Tax Court of Canada Judgments

 

 

 

Docket: 2003-4234(GST)G

BETWEEN:

ROYAL BANK OF CANADA,

Appellant,

and

 

HER MAJESTY THE QUEEN,

Respondent.

 

____________________________________________________________________

Appeal heard on March 7, 2007, at Toronto, Ontario

 

Before: The Honourable Justice J.E. Hershfield

 

Appearances:

 

Counsel for the Appellant:	James Warnock
Counsel for the Respondent:	Ronald MacPhee Michael Ezri

 

____________________________________________________________________

 

JUDGMENT

          The appeal from the reassessment made under the Excise Tax Act, for the period from November 1, 1996 to October 31, 1999, notice of which is dated August 29, 2003 and bears number 11111111441, is dismissed, with costs to the Respondent, for the reasons set out in the attached Reasons for Judgment.

 

Signed at Winnipeg, Manitoba, this 12th day of September, 2007.

 

 

"J.E. Hershfield"

 

 

 

Citation: 2007TCC281

Date:20070912

Docket: 2003-4234(GST)G

BETWEEN:

ROYAL BANK OF CANADA,

Appellant,

and

 

HER MAJESTY THE QUEEN,

Respondent.

 

 

REASONS FOR JUDGMENT

 

Hershfield J.

 

I.       Introduction

 

[1]     The Royal Bank of Canada (“RBC”) appeals a Notice of Reassessment dated August 29, 2003, pursuant to which the Minister of National Revenue (“Minister”) assessed the Appellant for $6,641,714.00 of Goods and Services Tax (“GST”) for the period from November 1, 1996 to October 31, 1999. The appeal concerns payments made by RBC to Canadian Airlines International Ltd. (“CAIL”), a domestic and international airline, under an affinity credit card agreement. Pursuant to this agreement CAIL issued frequent flyer points to credit card holders using a RBC Visa Canadian Plus credit card (the “Affinity Card”).

 

[2]     Under the terms of the agreement between RBC and CAIL, RBC granted credit and provided credit card services to holders of the Affinity Card. Cardholders were also enrolled in CAIL’s frequent flyer program and received frequent flyer points for card usage. Generally, under the Affinity Card program, for every dollar of qualifying spending on the Affinity Card, the cardholder received one frequent flyer point which could be redeemed for CAIL’s travel services. RBC made payments to CAIL according to the number of frequent flyer points issued by CAIL to Affinity Card holders.

 

[3]     The principal issue in this appeal is the proper characterization of the supply for which the RBC payments were made. The Appellant does not dispute the calculation of the GST amount, if the supply is taxable.

 

[4]     The Minister argues that RBC is the recipient of a taxable supply of property made by CAIL, namely frequent flyer points, which is subject to GST under the Excise Tax Act (GST Portions) (the “Act”).

 

[5]     The Appellant argues that CAIL made a supply of services which formed part of a service being supplied by RBC to its credit card holders. On this basis, the Appellant contends that the payments to CAIL were made for the supply of exempt financial services in respect of which no GST is payable. In the alternative, the Appellant argues that if it acquired or was a recipient of the supply of frequent flyer points, such supply by CAIL was a supply of gift certificates and not subject to GST. In the further alternative, CAIL as supplier was liable to collect and remit any GST payable and was already assessed on that basis in respect of the same transactions at issue in the current appeal. The Appellant therefore argues that the assessment against CAIL has given rise to a tax liability and to find the Appellant liable for the same tax on the same supply would constitute double taxation.

 

II.      Factual Background

 

[6]     The underlying facts are set out by the parties in an Agreed Statement of Facts which is attached to these Reasons as an Appendix. The parties also submitted a Joint Book of Documents. No witnesses gave evidence at the hearing. Briefly, the facts are as follows.

 

[7]     On March 1, 1994, RBC and CAIL entered into an Affinity Card Program Agreement (the “Agreement”). Under the Agreement, CAIL was to actively advertise, market, and promote the product including maintaining supplies of application forms. CAIL’s obligations included displaying advertising material, advising current and prospective customers of the existence and availability of the Affinity Card program, accepting the credit card in payment for airline travel services, and engaging in periodic marketing and promotion activities such as direct mail campaigns. CAIL was also responsible for providing “ancillary services” (as set out in Schedule “G” of the Agreement) which included the awarding of frequent flyer points called “Canadian Plus” reward points (“Points”) to cardholders. The Points were to be issued at the rate set out in Schedule “G” of not less than one Point for every dollar of qualifying credit card spending. The Points themselves had no assigned cash value but could be redeemed for travel services with CAIL.

 

[8]     Under the terms of the Agreement, RBC was responsible for issuing Affinity Cards and providing and administering the credit card financing services to cardholders. RBC agreed to offer the Affinity Card with, at a minimum, the same credit financing information and terms and conditions as the RBC Visa Classic Card product. In accordance with the terms of the Agreement, CAIL did not participate in the screening, reviewing or submitting of Affinity Card applications to RBC.

 

[9]     At the outset, each party bore its own costs and expenses in connection with their respective roles under the program. More specifically, section 1 of Schedule “H” of the Agreement provided that CAIL was to pay all costs and expenses incurred in connection with issuing Points. Under section 2 of Schedule “H”, RBC was responsible for its costs and expenses incurred in administering the credit card services. Costs in respect of marketing and promotion were to be shared.

