Federal appeal court ruling also features a ‘strong’ dissenting decision
The strong dissenting opinion of a Federal Court of Appeal judge has prompted some tax lawyers to think the majority decision upholding a Tax Court of Canada ruling that a Canadian bank be charged GST/HST on Aeroplan Miles may be appealed to the Supreme Court of Canada.
Stikeman Elliott LLP partner Jean-Guillaume Shooner says the bank has until mid August to ask for leave to appeal the case. But for now, the tax court decision that ruled the Aeroplan Miles is part of a single supply of promotional and marketing services it received from Aeroplan Limited Partnership still stands. This case could have implications for other loyalty programs that reward customers with points or miles, Shooner says, though for the time being “it should be business as usual.”
The FCA also decided not to rule whether the Aeroplan Miles are “gift certificates” under the Excise Tax Act. The bank’s primary arguments on appeal had been that the supply of Aeroplan miles made available by Aeroplan was the provision of Aeroplan miles to the bank’s customers. Therefore, the bank argued, the Aeroplan miles must have been the predominant supply under the agreement and that Aeroplan miles are “gift certificates” under the Act.
The FCA dismissed the bank’s appeal and found that the tax court judge did not make an error in his interpretation that the predominant supply was a single supply of promotional and marketing services. However, the FCA decided not to pronounce whether the Aeroplan Miles are “gift certificates.”
Shooner says the FCA’s majority ruling now provides the current state of the law on the applicability of GST/HST to a bank’s payments for services supplied in connection with participation in a loyalty rewards program through the issuance of credit cards. However, due to the vastly different positions taken by the majority and dissent in interpreting the predominant supply and the interpretation of contractual language, “it will not be surprising if this decision is appealed to the Supreme Court of Canada.”
He adds that many practitioners believe that because of this strong dissent, this is “the kind of case that could end up before the Supreme Court.
“I don't disagree with that. But obviously . . . it's not automatic right, you have to file an application for leave to appeal to the Supreme Court,” he says. The SCC would then decide “whether or not they want to hear the case.”
Shooner says the issue dates back to 2003 when Air Canada (which ran the Aeroplan program) and the bank in question entered into a credit card agreement that governed the bank’s participation in the Aeroplan Miles program. The credit card agreement was the basis of the supplies made available by Aeroplan to the bank and the payments made by the bank to Aeroplan for its participation in the program.
Under the credit card agreement, Aeroplan provided the bank’s cardholders with membership in the Aeroplan Miles program. It credited Aeroplan miles to those members when they made credit card purchases. Aeroplan would then invoice the bank for the credited miles. Aeroplan also undertook various referral activities and marketing related to the bank’s credit cards.
Aeroplan collected the applicable GST/HST on the payments on the understanding the miles were taxable supplies under the Excise Tax Act. While the bank did pay the GST/HST, Shooner says, “the matter likely became a source of contention between the parties.”
The original position of the bank early in the dispute was that the Aeroplan miles were supplies of financial services and, as such, should be exempt from GST/HST under the Act.
Following this view, the bank filed a general application with the Canada Revenue Agency for a rebate of GST/HST, arguing that it had paid the tax in error. However, the CRA denied the bank’s rebate application, saying the Aeroplan miles supplied were taxable supplies and not exempt as financial services.
The bank filed an appeal to the Tax Court of Canada, arguing the miles made available by Aeroplan should be considered a supply of “gift certificates” according to section 181.2 of the Act and not be subject to GST/HST.
The tax court dismissed the bank’s appeal, ruling the supply of Aeroplan miles to be part of a single supply of promotional and marketing services provided by Aeroplan to the bank and thus subject to GST/HST. In obiter, the tax court also said that the Aeroplan miles are not “gift certificates” as they do not have attributes similar to money.
The issue on appeal with the Federal Court of Appeal was whether the tax court judge erred in finding that the bank acquired promotional and marketing services from Aeroplan and not just Aeroplan miles. If the tax court judge erred in this interpretation, the next issue to decide was whether the tax court judge also erred in finding that Aeroplan miles are not “gift certificates” for the purposes of the Act.
The bank argued to the FCA that the supply of Aeroplan miles made available was the provision of Aeroplan miles to the bank’s customers. However, FCA Justice Wyman Webb, writing for the majority, dismissed this argument. He stated in his decision that the bank’s customers were not liable to pay the consideration to Aeroplan under the agreement. As such, the customers were not legally responsible for paying the GST/HST concerning the supplies made under this agreement. Instead, Justice Webb wrote, the bank was the party liable to pay the GST/HST.
Justice Webb’s ruling also found that the agreement explicitly identifies both the predominant supply and the incidental supplies as part of Aeroplan’s promotional and marketing services. Other obligations of Aeroplan, which would include issuing Aeroplan miles to the bank’s customers, are incidental to the promotional and marketing services.
The FCA noted the classification of Aeroplan Miles under the Act would impact both the people redeeming Aeroplan miles and Aeroplan, which would be accepting miles as consideration for goods or services. Yet neither the people redeeming Aeroplan miles nor Aeroplan was a party to the appeal. Moreover, the tax court judge stated in his decision that it was not clear how Aeroplan treated the redemption of Aeroplan miles.
For these reasons, the FCA decided not to address whether the Aeroplan Miles are “gift certificates” under the Act. However, Shooner notes the FCA made it clear that this should not be construed as an endorsement of the tax court judge’s conclusion in this respect.
Shooner also points to the dissenting decision of Justice David Stratas, who disagreed with the majority’s approach to contractual interpretation.
Justice Stratas stated in his dissent that the predominant element of a single multi-element, compound or composite supply is determined by identifying all aspects of the supply and asking which gives provides commercial efficacy.
This question goes beyond the technical content of the legal obligations found in a contract, Justice Stratas wrote. He added that the majority’s decision focused exclusively on the literal contractual language and deviated from past jurisprudence that encourages courts to get to the practical, commercial substance of a supply.
He also said that he feared that the majority’s decision could lead parties to add wording to their contracts not to change their contractual obligations or the practical, commercial substance of the supply but merely to trigger favourable GST treatment.
Justice Stratas wrote: “I fear that in the future parties will add words not to change their contractual obligations or the practical, commercial substance of the supply but merely to trigger favourable GST treatment. This may be a boon for cunning drafters and their bag of tricks. But it will be a bust for the important aims the Excise Tax Act is meant to serve.”
Based on this analysis, Justice Stratas concluded the element that gives the commercial supply efficacy was the right to allocate Aeroplan miles. Without the right to issue Aeroplan miles, there would be no point in the parties performing their other obligations.
He stated that Aeroplan miles do function as gift certificates in the commercial world, as they were purchased by accumulation partners of Aeroplan to be used as rewards for their customers. The miles are an exchange device because they may be used as consideration for property or services in the same way as money or a gift certificate. As a result, Justice Stratas found that the bank paid GST in error.
Shooner says Justice Stratas gave a strong dissent – “he really disagrees with the majority's approach to contractual interpretation.”