Background

The President’s Choice Bank (“PC Bank”) is a financial institution for the purposes of the Excise Tax Act (“ETA”) that is in the business of issuing branded credit cards (“PC Cards”) to its customers (“cardholders”). PC Bank generates interchange fees when cardholders use their PC Cards. Cardholders gain PC Bank Points (“PCB Points”) when they make purchases with their PC Card.

In the context of a multi-party agreement with related corporations including the grocery chain Loblaws (the “Loyalty Program”), PC Bank also grants additional PCB Points to cardholders for purchases made at a Loblaws store. Cardholders can then use these PCB Points to purchase goods at stores owned or controlled by Loblaws. When points are used by cardholders to purchase products at Loblaws stores, PC Bank fully reimburses Loblaws for the purchases made by cardholders using PCB Points (the “Redemption Payment”).

The President’s Choice Bank v. Canada, 2024 FCA 135 decision (the “FCA decision”) is the latest instalment in a series of cases involving PC Bank and whether the redeeming of PCB Points gives rise to notional input tax credits (“NITCs”).

In 2009, in President’s Choice Bank v. R., 2009 TCC 170 (the “2009 Decision”), although it was one of many issues litigated, the Tax Court of Canada had found that at least part of such payments made by PC Bank were in the course of a commercial activity. Specifically, Redemption Payments made in relation to PCB Points that had been generated by taxable purchases were found to have been made in the course of a commercial activity. However, the structure of the Loyalty Program was materially different in the relevant period as all PCB Points generated by taxable purchases were made at a Loblaws store.

In 2022, the Tax Court of Canada found in President’s Choice Bank v. The Queen, 2022 TCC 84 (the “TCC decision”) that Redemption Payments made by PC Bank are made solely in the course of making exempt supplies of financial services to cardholders. Essentially, the Tax Court based its analysis on the premise that it needed to determine whether the “Redemption Payment is linked to the making of exempt supplies or taxable supplies”. Since PC Bank does not make taxable supplies, the Tax Court found the Redemption Payments were linked to its financial services activity.

This meant that PC Bank was not entitled to NITCs for the Redemption Payments under subsection 181(5) of the ETA.

Issue

In the FCA decision, the Federal Court of Appeal (“FCA”) had to determine whether the Tax Court had erred in finding that PC Bank does not make the Redemption Payment “in the course of a commercial activity” under subsection 181(5) of the ETA.

Majority Decision

Justice Goyette, writing on behalf of the majority, found that the Redemption Payments were made “in the course of a commercial activity” and that PC Bank was entitled to NITCs.

The FCA decision hinges on three essential components:

  1. The Tax Court committed an extricable error of law when it concluded that the phrase “in the course of a commercial activity” implies that the payment mentioned in subsection 181(5) of the ETA can either be in the course of a commercial activity or in the course of another activity (the “Either/Or Error”);
  2. The Tax Court committed an extricable error of law when it considered the absence of profit in determining the existence of a commercial activity (the “Profitability Error”); and
  3. Once the two errors are extricated from the Tax Court’s factual findings, it follows that PC Bank makes the Redemption Payment in the course of a commercial activity.

The Either/Or Error

Justice Goyette started by making a thorough analysis of the meaning of the phrase “in the course of a commercial activity” to conclude that the Tax Court had erred in applying an either/or test.

For context, the preamble to subsection 181(5) of the ETA provided, in essence, that where a registrant supplier accepted a coupon in full or partial consideration for a taxable supply and another person paid an amount to the supplier for the redemption of the coupon in the course of that person’s commercial activity, certain specific rules applied.

As a matter of legislative interpretation, the FCA found that the plain text of subsection 181(5) of the ETA was not compatible with the Tax Court’s interpretation. For instance, it did not mention that the amount had to be paid “exclusively” or “primarily” in the course of a commercial activity. In contrast with the words “exclusively” and “primarily”, citing precedent, Justice Goyette mentioned that the phrase “in the course of” has a broad meaning that should be understood as “incidental to” or “connected to, directly or indirectly”.