 

[10]    Pursuant to an amending agreement dated May 1, 1994 (the “1994 Amended Agreement”), the cost sharing provisions for marketing and promotion expenses associated with the Affinity Card program were amended to set the maximum amount payable by CAIL in any year at $200,000.[1] The 1994 Amended Agreement covered joint marketing initiatives and the development of an annual marketing plan and an annual customer service plan for the program. The 1994 Amended Agreement also set out the procedure for CAIL to credit Points to cardholders and required RBC to make monthly reimbursements for the costs and expenses incurred by CAIL in issuing the Points to cardholders. The amount to be paid to CAIL was determined according to the rate set out in section 4.1 of the 1994 Amended Agreement. Section 4.1 reads as follows:

 

4.1       Notwithstanding Section 1. of Schedule “H” of the Agreement, the Bank agrees to reimburse Canadian for the costs and expenses Canadian has incurred relative to the issuance by Canadian of Points to Cardholders pursuant to Section 2.(a) of Schedule “G” of the Visa Agreement at the rate of $0.0085 per Point issued or at such other rate(s) as Canadian and Royal Bank have agreed to in writing.

 

This original rate of $0.0085 per Point was adjusted in subsequent amendments to $0.01 per Point issued.

 

[11]    CAIL did not charge or collect GST from RBC on the payments made pursuant to section 4.1 of the 1994 Amended Agreement. Where Points were purchased by RBC for use in certain in-house promotions, GST was paid by RBC.[2]

 

[12]    CAIL commenced proceedings under the Companies Creditors Arrangement Act (“CCAA”) in March of 2000. Pursuant to these proceedings, a Plan of Compromise and Arrangement (the “Plan”) was filed. The Plan released CAIL of its liabilities arising before March 24, 2000.  The Plan was accepted by CAIL’s creditors, including the Canada Revenue Agency (the “CRA”), and approved by the Alberta Court of Queen’s Bench. The approval of the Plan led to the merger of CAIL with Air Canada. CAIL was not assessed for GST remittances in respect of the payments made to it by RBC pursuant to section 4.1 of the 1994 Amended Agreement until June of 2000.

 

[13]    RBC was first assessed for GST payable in respect of such payments in January 2001. After a series of assessments and objections and adjustments, the Notice of Reassessment that is the subject of this appeal was issued in August 2003.

 

III.    Issues

 

[14]    The issues to be decided in this appeal are as follows:

 

A.  Were the payments made by RBC to CAIL in consideration for taxable supplies or did CAIL supply a GST-exempt financial service?

 

B.   In the alternative, did CAIL make a supply of non-taxable gift certificates in the form of the Points to RBC?

 

C.  Does the prior assessment of CAIL for GST preclude the subsequent assessment of RBC for the same supply?

 

IV.     Arguments and Analysis

 

A.      The Supply of a Financial Service

 

[15]    In addition to section 165 of the Act which provides that the recipient of a supply must pay the GST on the consideration paid for the supply, it is important to note that the term “recipient” is defined in section 123 of the Act to include:

…

(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,

…

and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply;

 

[16]    In this appeal, the Appellant does not dispute that pursuant to paragraph (a) of this definition, it is the recipient of a supply. It is not in dispute either that the Points are property capable of being a supply paid for under the 1994 Amended Agreement. The Appellant rather contends that the Points were not the supply for which consideration was paid. The threshold question then is whether the supply or the dominant element of the supply was the issuance of Points. If so and if such finding supports the further finding that the consideration paid by RBC to CAIL was for this supply, as a single supply, the Appellant’s principal argument cannot prevail.

 

[17]    The Appellant argues that the payments to CAIL fell under the definition of “financial service” as they were made not for Points but for services that were in the nature of “arranging for” the “granting of any credit”. Under the Act, “financial service” includes:

          …

(g) the making of any advance, the granting of any credit or the lending of money,

…

(l) the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i), or

…

but does not include

…

(t) a prescribed service;

 

[18]    The Appellant argues that CAIL participated in the establishment and operation of the Affinity Card program, including either specifying or agreeing to specified terms and features of the credit card product. The Appellant argues that such participation is sufficient to constitute “arranging for” the credit services made available by RBC and relies on the ordinary meaning of the verb “to arrange”, which means “to plan or to provide for; to cause to occur.”[3] The Appellant argues that the Affinity Card and its credit facility would not be available but for CAIL’s role. As a matter of causation, CAIL’s participation was essential.

 

[19]    The Appellant relies on the English Court of Appeal decision in Customs & Excise Commissioners v. Civil Service Motoring Association (“CSMA”),[4] relating to a similar financial service exempting provision in the United Kingdom Value Added Tax legislation (VAT). In CSMA, the English Court of Appeal held that the participation of the automobile association in a credit card program fell within the VAT exemption for financial services because it was involved in the design and operation of that program and was paid commissions for credit card use. The Court found that it was not necessary for the automobile association to be involved in individual applications and credit approvals in order to meet the exemption of making arrangements for the granting of credit.

 

[20]    The Appellant argues that CAIL, like the automobile association in CSMA, was involved in the design and operation of the subject credit card program and that CAIL was paid for credit card use. Payments by RBC to CAIL were set at a rate per dollar of credit extended by the use of the Affinity Card which should be seen as a commission for helping to arrange the credit line granted to Affinity Card holders. This reflects the true nature and character of the service for which CAIL was paid, namely its role in giving birth to and facilitating a credit granting business. The Appellant contends that the reference to the payments as reimbursements for the Points in the 1994 Amended Agreement should not be determinative of their nature and cites Hidden Valley Golf Resort Association v. Her Majesty the Queen[5] as authority for this principle.

