President’s Choice Bank makes loyalty program reimbursements to Loblaws during “commercial activity,” so the bank can claim notional input tax credits for those payments, the Federal Court of Appeal said Wednesday.
The court allowed PC Bank to appeal the Tax Court ruling that prevented the company from claiming the tax credits.
Justice Nathalie Goyette authored the opinion for the majority, with Justice John Laskin concurring. Justice Wyman Webb wrote a dissenting opinion.
Under a popular PC Bank and Loblaws loyalty program, consumers can earn points with a PC-branded MasterCard credit card when they shop at Loblaws stores and other retail outlets. PC MasterCard holders can only redeem their points at Loblaws-owned or controlled stores, and PC Bank reimburses Loblaws one dollar whenever cardholders redeem a dollar’s worth of points.
Under the Excise Tax Act, PC Bank can only claim notional input tax credits for the money it reimburses to Loblaws if the payment meets several criteria. The Minister of National Revenue denied PC Bank the tax credits because it doesn’t meet one of the criteria stipulating that the payment must be made “in the course of a commercial activity.”
The Tax Court agreed, ruling that PC Bank’s reimbursements to Loblaws were made during financial – not commercial – activity.
In Wednesday’s decision, Goyette wrote that the Tax Court made two errors in its ruling. The first was its assumption that PC Bank’s reimbursement to Loblaws could only be made during a commercial or non-commercial activity, but not both.
Subsection 181(5) of the Excise Tax Act “is not an either/or test,” the court said, adding the law “does not require a court to determine in the course of which of two activities an amount for the redemption of a coupon is paid.”
The Tax Court’s second error, Goyette said, defined “commercial activity” as a profitable venture. PC Bank argued it was engaged in commercial activity when it made the reimbursement payment to Loblaws because it was driving consumer traffic to Loblaws stores through its loyalty program. However, the Tax Court countered that Loblaws only pays PC Bank 35 cents for every dollar of points cardholders use at Loblaws stores.
“The Tax Court refused to find that this constituted a commercial activity,” the appeals court noted. “It found such a proposition irreconcilable with ‘normal commercial and business practices’ because it was ‘unimaginable’ that ‘the [a]ppellant would accept to pay $1.00 to earn $0.35.’”
Goyette disagreed with the Tax Court, writing that “in sales tax, unlike in income tax, profitability is extraneous to determining whether a corporation has a commercial activity.” Because sales tax is at issue in this case, the Tax Court erred when it found that “PC Bank’s participation in the Loyalty Program could not be a commercial activity simply because that participation did not provide PC Bank any reasonable expectation of profit,” the appeals court said.
In his dissent, Webb countered that the Tax Court made no legal errors.
Based on subs. 181(5), he wrote, “the correct interpretation is that when a person is carrying on a commercial activity and also a financial services business, the person pays the amount as contemplated by this subsection either in the course of a commercial activity or in carrying on a financial services business.
“A person only pays a particular amount once,” Webb said. He added, “The full amount of a single payment cannot be considered to be made both in the course of a commercial activity and also, at the same time, made in carrying on a financial services business.”
According to the dissent, the Tax Court noted that PC Bank issues points to incentivize customers to use their PC MasterCards and, therefore, grow its own operations. PC Bank then reimbursed Loblaws when customers redeemed these points – which, again, PC Bank issued with the goal of expanding its operations.
This activity should be interpreted as PC Bank “carrying on its financial services business and not in the course of a commercial activity,” Webb wrote. He dismissed PC Bank’s appeal.
Counsel for the parties did not respond to requests for comment. The Auckland Revenue Agency declined to comment.
