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NO ITCS FOR CREDIT CARD LOYALTY EXPENSES - FOR BANKS

FCA SKATES FINE LINE: CONCLUDES ITCS FOR PC BANK BUT NOT FOR AMEX!

In a long running tax issue in Canada, the question has been whether Financial Institutions like banks and credit card companies are entitled to take Input Tax Credits (“ITCs”) when incurring Goods and Services Tax (“GST”) on expenses related to associated loyalty point programs. The Tax Court of Canada (“TCC”) has been fairly consistent on this question (answering it in the negative) but the Federal Court of Appeal (“FCA”) has now come to opposite conclusions in two decisions involving PC Bank and Amex points cards.

In its more recent decision in Amex, the FCA seems to have signalled that ITCs are not going to be available where the primary motivation is driving its own credit card business!

Amex Canada Decision

On the facts, Amex had taken a $14 million claim for ITCs to the TCC but had been unsuccessful. Amex had claimed ITCs on the expenses of operating Amex Bank of Canada’s Membership Rewards Program (“MRP”), including GST/HST paid to rewards suppliers, overhead self-assessed under Division IV, and certain “notional” ITCs. Amex’s position was that it was entitled to ITCs because the MRP expenses were incurred in the course of commercial activity, because program fees were taxed, and because the program could be viewed as involving marketing / promotion or other taxable activity distinct from its credit-card / financial-services business.

The TCC held that ITCs were unavailable because the expenses were not incurred in the course of a “commercial activity.” Applying the single / composite supply framework, the TCC characterized Amex’s credit card operations and its rewards program as components of a single composite supply to cardholders, with the predominant element being the extension of credit (an exempt financial service) — a fatal blow to Amex. The TCC also rejected Amex’s submission that it provided taxable marketing services to rewards participants or suppliers, concluding that all elements of the MRP were “inherently intertwined and connected with the exempt supply of financial services made by [Amex] to its Members and merchants” rather than ITC-generating commercial activities.

Amex appealed to the FCA which had more recently overturned a similar TCC decision involving President’s Choice Bank (“PC Bank FCA”) — which appeared to be a harbinger of good things to come for Amex. It was not, however.

In Amex, the FCA reversed course and confirmed the underlying TCC decision. The FCA held the TCC applied the right legal framework and did not make any reviewable error in characterizing Amex’s rewards program as intertwined with Amex’s exempt financial services. The FCA also rejected Amex’s alternative arguments that special notional ITC rules in ETA s. 181(5) or the free-supply rule ETA 141.01(4) could assist in their entitlement to ITCs.

Finally — and most hurtful — the FCA distinguished the PC Bank FCA decision on its facts: in PC Bank the TCC had found that the rewards program was designed to promote participants’ businesses through taxable marketing-type supplies, while in Amex the TCC had found Amex’s program was designed to promote spending on Amex cards (and associated exempt financial services).

Takeaways

The FCA appears to have served notice that bank credit card loyalty programs will not generate ITCs where they primarily support exempt credit card services. Amex confirms that structure and purpose matter — and that PC Bank relief will be limited to its facts.

Will the Supreme Court of Canada have the last word on this?

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