 

[21]    The Respondent’s position is premised on the argument that the dominant element of the supply made by CAIL is the issuance of the Points and relies on the decision of this Court in O.A. Brown Ltd. v. Her Majesty the Queen,[6] which has been cited as the seminal case for single and multiple supplies. The Respondent argues the present appeal is not about CAIL being paid for arranging credit, it is about acquiring a perk to enhance credit card use. While the Affinity Card program was a joint program under which CAIL was to promote the issue and use of the card by its customers and potential customers, the dominant service was promoting use of the card by the issuance of Points to card users. This is reflected by the fact that $200,000,000 in payments for Points dwarfed the cost of every other element in the contract. Whereas the Agreement, as amended, limits the cost to CAIL of providing non-monitored promotional services to no more than $350,000 per year, accounts for Points, in contrast, were issued and paid monthly.

 

[22]    Further, while the original Agreement provided that each party was to pay its own expenses, the 1994 Amended Agreement provided that CAIL’s costs and expenses incurred relative to the issuance of Points was to be reimbursed at a rate per Point. There was a legal obligation to pay consideration in respect of the issuance of the Points and the link between the payment and that supply is close enough for the payment to be regarded as having been made “for” that supply.[7]

 

[23]    The Respondent relies on the fact that services provided by CAIL did not include responsibility for screening, reviewing or submitting applications for the Affinity Cards and could not thereby be considered to be services supplied in the course of “arranging for” the supply of credit. Only RBC reviewed and screened applications and granted the approvals necessary for the cards to be issued. The credit facility and services were established, provided and administered by RBC. In this sense they were wholly arranged by RBC. Accordingly, the Respondent submits that there was no supply of financial services by CAIL even if the dominant element of the single supply was not Points.

 

[24]    In this regard the Respondent argues that the Appellant’s services did not meet the threshold requirement for “arranging for the granting of credit” as set down in Les Promotions D.N.D. Inc. v. Her Majesty the Queen[8] and the administrative practice set out by the CRA in Policy Statement P-239.[9]

 

[25]    Finally, Respondent’s counsel argues that paragraph (t) of the definition of “financial service” and subsection 4(2) of the Financial Services (GST/HST) Regulations, (the “Regulations”) apply to exclude the services supplied by CAIL to the extent they might otherwise be regarded as financial services.

 

[26]    I will first consider the decision of O.A. Brown which looked to the English VAT authorities. In his Reasons for Judgment, Rip J. considered such authorities and explained at page 2095:

 

21        In deciding this issue, it is first necessary to decide what has been supplied as consideration for the payment made. It is then necessary to consider whether the overall supply comprises one or more than one supply. The test to be distilled from the English authorities is whether, in substance and reality, the alleged separate supply is an integral part, integrant or component of the overall supply. One must examine the true nature of the transaction to determine the tax consequences. The test was set out by the Value Added Tax Tribunal in the following fashion:

 

In our opinion, where the parties enter into a transaction involving a supply by one to another, the tax (if any) chargeable thereon falls to be determined by reference to the substance of the transaction, but the substance of the transaction is to be determined by reference to the real character of the arrangements into which the parties have entered.

 

[Emphasis added]

 

[27]    The Appellant does not deny that it was the recipient of a single supply of which part of, or a component of, was Points. However, the Appellant asserts that this component was not the property or the supply for which payment was made by it to CAIL. I do not agree. Not only is that the most substantive aspect of the supply to which all else relates but there is in my view no substantive single supply of the financial services variety relied on by the Appellant.

 

[28]    The substantive focus of the program was to promote use of the Affinity Card by the issuance of Points for such use. Everything CAIL did from being involved in establishing the terms of the credit facility to advertising the program was to promote the use of the card by the issuance of Points and that is what it was paid for – the issuance of Points. When the Appellant acquired Points for its own use, it paid the same price for the Points. As well, when there was a separate purchase for promotional purposes, it paid the same price for the Points.[10] In all cases, CAIL was paid for issuing Points and not for its role in setting up the program. Paragraph 4.1 of the 1994 Amended Agreement says exactly that. That is, the sole dollar consideration forming the subject of this appeal was paid for the acquisition of Points. If no Points were issued, there was no consideration payable. Further, from CAIL’s perspective, by selling Points, it was selling air travel services which was its business. While the consideration payable is referred to as cost recovery payments, it seems apparent that such cost was the cost of giving free air travel. Accordingly, I find that the subject payments are not payments for the supply of a financial service.

 

[29]    In coming to this conclusion, I have not ignored the critical role CAIL played in the establishment of the Affinity Card program and the extent of credit use thereby generated for RBC. However, having considered the authorities cited by the parties and the meaning of the phrase “arranging for” in the definition of “financial service”, I find there is no other perspective of this appeal that would change my conclusion that the consideration paid was for the issuance of the Points.

 

[30]    The Appellant argues that the statutory language “arranging for” must be given a broad interpretation and that finding that CAIL’s role in setting up the program was essential to the granting of credit under the program requires a finding that it arranged for the granting of credit. To support a broad interpretation of the language “arranging for”, the Appellant relies on the ordinary meaning of the word “arrange” and on D.N.D. Promotions which accepted a fairly minimal threshold as to what would constitute “arranging for” the granting of credit.

