The Canadian government has chosen to make many financial services tax exempt under the Excise Tax Act (“ETA”). In particular, under the definition of “financial service” in ss. 123(1) of the ETA, a service is an exempt financial service where it is included in any of paras. (a) to (m), and not excluded by any of paras. (n) to (t). Unfortunately, determining what constitutes a financial service and what ancillary or supporting activities are subject to GST/HST is not always clear. It’s been particularly difficult since the introduction of Bill C-9, the Jobs and Economic Growth Act (“Bill C-9”) on March 29, 2010, which refined the definition of “financial service” in ss. 123(1) to clarify that that services that support the delivery of a financial service that are in the nature of management, administration, marketing or promotional activities are not themselves financial services and are thus taxable.
The Bill C-9 changes have created considerable uncertainty in many industries as to whether exempt financial services under ss. 123(1) prior to the enactment of Bill C-9 remained exempt after the Bill C-9 changes. The uncertainty was particularly felt by issuers, acquirers, merchants, credit card companies, and any other entity that operates in the payment/credit card processing industry where prior to Bill C-9 the ss. 123(1) definition of financial service had been broadly applied to ancillary services in cases such as Costco Wholesale Canada Ltd. v The Queen, 2009 TCC 134.
That said, the question of whether or not parties operating in the payment/credit card processing are supplying exempt financial services has gotten even more uncertain after the recent decision of the Tax Court of Canada (“TCC”) in CIBC v The Queen, 2018 TCC 109 (“CIBC”).
The facts of the CIBC case are as follows: CIBC issues Visa credit cards and uses a payment system operated and managed by Visa. This relationship entailed Visa providing various services to CIBC including: (i) transaction processing; (ii) licensing of the Visa brand; (iii) payment network management; and (iv) Visa brand management and promotion. Visa charged CIBC a fee, which included GST, for the services. CIBC paid the full fees, but later sought a rebate of GST it said was paid in error per s. 261 of the ETA, as it argued that the fees were for an exempt financial service. The CRA denied the rebate on the basis that the Visa services were taxable as they were not a financial service as defined in ss. 123(1).
On appeal, the TCC utilized the Global Cash Access (2013 FCA 269) test for determining whether a supply is a financial service and found that even though the services provided by Visa fell into inclusionary paras. (a), (i), and (l), they were excluded from the definition of financial service in ss. 123(1) because the services also fell into the exclusion in para. (t). In particular, the TCC held that services provided by Visa were “quintessentially administrative in nature” by relieving CIBC of the need to keep track of, and individually pay, merchants for credit card transactions and instead simply make one lump sum payment to Visa at the end of each day. On this basis, the TCC concluded that the services provided by Visa were excluded from the definition of financial service by section 4 of the Financial Services and Financial Institutions (GST/HST) Regulations, which excludes any service that constitutes an “administrative service.” The TCC therefore held the supply made by Visa to CIBC to be taxable and dismissed CIBC’s appeal
Unfortunately, the question of whether or not parties operating in the payment/credit card processing industry are supplying exempt financial services has clearly gotten a lot murkier as a result of the CIBC decision. In fact, the TCC has arguably interpreted the “administrative service” exclusion to the ss. 123(1) definition of financial service in a manner that makes it extremely difficult for anyone operating in the payment/credit card processing industry to satisfy the requirements of ss. 123(1).
This case has been appealed to the Federal Court of Appeal (“FCA”). Hopefully, the FCA will hopefully provide some clarity on the definition of financial service in ss. 123(1) as it relates to payment/credit card processing. In the meantime, any party that operates in the payment/credit card processing industry should seek tax advice to minimize the potential risks given the current uncertainty in this area.
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