Court considers whether Visa supplies financial services, which are exempt from GST/HST
The Federal Court of Appeal recently ruled that GST/HST can no longer be collected from banks and credit unions on credit card transaction processing services, a conclusion which will greatly benefit financial institutions, says Jean-Guillaume Shooner, a Montreal-based partner at Stikeman Elliott LLP.
“Where it was initially possible for these entities to claim input tax credits on inputs incurred for purposes of supplying the transaction processing services mentioned in the FCA decision, taxes paid on such inputs are not recoverable when providing exempt financial services,” says Shooner.
This decision, unless successfully appealed, may result in additional costs to businesses like Visa and Mastercard and a lower profits margin, which may in turn lead to increased fees charged to financial institutions or to merchants, with the end consumers most likely suffering the additional economic burden, Shooner says.
In Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 10, the appellant bank, which issues Visa credit cards, was seeking GST/HST rebates on fees charged by Visa for the supply that the bank received pursuant to the Visa payment system. The bank contended that the tax was paid in error because the Visa supply was exempt as a financial service. The Minister of National Revenue rejected the rebate claims.
Under the GST/HST statutory scheme, a supply is a financial service and exempt from tax if it falls within the inclusions provided in paragraphs (a) to (m) of s. 123(1) of the Excise Tax Act, RSC 1985, c E-15. One of the exclusions is an administrative service, except if supplied by a person at risk.
The Tax Court of Canada rejected the bank’s appeal, determining that the Visa supply was an administrative service, not a financial service, and that Visa should not be considered a person at risk. The tax court, considering whether paragraph (l) of the inclusions would apply, concluded that Visa’s services, which involved the facilitation of the transfer of payments among issuers, acquirers and merchants, were for the purposes of “arranging for” the bank’s credit services. Visa’s services also met the conditions of the inclusions in paragraphs (a) and (i), the tax court found.
The tax court then determined that the Visa supply, being quintessentially administrative in nature, was prescribed under s. 4(2) of the Financial Services and Financial Institutions (GST/HST) Regulations, SOR/91-26, subject to the saving provision for a person at risk under s. 4(3) of the regulations, which would be excluded from the definition of financial service under paragraph (t). Because the saving provision was not applicable, the Visa supply was a prescribed service excluded from the definition of financial service and was subject to GST/HST, said the tax court.
The Federal Court of Appeal set aside the tax court’s judgment, allowed the appeal and referred the assessments back to the minister for reconsideration and reassessment. The court disagreed with the bank’s contention that the tax court erred in law in interpreting the definition of administrative services, but found that the tax court did err when it made contradictory and irreconcilable findings regarding the Visa supply’s nature and effects. The Visa supply added value which went beyond cost saving and logistical simplification services, the court found.
The court ruled that, once this error was reversed, there would be no basis for a finding that the Visa supply was an administrative service or that an exclusion would apply. Lastly, the court said that it was no longer necessary to determine whether Visa was a person at risk, considering its other findings.
Lawyers should keep in mind that the Canada Revenue Agency still has time to file an application for leave to appeal from the judgment with the Supreme Court of Canada, said Shooner, who co-wrote an article discussing the case with Vanessa Clusiau, associate at Stikeman Elliott.
“To the extent a court decision does not appear consistent with the fundamental structure of our value-added tax regime, although we are not saying it is the case here, the Tax Policy Branch of the Department of Finance could eventually propose legislative amendments in response to such court decision.” These legislative amendments may have retroactive impacts in certain circumstances, says Shooner.