 

[31]    In D.N.D. Promotions, the taxpayer’s business was promoting credit cards. The taxpayer’s employees distributed the credit card applications in shopping centres. The employees would review the applications for completeness and then the taxpayer would send the applications to the credit card company for approval. The taxpayer had no decision making capacity or involvement in the granting of credit. The Minister denied the ITCs sought by the taxpayer on the basis that the taxpayer was providing the exempt financial service of arranging for the granting of credit pursuant to paragraph (l) of the statutory definition. This Court agreed with the Minister and the decision of the Court formed the basis for the CRA’s administrative practice, as set out in Policy Statement P-239.[11]

 

[32]    Appellant’s counsel argues that if checking an application for completeness was sufficient to constitute “arranging for” granting credit, then surely establishing the terms of the credit for cardholders must be seen as “arranging for” the credit granted under such terms. CSMA is a clear and persuasive authority for the view that that role overshadows the supply of property (Points). As well, the Appellant would rely on D.N.D. Promotions as authority for not invoking the exclusion in paragraph (t) of the definition of “financial service”.

 

[33]    Paragraph (t) of the definition of “financial service” excludes prescribed services and subsection 4(2) of the Regulations excludes as financial services the transfer, collection or processing of information and any administrative service. If reviewing credit card applications was not an administrative service excluding it from being a financial service, then surely establishing the terms of the credit for cardholders could not be excluded under paragraph (t) of the definition of “financial service”.[12]

 

[34]    While I agree with the Appellant’s argument that D.N.D. Promotions supports a broad construction of the phrase “arranging for” and that arranging credit terms on behalf of cardholders goes well beyond any prescribed administrative exclusion set out in subsection 4(2) of the Regulations, these conclusions do not rescue the Appellant from my finding that what was paid for in the present appeal was so materially tied to another supply (the Points) as to be subsumed in that dominant supply. In my view, there was no severable consideration paid for “arranging” the terms of credit role served by CAIL. The entire consideration I have been addressing is clearly consideration paid for the Points. Establishing and promoting credit card use was a means to issue Points which as noted above was a form of selling air travel services. Ensuring competitive credit card terms was not done in an intermediary capacity as a service to RBC or credit card users nor was consideration paid for such a service; it was a condition of CAIL’s participation in the program to encourage use of the Affinity Card in order to sell Points.

 

[35]    This fact also distinguishes the present appeal from CSMA. The automobile association in CSMA played an active intermediary role in negotiating the terms of the credit facility being offered to its members. On behalf of its members, the automobile association designed a credit card arrangement for the specific purpose of granting credit to those members. Critical terms of the credit arrangement, such as interest rates, were negotiated for members. An arbitration process for members was put in place. The Court determined that the nexus between the intermediary’s function and the credit granting process warranted a finding that the compensation paid was a commission for these credit arrangement services. Such services were the dominant aspect of the supply provided and paid for. The substantive element and real character of the supply in that case was to arrange favourable, special credit terms and benefits for its members from the financial institution granting the credit facility. Indeed, there was no other supply, like a supply of Points, made in CSMA.

 

[36]    In the case at bar, there is no supply, other than the Points, to which the payments can be attributed. The major terms of the credit card contract are set out in the Agreement but there is no evidence of negotiations on behalf of cardholders. Listing RBC services and ensuring that the financing services to be provided by RBC were to be at least the same as those provided under RBC’s Visa Classic Card, do not in themselves speak to an intermediary role on behalf of cardholders. An interest in the attractiveness of the terms of the cardholder contract speaks more to CAIL’s financial interest in selling Points than to its role as an intermediary.

 

[37]    A finding that CAIL was not a financial intermediary arranging for credit for cardholders is further supported considering its role in terms of risk. There are situations where the business of an intermediary might put that intermediary at material risk for credit failures or card service failures. Such cases go beyond the mere administration excluded under paragraph (t) of the definition of “financial service” and would more clearly be an exempt financial service under the “arranging for” provisions. However, CAIL had no business risk in the credit granting process. The liability, indemnity and save harmless provisions in the Agreement sought to ensure that CAIL did not bear any risk in respect of the credit financing services provided by RBC. Its role was the provision of travel services, for a fee.

 

[38]    Further, I do not accept the Appellant’s argument that the subject payments received by CAIL were made as commissions for credit card usage. Credit card usage was the yardstick used to measure the Points being bought and sold. Tools or reference points used to measure the amount of consideration payable for that supply should not be mistaken for the supply. Clearly CAIL could increase its revenue from this arrangement by promoting the Affinity Card and offering good value for the Points issued. Shared advertising and marketing costs then do not relate to promoting credit card use from a credit financing perspective but relate to increased sales revenue that result from increased card use. Promoting the use of a credit facility may have been good business for CAIL but is not to be seen as “arranging for” the granting of that facility.

 

[39]    To conclude, I find that CAIL’s role in arranging the credit facility was incidental to its own business of selling Points. This follows as a matter of common sense and commercial reality. CAIL sold travel services. Selling Points was selling travel services. The Appellant purchased travel services as a reward for use of its Affinity Card which in turn increases its revenues. All else is incidental to this synergistic arrangement. It is simply not reasonable to find on the facts of this case that CAIL played any substantive role in arranging for the granting of credit by RBC.

 

[40]    Before turning to the Appellant’s alternative arguments I note that while I have only made reference to one English case on this issue of “arranging for” the granting of credit (CSMA), I was referred to a number of other English cases. The cases referred to by the Appellant, like CSMA, involved non-financial organizations endorsing a particular credit card product.[13] The Respondent on the other hand relied on the case of Tesco plc v. Commissioners for Customs and Excise[14] which dealt with, and which cited other English cases dealing with, customer loyalty incentive programs. These cases were factually more comparable to the case at bar than the endorsement line of cases relied on by the Appellant. Unlike CSMA, Tesco involved the issuance of patronage reward points in a credit facility program and unlike CSMA, the point issuer (Tesco) was found to have supplied promotional services which could not be regarded as arranging credit.

