The Tax Court of Canada last week released a landmark decision on the GST/HST status of certain commonplace transaction processing services, namely VISA’s payment platform offering to financial institutions.
In Canadian Imperial Bank of Commerce v Her Majesty the Queen, 2018 TCC 109, Chief Justice Rossiter held that the supply of services made by VISA to CIBC fell outside the financial service definition in the Excise Tax Act (Canada) (the “ETA”) and therefore did not qualify as an exempt supply. VISA had correctly charged tax on its services fees.
As background, CIBC took the position that the services constituted an exempt financial service. Accordingly, CIBC applied to the CRA for a rebate for the tax it paid in error to VISA. The CRA denied the rebate and CIBC appealed.
The first issue before the Court was how to characterize VISA’s services. There was no dispute that, even though VISA’s services embodied different service activities and benefits, VISA made a single supply of a service. In other words, there was one transaction for GST/HST purposes, which included the following components:
- Transaction processing;
- Licensing of the VISA brand;
- Payment network management; and
- Brand management and promotion.
Having determined that there was a single supply, the next step was to establish the essential or predominant character of the supply. This would allow the supply’s GST/HST status to be identified. After a substantial caselaw review, the Court ultimately characterized the supply as the provision “of a payment platform and facilitating payments on that platform”.
The remaining question was whether VISA’s services constituted a financial service as defined in the ETA. That definition is divided into two parts: the inclusionary paragraphs and the exclusionary paragraphs. To determine whether a service is a financial service, one first looks to see whether it is included in paragraphs (a) to (m) of the definition. If it is included, then one considers whether the service falls into any of the express exclusions listed in paragraphs (n) through (t). If it does fall into one or more of the exclusionary paragraphs, then the service is not a financial service.
Rossiter C.J. held that VISA’s services fell into the inclusionary paragraphs (a), (i) and (l), but that they also fell into exclusionary paragraph (t). Paragraph (t) provides that excluded services may be prescribed by regulation, which in this case are the Financial Services and Financial Institutions (GST/HST) Regulations (the “Regulations”). Section 4 of the Regulations essentially excludes a service that constitutes an “administrative service.” The Court found that VISA’s services were “quintessentially administrative in nature” because VISA relieved CIBC of the need to keep track of, and individually pay, merchants for credit card transactions by allowing CIBC instead to make one lump sum payment to VISA at the end of each day.
Section 4, however, also provides a saving provision under which the exclusion does not apply if the person providing the administrative service is a “person at risk.” This is defined to mean the following:
… a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument.
In other words, if VISA was a “person at risk,” then its services would constitute a financial service, despite being an administrative service. The Court accepted that VISA technically bears some risks, including merchant risk, foreign exchange risk, and possibly sovereign risk. However, the Court held that these risks were remote, with the probability of risk exposure being extremely below. As part of its analysis, the Court looked to a 1991 Department of Finance news release explaining the purpose of the “person at risk” definition. That publication explicitly states that the intention behind the definition was to ensure that administrative services in credit card transactions would not be financial services merely because of a remote risk of honouring payments borne by the service provider. Hence, the Court ruled that the “purely hypothetical remote risks” borne by VISA were insufficient to qualify VISA as a “person at risk”.
As such, VISA’s services were not financial services and VISA correctly charged tax. CIBC’s rebate claims were accordingly dismissed.