Further, the FCA examined the broader context of other provisions of the ETA containing the phrase “in the course of a commercial activity”. Subsections 169(1) and 202(2), and paragraphs 217.1(6)(c) and 217.1(7)(c), clearly show that “when Parliament wants a property or service acquired to have a special connection with a commercial activity, it states so expressly” by including a qualifier such as “to the extent”, “primarily” or “exclusively”.

In drafting these provisions, it is clearly contemplated that payments or acquisitions of supplies can be made both in the course of a commercial activity and of another activity. The absence of a qualifier or special connection with a commercial activity under subsection 181(5) “indicates that Parliament did not intend to require a higher degree of connection between the amount paid for the redemption of the coupon and the registrant’s commercial activity”, concluded the FCA.

Finally, the majority argued that the purpose of subsection 181(5) of the ETA is to ensure that the correct overall net amount of tax is remitted to the government in respect of the supply to the vendor. This is compatible with Parliament’s choice of a broad phrase like “in the course of”, which merely requires a payment to be “connected to” or “incidental to” a commercial activity.

Insofar as imposing an either/or test would restrict NITCs for payments connected to commercial activities, such an imposition would contravene Parliament’s purpose. Since the Tax Court’s interpretation would result in an overpayment of tax, it is incompatible with a purposive interpretation of the Act.

Therefore, the FCA found that the Tax Court erred in law in finding that the Redemption Payment had to be made either in the course of making financial services or in the course of a commercial activity.

The Profitability Error

The second extricable error made by the Tax Court, Justice Goyette found, was that it refused to find that driving customer traffic to Loblaws constituted a commercial activity of PC Bank because it was not profitable for PC Bank under the terms of the Loyalty Program.

However, in rather simple terms, the definition of a “commercial activity” under subsection 123(1) of the ETA provides specifically that it is not necessary for a corporation to have a reasonable expectation of profit to be conducting a commercial activity.

Payments and Commercial Activity

The majority concluded that, as a matter of fact, the agreements that form the Loyalty Program fulfil the rather broad definition of a “business” in subsection 123(1) of the ETA: an “undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit”.

It then follows that, disentangled from the two legal errors committed by the lower court, the Tax Court’s factual findings lead to the conclusion that PC Bank makes the Redemption Payment in the course of a commercial activity of driving customers to Loblaws.

PC Bank was therefore entitled to the NITCs under subsection 181(5) of the ETA in relation to the Redemption Payments.

Final Thoughts

We find that the FCA decision is globally compatible with the 2009 decision of the Tax Court of Canada articulated by Justice Lamarre. In both cases, the Court found that PC Bank is legitimately engaged in a commercial activity of driving retail customers to Loblaws stores.

In the 2009 Decision, the Tax Court ruled that PC Bank was entitled to NITCs under subsection 181(5) of the ETA only in relation to Redemption Payments of PCB Points generated in the context of taxable supplies. Since this previous iteration of the Loyalty Program would only award PCB Points for purchases of taxable supplies at Loblaws stores, it was an implicit recognition that PC Bank not only engaged in the commercial activity of driving retail customers to Loblaws stores, but that the Redemption Payments were made for that purpose. The rest of the PCB Points at that time were generated by the purchasing of financial products by customers.

The FCA decision is markedly more liberal in finding a connection between the Redemption Payments and the commercial activity. Justice Goyette and the majority found that all Redemption Payments for PCB Points are made in the course of a commercial activity of PC Bank, notwithstanding the Points’ origin.

However, as the majority argues in the FCA decision, this qualifier is nowhere to be found in the wording of subsection 181(5) of the ETA, which simply requires that “a particular person . . . pays, in the course of a commercial activity of the particular person, an amount . . .”. What’s more, it appears that disallowing NITCs in this context results in over-taxation.

At any rate, the FCA decision seems in line with a general trend by courts to favour a liberal, indirect and expansive definition of the commercial activity conducted by registrants and of not linking it directly to the making of taxable supplies.