 

[41]    In Tesco there were a variety of programs considered. In very general terms, customer loyalty reward points were issued for vouchers for future purchases. The Court found that no part of the purchase price paid by consumers for goods was consideration for such rewards. Likewise, the Court held that assisting another party’s business by issuing points for consideration to that other party or that other party’s customers should be treated as a promotional service as opposed to a sale of property. While this latter conclusion does not accord with my findings in the case at bar, it does not assist the Appellant. Had I reached a similar conclusion on the facts as reached in Tesco and determined that the Appellant paid for promotional services from CAIL, the result, as in Tesco, would be that such services are not exempt financial services. Promotional services do not constitute “arranging for … the granting of any credit”.

 

[42]    Considering the authorities as a whole, it is apparent that there is no one principle that might apply to any given situation. It is always a question of fact as to how GST will be applied in the context of a particular affinity or loyalty program. While the contractual agreements relating to the program and the actual manner in which the program is conducted will generally dictate how GST will be applied, it is always open for a Court in each case to determine the substance of the supply for which consideration was paid. As stated, the express language in section 4.1 of the 1994 Amended Agreement identifies that payments were made for Points. In my view, it is clear that the substance of the supply in this case was the supply of Points.

 

B.      Gift Certificates

 

[43]    In the alternative, the Appellant argues that the purchase of the Points should not be subject to GST upon acquisition because the Points are gift certificates as described in section 181.2. The Appellant relies on section 181.2 to defer payment of tax until the Points are redeemed by the cardholder.

 

[44]    Section 181.2 states:

181.2 Gift certificates -- For the purposes of this Part, the issuance or sale of a gift certificate for consideration shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money.

[45]    The Technical Notes to the section indicate that the sale of a gift certificate is not considered to be a supply (despite consideration) and therefore will not attract GST.[15] Only when a gift certificate is subsequently exchanged for goods or services is its redemption value to be treated as part of the consideration for those goods or services.

[46]    At this point, in order to help put matters in perspective, a few preliminary observations need to be made:

-        The term "gift certificate" is not defined in the Act so that the common understanding of what that term embraces will have to be considered. According to the CRA, a gift certificate must have a stated or face value. As the Points have no such stated or face value, administrative practice dictates that they cannot be gift certificates.

-        There is another type of instrument dealt with in section 181 in an entirely different way. This instrument is called a "coupon" and is simply defined as a device other than a gift certificate. In general terms, unlike a gift certificate, a coupon is not treated on its use by a consumer as consideration paid by the consumer. That is, the ultimate consumer pays tax on the value of the consideration paid for the services or goods acquired net of the coupon reduction amount. Respondent’s counsel argues that the sale of Points is a sale of coupons which, unlike the sale of gift certificates, is a taxable supply. On that basis when credit card holders redeem Points for air travel, no GST is payable pursuant to section 181 which reflects the CRA’s current assessing practices.

-        To help distinguish between the two instruments, the CRA has conveniently (or arguably necessarily) prescribed characteristics to them that are not prescribed in the Act. The CRA has administratively prescribed that a gift certificate must have a stated value and that it must be acquired for an amount equal to that stated value.[16] Coupons may or may not have a stated value and, generally at least, would offer a discount as opposed to a free supply and would be issued without consideration.[17]

 

[47]    Dealing firstly with the Respondent’s argument that the Points cannot be gift certificates for want of a stated or face value, I find no support in the Act or case law for such position. Still, the Respondent argues that because a gift certificate is deemed under the Act to be “money” there is an implicit requirement in the legislation for a stated value when section 181.2 is read together with the definition of “money” in subsection 123(1):

 

"money" includes any currency, cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument, whether Canadian or foreign, but does not include currency the fair market value of which exceeds its stated value as legal tender in the country of issuance or currency that is supplied or held for its numismatic value;

 

[48]    This definition certainly imports a necessity that “money” have a stated value. Respondent’s counsel then in effect asks: “How can section 181.2 deem something to be that which it cannot be given that it lacks a fundamental characteristic of what it is deemed to be?” Of course that is exactly what a deeming provision does. Respondent’s counsel then argues that deeming the certificate to be money without requiring it to have stated value makes the deeming provision unworkable. How can it operate as money when it lacks the very feature that it needs to operate as money? This argument presupposes a limited definition of what a gift certificate is. Such presupposition is not warranted based on case authorities or any provision of the Act.

 

[49]    As to a common understanding of what a gift certificate is, perhaps it is presumptuous to think that there is such a thing. Respondent’s counsel’s argument that I read in an implicit requirement for a stated value for an instrument to be a gift certificate might have merit if, for example, the common understanding of a gift certificate is that it affords its user some discretion as to its use as money does. If that is the case, a certificate for a "basic exterior car wash" at Joe's Car Wash which has no stated value would not be a "gift certificate" regardless that it might say that on its face and that I acquired it as such. As the purchaser of such a certificate my understanding would be that I had acquired a gift certificate. On the other hand, the user of such a certificate might expect that such a certificate is GST prepaid which is to say that the common understanding of the user in this case may be that the car wash certificate is not a "gift certificate" as that term is used in the Act.[18]

