Introduction

On January 22, 2021, the Federal Court of Appeal (FCA) overturned the decision rendered by the Tax Court of Canada (TCC) in Canadian Imperial Bank of Commerce v. The Queen¹ (Decision under Appeal) and concluded that the service provided by Visa to the Canadian Imperial Bank of Commerce (CIBC) was an exempt supply of  a “financial service” as defined under the Excise Tax Act² (ETA). As a result, CIBC was entitled to the rebate applications it filed for GST/HST paid in error on fees charged by Visa from 2003 to 2013 (Fees).

The FCA distinguished the case at bar with the decision rendered in Great-West Life Insurance Company v. The Queen³ and confirmed that Visa provided a service whose predominant element went beyond mere cost savings and logistics. As virtually every business in Canada deals with payment processors, this key decision sheds more light on what distinguishes a financial service from a service merely administrative in nature.

Background

CIBC issued Visa-branded credit cards to its customers and paid the Fees to Visa to participate in the Visa payment system, a set of instruments, procedures, rules and technology (Visa System). The Visa system allows Visa credit cardholders to immediately access credit granted by their financial institution, CIBC in this case, wherever merchants (Participating Merchants) accept Visa as a payment for any given purchase.

The Visa System’s rules, which are contractually binding by-laws, operating regulations, guides and directives established by Visa, are circulated among the Visa System participants and govern their participation in the Visa System. Visa ensures compliance with the Visa System’s rules of all participants and may modify such rules without the participant’s approval. The evidence presented before the TCC however established that such rules are in fact relatively static. Visa also proceeds with risk assessments regarding the participants to the Visa System, including the investigation, assessment and monitoring of the credit-worthiness of Participating Merchants (Merchant Risk).

Issue

The central question in this case was whether the service CIBC acquired from Visa (Visa Service) in consideration of the Fees came within the definition of a “financial service” provided in the ETA and therefore not subject to GST/HST.⁴

The expression “financial service” is defined under subsection 123(1) ETA (Definition). A service is a financial service if it is included under at least one of the paragraphs (a) to (m), while not excluded by one of the paragraphs (n) to (t) of the Definition. Pursuant to paragraph (t) of the Definition and section 4 of Financial Services and Financial Institutions (GST/HST) Regulations⁵ (Regulations), any administrative service is excluded from being a “financial service”, except, among other things, if the administrative service is supplied by a “person at risk”.

TCC decision

In the Decision under Appeal, the TCC concluded that the Visa Service did not constitute a financial service as defined under the ETA.

Both parties agreed that the supply of the Visa Service constituted a single compound supply. After accepting that Visa provided one single compound supply, whose predominant element only should be taken into account when determining whether it constituted a supply of a financial service under the ETA, the TCC concluded that while the Visa Service fell within paragraphs (a), (i) and (l) of the Definition, it was however excluded under paragraph (t) of the Definition and the Regulations.

Despite the fact that it described the Visa Service as “an essential part of the ability for CIBC to offer credit card based services to their clients”,⁶ giving “CIBC customers the ability to purchase goods and services anywhere in the world without CIBC having to individually contact each merchant to set up payment arrangements with them”⁷ and that “If CIBC was forced to create such a payment network on its own, even if technically feasible, this network would invariably be much less widely accepted than the ones offered by Visa”,⁸ the TCC concluded that the Visa Service was essentially “cost saving and logistical simplification”⁹ “with minimal decision making involved”¹⁰ and therefore, referring to the Great-West decision, merely administrative in nature. Stating that Visa was not a “person at risk” as defined under the Regulations, the TCC then concluded that the Visa Service did not qualify as a financial service for GST/HST purposes.

FCA analysis

Since the determination that the Visa Service is included in paragraphs (a), (i) and (l) of the Definition was not challenged in the appeal, the main issue raised before the FCA was to determine whether such service was subsequently excluded from the Definition by virtue of paragraph (t) of the Definition and the Regulations.

In a unanimous decision, the FCA agreed with the TCC interpretation of an “administrative service” but considered that the TCC judge made a palpable and overriding error in concluding that the Visa Service was an administrative service. More particularly, the FCA ruled that the evident contradiction between the TCC’s findings that, on one hand, the Visa Service formed an essential part of the ability for CIBC to offer to its client a credit card based service and, on the other hand, the same supply was “quintessentially administrative in nature”, warranted the Court’s intervention.

Distinguishing the present case from the Great-West case, the FCA confirmed that the evidence presented before the TCC showed that the benefit provided to CIBC by the Visa Service, including the provision by Visa to CIBC of a reputable worldwide network as well as Visa’s monitoring of Merchant Risk on behalf of CIBC, went beyond the mere administrative service. The FCA also concluded that the fact that the Visa System operated with minimal decision making involved, as was the case in Great-West, was not sufficient to support the conclusion that the Visa Service was only administrative in nature since Visa set and maintained decision-making authority in the application of the Visa System rules.

It should be noted that considering the FCA concluded that the Visa Service was not an administrative service, it was not longer required to determine if Visa was a “person at risk” as defined under the Regulations.

Conclusion

Since, there was no dispute before the FCA to whether the Visa Service fell within the paragraph (a), (i) and (l) of the Definition and considering that the application of the exclusion set forth in paragraph (t) of the same Definition was not established, the Visa Service to CIBC constituted a financial service under the ETA. As such, no GST/HST was payable on the Visa Service, and CIBC was allowed to claim a refund for the GST/HST paid in error in respect of such service.

1. 2018 TCC 109.
2. R.S.C. 1985, c. E-15.
3. Great-West Life Insurance Company v. The Queen, 2015 TCC 225 (affirmed by the FCA in Great-West Life Insurance Company v. Canada, 2016 FCA 316) (Great-West).
4. 123(1) and Schedule V, Part VII of the ETA.
5. SOR/91-26 [P.C. 1990-2735, December 18, 1990].
6. Paragraph 92 of the Decision under Appeal.
7. Paragraph 95 of the Decision under Appeal.
8. Paragraph 95 of the Decision under Appeal.
9. Paragraph 116 of the Decision under Appeal.
10. Paragraph 117 of the Decision under Appeal.