We previously blogged about a Tax Court of Canada (TCC) case on the tax status of credit card/payment processing services provided by Visa. In that case, the TCC held that Visa’s services constituted the supply of “administrative services” and were therefore excluded from the definition of a “financial service” in subsection 123(1) of the Excise Tax Act (ETA).
The Federal Court of Appeal (FCA) has now reversed the TCC decision, holding that Visa’s services were in fact exempt financial services.
Briefly, the facts of the case were as follows: CIBC issued Visa-branded credit cards to customers, and paid fees to Visa for the credit card and payment processing services that CIBC received as a participant in the Visa system. Visa charged GST/HST on these fees. CIBC subsequently applied for a refund of tax paid in error, arguing that the Visa services were actually exempt financial services. The CRA denied the rebate claims, and CIBC appealed.
The TCC considered the ETA definition of “financial service” and found that despite Visa’s services coming within inclusionary paragraphs (a), (i) and (l) of that definition, the services also fell within exclusionary paragraph (t) as being “administrative services”.
In determining that Visa’s services were administrative services, the TCC relied on two factors:
- the level of decision-making by Visa (which the TCC found to be minimal), and
- the role of Visa’s services in CIBC’s business (which it found to be simply “cost saving and logistical simplification”).
On appeal, the FCA found that although these factors were relevant in interpreting the definition of “administrative service”, the TCC made a palpable and overriding error when applying these factors to Visa’s supply to CIBC.
Specifically, the FCA held that the TCC made contradictory and irreconcilable findings when describing the nature of Visa’s services and their role in CIBC’s business. Despite the TCC’s finding that the benefit to CIBC was merely “cost saving and logistical simplification”, it also described Visa’s services as forming “an essential part of the ability for CIBC to offer credit card-based services to their clients”.
Based on the evidence, the FCA concluded that there was no basis to find that the Visa supply was an administrative service, and as no exclusions were made out, the supply constituted a financial service.
The FCA also distinguished the Great West Life case (2015 TCC 225, aff’d 2016 FCA 316) on the basis that Visa’s supplies altered the substance of CIBC’s business, whereas the supplies in Great West Life did not.
Although this decision is a 'win' for CIBC, it is a less fortunate result for Visa. Visa’s supplies being exempt means that it would not be entitled to claim input tax credits on its business inputs, which could have a significant financial impact.
Companies in the credit card processing industry should consider the implications of this decision on their business and seek tax advice as appropriate.
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