[50]    While it may be presumptuous to suggest that the term “gift certificate” means one thing or another, it is not presumptuous to think that pronouncements of this Court as to how to interpret the term, will not be ignored. A clear statement has been made by this Court that a gift certificate as used in section 181.2 does not have to have a stated value and may be for identifiable goods or services. In Canasia Industries Limited v. Her Majesty the Queen[19], while noting that the term “gift certificate” is a colloquial term that may be applied in a variety of forms and transactions, then Chief Justice Garon provided a description of the constituent elements of a gift certificate:

 

What is essential is that the bearer of the certificate who could be anyone to whom the certificate was transferred by the original purchaser of the certificate or by a subsequent bearer, is entitled to receive free of charge from the issuer of the certificate either a product or a service or the stated value towards a product or service. I do not think it is important that the bearer of the certificate may have paid something or given consideration for securing the gift certificate from the original purchaser of the certificate or some subsequent intermediary. In my view, the concept of “gift certificate” in the context of a situation contemplated by section 181.2 of the Excise Tax Act necessarily implies that the product or service referred to in the certificate is provided free of charge to the certificate holder when the certificate is redeemed by its issuer. Otherwise, the reference to the “gift” portion in the phrase “gift certificate” is meaningless.[20]

 

[51]    This passage does not suggest that a gift certificate must have a stated value on its face to be a gift certificate. It says that a gift certificate must be for free goods or services or have a stated value toward a product or service. If the certificate entitles the holder to an identifiable supply, it can still be a gift certificate. As well, in Canasia, then Chief Justice Garon notes that the consideration paid to purchase the gift certificate need not be equal to the stated value “if one appears on the certificate since the requirement in the latter section is simply that there must be a consideration.”[21] The “if” clearly suggests that a stated value need not appear on a gift certificate as a condition of it being a gift certificate. Further, I note that there is no reference to the need for a gift certificate to have a stated value in either of the Technical Notes to section 181.2 or subsection 157(2).

[52]    While I appreciate the Respondent’s position - that this Court should recognize that section 181.2 requires that a gift certificate be treated like money which requires it to have “money” attributes - I am faced with what appears to me to be a sensible analysis by this Court which comes to a different conclusion in allowing that a gift certificate could include an instrument entitling the bearer to an identifiable supply at no charge. I am not prepared then, nor is it necessary on the facts of this case, to undermine such jurisprudence which puts emphasis on giving the word “gift” some meaning. In this regard, Canasia stands for the principle that a gift certificate would not include an instrument that only gives the bearer conditional rights. This qualification imports both a common and legal understanding of what a gift is.

 

[53]    In Canasia, this Court was asked to determine whether travel certificates which were redeemable for round-trip airfare to vacation resort destinations were gift certificates. They were held not to be gift certificates as the bearer was not entitled to anything unless both a processing fee was paid and at least seven nights accommodation at specific hotels at the destination were paid for. The Court noted that by ordinary usage and a common understanding, a gift certificate would not include an instrument that required a substantial outlay before it could be used. The travel certificates were not gift certificates under section 181.2 because they did not entitle the holder to unconditional free goods and services.

 

[54]    Similarly, the purchase of the Points in the case at bar was only one step in the midst of a series of requirements and events – credit card use, payments by RBC as Points are issued, continued credit card use as necessary to permit accumulations of Points, the reward program not being cancelled, and a surrender of such number of Points regarded at the time of surrender as sufficient to secure a particular air travel service at no cost. No single step, including the purchase or issuance of Points, gives unconditional rights to anything.

 

[55]    As well, making what I believe to be the same point, the Respondent argues that the Points cannot be considered to be a gift certificate under a common understanding of that term as there is no fixed correlation between the Points issued and their use. Travel rewards are subject to change. The value of the Points ultimately depends on the number of Points accumulated over time and the number of Points required at the time of conversion in order to receive travel rewards. Further, CAIL can cancel the Points at any time so there is no right or entitlement to anything at the time of their issuance.[22] There is no identifiable gift of or right to anything at that time. I concur with this reasoning.[23]

 

[56]    These conclusions are sufficient to support a finding that the Points are not gift certificates. As such, there is no provision deeming the supply of Points not to be a supply.

 

[57]    While nothing further need be said about this alternative argument, some observations concerning the Respondent’s argument that the Points be considered to be section 181 “coupons” seem necessary.

 

[58]    The Respondent argues that the Points should be considered as a “coupon” as defined in section 181 of the Act. Under the Act, unlike a gift certificate which is treated as a right to have the price payable for goods or services satisfied in whole or in part, with GST payable when the certificate is redeemed, a coupon is treated as a right to obtain a particular good or service at a reduced price. When the coupon is redeemed, it reduces the taxable value to the consumer of the particular good or service acquired with the coupon to the net amount paid.

 

[59]    The relevant subsections of section 181 provide as follows:[24]

 

181 (1) Definitions -- The definitions in this subsection apply in this section.

"coupon" includes a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit (within the meaning of section 181.3).

...

(4) Acceptance of other coupons -- For the purposes of this Part, if a registrant accepts, in full or partial consideration for a supply of property or a service, a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and paragraphs (2)(a) to (c) do not apply in respect of the coupon, the value of the consideration for the supply is deemed to be the amount, if any, by which the value of the consideration for the supply as otherwise determined for the purposes of this Part exceeds the discount or exchange value of the coupon.

 

[60]    While a principal feature of a coupon is that it is a discount vehicle, section 181 does not preclude by its language a discount equal to the full price of goods or services on redemption of the coupon. The consideration that is taxable under the foregoing provision is the amount “if any” by which the price of the goods or services exceeds the discount. That there could be a nil excess of the price payable after the discount illustrates that the Points can indeed be coupons even though they can only be used in fixed blocks that are sufficient to ensure that the taxable excess is always nil.

