to CIBC (CIBC, para 53-54). Laskin J. took issue with the TCC’s contradictory determinations. The lower court described Visa’s services as an essential component of CIBC’s ability to offer credit cards and noted that “if CIBC … created such a payment network on its own, even if technically feasible, this network would invariably be much less widely accepted than the one offered by Visa” (CIBC, para 56). On the other hand, the TCC also determined that the services were “quintessentially administrative in nature,” and the benefit that Visa offered CIBC was “cost-saving and logistical simplification”(CIBC, para 31). The determination that services were for “cost-saving and logistical simplification” was a key factor in the Tax Court judge’s conclusion that Visa’s supply was administrative (CIBC, para 57-58).

Given the limited and specific nature of the evidence, the FCA found the most efficient use of resources was for its Court to resolve this issue instead of remitting it back to the TCC. In doing so, it cited testimony from Steven Webster, a vice-president at CIBC, who iterated the importance of Visa’s service. Without such service, Webster stated that CIBC would not have the reach to create a globally functioning credit card system (CIBC, para 60).

To find a service as an “administrative service,” the TCC relied on two factors that composed the definition: 1) minimal decision-making and 2) the role the services played in the business of the party receiving them (CIBC, para 53). Laskin J. did not see Visa’s supply as having “minimal decision-making involved” because Visa had to set out all of its payment network rule and maintained decision-making authority within its own framework. Further, this service was crucial to CIBC. These two findings undermined the TCC’s determination. Visa’s supply to CIBC, therefore, constituted a “financial service” because the supply fell within the definition of “financial service” under paragraphs (a), (l), and (i) of 123(1) of the ETA and did not fall within the scope of the exclusionary parts (CIBC, para 69).

Implications

Read in a silo, one may only see CIBC as a niche case that clarifies the meaning of “financial service” in a hyper-specific circumstance. However, most Canadians use a credit card regularly while most Canadian banks purchase the supplies contemplated by this case from Visa and MasterCard. A change in how financial service supplies are taxed could result in a new fee structure that impacts everyday consumers.

The final decision may also have implications on the proposed GST/HST changes to digital services suspected in the upcoming Federal budget. It is completely unknown what effects this could have. But before we determine the broader implications, the Crown can still appeal the FCA’s decision to the SCC.

Adrian Zee

Adrian Zee

Adrian Zee is a second-year JD student at Osgoode Hall Law School. He graduated from Western University with a Bachelor of Arts in Management and in Writing Students in 2017. Adrian is currently a member of Osgoode Hall's Donald G. Bowman Tax Moot team and a Caseworker at both the Osgoode Venture Capital Clinic and at the CLASP Tax Dispute Clinic. His legal interests include tax, corporate, and commercial real estate, and outside of school, Adrian is a food photographer.

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