 

[61]    Accordingly, I agree with the Respondent that it is not inconsistent with terms of the Act to treat the Points as coupons. However, that said, it is important that I add that I have reservations about appearing to give a general endorsement of CRA’s administrative practises relating to the application of section 181 and the distinctions it seeks to make between coupons and gift certificates. In my view, the provisions are not easily applied as the CRA seeks to apply them.  This leaves the state of the law uncertain – a situation that begs for legislative clarification. Without such clarification, the Act will impose collection and remittance obligations on suppliers who will have little guidance as to the outcome of a dispute relating to such obligations should one arise.

 

C.      Double Taxation

 

[62]    As to the third and final issue, the Appellant claims that it cannot be assessed for GST in January 2001 because CAIL was assessed in June 2000 in respect of the same transactions. Both assessments were confirmed. The assessment against CAIL has not been vacated, varied nor otherwise dealt with. Therefore, there are two assessments outstanding in respect of the same taxable supply which could result in double taxation.

 

[63]    Counsel for the Respondent maintains that the law is clear that the Minister is permitted to assess both the supplier and recipient in respect of the same supply pursuant to subsection 296(1) of the Act. Under paragraph 296(1)(a), the Minister can assess the supplier for net tax and under paragraph 296(1)(b) he can assess the recipient for the tax payable. The relevant portions of subsection 296(1) read as follows:

 

296 (1) Assessments -- The Minister may assess

 

(a) the net tax of a person under Division V for a reporting period of the person,

 

(b) any tax payable by a person under Division II, IV or IV.1,

 

(c) …

 

(d) …  and

 

(e) …

 

[64]    Paragraph 296(1)(a) permits the Minister to assess net tax under Division V which pursuant to section 225 includes amounts that suppliers must collect pursuant to subsection 221(1). CAIL was required to collect GST payable in respect of the taxable supply to the Appellant and is assessable on this basis. The net tax amount must be remitted to the Receiver General pursuant to section 228.

 

[65]    Paragraph 296(1)(b) permits the Minister to assess any tax payable under subsection 165(1) of the Act. Subsection 165(1) requires the Appellant as the recipient of a taxable supply to pay GST and is assessable on this basis.

 

[66]    It is apparent that the “and” after paragraph (d) in subsection 296(1) must be read adjunctively to permit the Minister dual assessment power under the express terms of the Act. To read it otherwise would undermine the scheme of the Act. If someone is liable to pay and someone else is liable to remit, dual liability is essential. Furthermore, such dual liability is not dependant on an assessment having been made. Subsection 299(2) makes that abundantly clear:

 

(2) Liability not affected -- Liability under this Part to pay or remit any tax, penalty, interest or other amount is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made. [Emphasis added]

 

The emphasis added highlights two co-existent liabilities. However, the nature of each liability is different. The liability of the recipient is a liability to “pay” tax that arises as a consequence of being a recipient of a taxable supply. The liability of the supplier is to “remit” to the Receiver General the amount of tax collected or collectable from the recipient to whom the supplier has made a supply. The remittance liability is a gun to the supplier’s head – “collect and remit or remit the tax yourself and then seek reimbursement from the recipient as provided in section 224”.[25] A failure to remit results in the supplier being assessed pursuant to paragraph 296(1)(a).

[67]    This was how the course of events unfolded in the present case at least until the Appellant was assessed. At that point an interesting question arises: Is it arguable that there are two parties to whom the Appellant is liable to pay GST – the Receiver General and its agent CAIL?

 

[68]    I believe it should go without saying that it is untenable to think that recipients would be liable to pay two collectors for GST on the same transactions. To prevent this, the limitation on collection would be on the Crown. Subsection 278(2) provides that amounts collectable by the Crown from a recipient cannot be paid to the Crown if the supplier is liable to collect the tax from the recipient. That subsection reads as follows:

 

(2) Place of payment -- Every person who is required under this Part to pay or remit an amount shall, except where the amount is required under section 221 to be collected by another person, pay or remit the amount to the Receiver General.

 

[69]    It is not enough then that an assessment has been issued against the Appellant. As long as CAIL as supplier has an obligation under section 221 to collect tax from the Appellant as agent of Her Majesty in the right of Canada, the Crown cannot collect the tax payable by the Appellant as recipient of a supply except on behalf of CAIL. That subsection 315(1) requires an assessment before collection action can be taken by the Crown does not in itself, in light of subsection 278(2), suggest that collection action by the Crown requires that payment be made to the Crown when an assessment is issued if there is a supplier liable to collect the tax. That subsection 313(2) permits collection proceedings in Court by the Crown where an assessment may be issued does not in itself, in light of subsection 278(2), suggest that collection proceedings in Court by the Crown requires that payment be made to the Crown where a supplier is liable to collect the tax. Regardless of such actions or proceedings, subsection 278(2) requires that the payment of recipient tax debts be made to the supplier who is liable to collect it.

 

[70]    The anomaly here is that the agent (the supplier) is required to collect tax from the recipient of a taxable supply and remit that tax before the principal is authorized to collect it.[26] However, such state of affairs is much less of an anomaly if one considers that the Act provides no rules governing the possibility of collections by two persons of an amount owed by two persons.[27] Section 278 appears then to be no accident - there can only be one authorized tax collector/payee at a time.

 

[71]    Such proposition has not been tested in the courts to my knowledge. In Carlson & Associates Advertising Ltd. v. The Queen[28] there is the suggestion that although the Minister can assess a recipient for GST, the Minister cannot directly collect tax yet unpaid by the recipient from the recipient where the CRA was of the view that the supplier would never be able to collect the tax.[29] However, that case may well have side-stepped the issue of payment to the Receiver General in that no “payments” were necessary. The GST liability was paid by offsetting ITCs pursuant to section 318.

 

[72]    There is also the question as to how subsection 313(1.1) of the Act interacts with subsection 278(2).[30] While this provision stipulates that any tax debt owed to Her Majesty is collectable, it is clear in my view that the direct beneficiary of any action or proceeding can only be the supplier pursuant to subsection 278(2). That is, a strict construction of subsection 278(2) dictates that the Crown can only be the direct beneficiary of collection activity when the obligation of the supplier to collect ceases regardless of the financial circumstances of either of the recipient or the supplier. However, the Act is silent on when such obligation ceases.

 

[73]    In the case at bar, CAIL filed the Plan under the CCAA which released it of its liabilities arising before March 24, 2000. As the Plan was accepted by CAIL’s creditors, including the CRA, and approved by the Alberta Court of Queen’s Bench, it may necessarily follow that CAIL’s collection obligation under section 221 was terminated so as to lift the limitation in subsection 278(2). But in the absence of provisions in the Act spelling out when such limitation is lifted, such finding is best left for another day – perhaps in a collection forum.[31]

 

[74]    Returning to the Respondent’s double taxation argument, the point that continues to stand out is the need for rules governing the potential duality of liability to the Crown for GST of suppliers and recipients in respect of the same supply.[32] That potential may be of concern but it does not amount to the type of double taxation that offends general principles of taxation.[33] As to the recipient, RBC in this case, there should be no concern that it could be subject to double taxation. The foregoing analysis of subsection 278(2) hopefully gives some comfort in this regard. Whether it is the Crown or the supplier that is the direct beneficiary of a collection action against a recipient, there can only be one payment obligation. If that comfort is not sufficient, case authorities confirm, in any event, that there is no real likelihood that this Court or any other would require a recipient to pay the same tax twice.[34]

 

[75]    Regardless of these observations, the resolution of collection issues does not impact on the correctness of the assessment against the Appellant. It has received a taxable supply and may be assessed under section 296. The prior assessment of CAIL does not preclude the subsequent assessment of RBC for the same supply.

 

[76]    As well, I note that the issue of the potential for double taxation violating a rule against double taxation, was dealt with in Carlson Advertising where the Court of Appeal did not interfere with this Court’s judgment that potential for double taxation is not double taxation. In dismissing the appeal, Hamlyn J. held:

 

 

 

 

32 … It must be noted that the concern is to prevent the incidence of ‘double taxation’ where not specifically intended to occur, not the potential of ‘double taxation’. [Emphasis added]

 

[77]    While the potential for double taxation is at an advanced stage in the case at bar relative to the situation in Carlson Advertising (where only the recipient had been assessed), the dual assessments in the case at bar do not in my view in themselves invoke double taxation. That there are collection issues arising from the dual assessments is not sufficient to support a finding that the present assessment should fail on the grounds that it violates a rule against double taxation. Accordingly, I find this alternative argument of the Appellant insufficient to warrant this Court’s intervention.

 

[78]    Before concluding I need mention that the Notice of Appeal asserted that the amounts paid to CAIL in respect of the subject supplies were GST included. This position was not pursued at trial and on the evidence could not have succeeded. As well, the Appellant raised concerns that CAIL had a GST credit of approximately $12,400,000 available to the Minister that was not applied against the assessment. The Respondent replied that section 318 of the Act and section 155 of the Financial Administration Act allow Her Majesty in the right of Canada to set off indebtednesses to the Crown against amounts payable by the Crown and that this was done without reducing the tax payable in respect of the subject supply of Points as authorized by these provisions.

 

[79]    I was provided so little in the way of particulars of the Appellant’s argument on this point that I can only speculate as to its weight and relevance. That is not sufficient to satisfy the Appellant’s burden to dissuade me from accepting the Respondent’s position on the point. Further, if the issue concerns the quantum of tax payable I am satisfied that I need not address it given that Appellant's counsel conceded at the hearing that the quantum of tax assessed was not in dispute.

 

V.     Conclusion

 

[80]    For all these reasons, the appeal is dismissed with costs to the Respondent.

 

 

Signed at Winnipeg, Manitoba, this 12th day of September, 2007.

 

 

"J.E. Hershfield"

 

APPENDIX to the Reasons for Judgment signed on the 12th day of September, 2007.

CITATION:                                       2007TCC281

 

COURT FILE NO.:                            2003-4234(GST)G

 

STYLE OF CAUSE:                          ROYAL BANK OF CANADA AND HER MAJESTY THE QUEEN

 

PLACE OF HEARING:                     Toronto, Ontario

 

DATE OF HEARING:                       March 7, 2007

 

REASONS FOR JUDGMENT BY:    The Honourable Justice J.E. Hershfield

 

DATE OF JUDGMENT:                    September 12, 2007

 

APPEARANCES:

 

Counsel for the Appellant:	James Warnock
Counsel for the Respondent:	Ronald MacPhee Michael Ezri

 

COUNSEL OF RECORD:

 

       For the Appellant:

 

                          Name:                      James Warnock

 

                            Firm:                     McCarthy Tétrault LLP

 

       For the Respondent:                    John H. Sims, Q.C.

                                                          Deputy Attorney General of Canada

                                                          Ottawa, Canada