This dispute arose when the Canada Revenue Agency ("CRA") reassessed President's Choice Bank ("PCB") for uncollected GST/HST on bundled supplies made to a major Canadian bank (the "Bank") and denied the Bank's rebate claims for GST/HST allegedly paid in error to PCB. The CRA was of the view that the supply of bundled rights made by PCB to the Bank was not an exempt "financial service" as defined under subsection 123(1) of the Excise Tax Act (Canada) (the "ETA").

On September 28, 2023, the Federal Court of Appeal upheld two Tax Court of Canada ("TCC") rulings relating to the characterization of the supply and to whether the TCC was required to apply factual findings from a previous TCC decision rendered in 2009 (the "2009 Decision") to the present case. The TCC rulings had dismissed:

  1. The Bank's motion to apply the findings of fact from the 2009 Decision in which the exempt nature of PCB's supply to the Bank had been affirmed (albeit with respect to earlier reporting periods) (the "Motion Order"); and
  2. The Bank's appeal of the CRA's decision to deny its GST/HST rebate claims (the "Rebate Judgment")

The TCC had determined that the supply made by PCB to the Bank was excluded from the list of supplies that qualify as a "financial service" as defined in subsection 123(1) of the ETA, pursuant to the application of paragraph (r.5). That paragraph was added by amendments to the ETA that were enacted in 2010 with retroactive effect to December 17, 1990 (the "2010 Amendments"). As a consequence, the supply of bundled rights by PCB to the Bank was held by the TCC to be taxable for GST/HST purposes.

Background

The agreements

In 1997, the Bank and the Loblaws Companies Limited ("Loblaws") entered into a Financial Service Agreement ("FSA") and a Loyalty Service Agreement ("LSA"). Under these two agreements (collectively, "the PCF Agreements"), which were later assigned to PCB, Loblaws' wholly-owned indirect subsidiary, the Bank gained:

  • Access to new customers through the positioning of the highly regarded PCB brand in Loblaws' large network of retail stores;
  • A loyalty program under which the Bank could issue points to Loblaws customers; and
  • The right to be the seller of PCB's products.

Collectively, the above were referred to in the litigation as the "Bundle of Rights" to which the Bank was entitled under the agreement.

In addition to the Bundle of Rights, the PCF Agreements contemplated that a team of approximately 15 employees from both sides (the "Employees") worked together to ensure that the business deal would be mutually beneficial. The Employees collaborated on product design, promotional services and marketing initiatives with the common objective of persuading Loblaws customers to purchase financial products from the Bank. The FSA was later amended to reflect this collaboration, by changing the way fees were calculated to include revenue sharing payments.

Was this a supply of a "financial service"?

PCB did not collect GST/HST on the supply it made to the Bank as per the PCF Agreements because its view, initially at least, was that the supply of the Bundle of Rights constituted a supply of a "financial service" as defined in subsection 123(1) of the ETA. According to that definition, something is a supply of a financial service if it is listed in any of paragraphs (a) to (m) thereunder (the "Inclusionary Paragraphs") – unless it also falls under one of the exclusions in paragraphs (n) to (t) (the "Exclusionary Paragraphs"). In that case, it is deemed not to be a financial service, which makes it taxable.

Inclusionary Paragraph (l) specifically refers to an agreement to provide or the "arranging for" a service referred to in any of Inclusionary Paragraphs (a) to (i). Notably in response to the broad interpretation of the definition of "financial service" in the 2009 Decision, Parliament passed the 2010 Amendments which added two new Exclusionary Paragraphs – (r.4) and (r.5) – which exclude the supply of certain services and property as follows (emphasis added):

(r.4)a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l), or that is provided in conjunction with a service referred to in any of those paragraphs, and that is
(i) a service of collecting, collating or providing information, or
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service
(r.5)property (other than a financial instrument or prescribed property) that is delivered or made available to a person in conjunction with the rendering by the person of a service referred to in any of paragraphs (a) to (i) and (l)....

Tax Court of Canada Rulings

Arguments on the Motion Order

In the course of its appeal, the Bank initially filed a motion for an order allowing its appeal from the CRA assessments denying its rebate claims for GST/HST paid after 2002. It argued that one or more of the doctrines of res judicata, issue estoppel or abuse of process precluded a re-litigation of the issue of the nature of the supplies made by PCB as that issue had been determined in the 2009 Decision. Specifically, the Bank took the position that it would be abusive to allow the character of the supplies to be determined through a hearing of the appeal that would allow for a new factual matrix to be established by the trial judge after hearing full evidence on the issue.

The Crown replied that the central issue in the current litigation related to different reporting periods and that the issue had not been adjudicated in 2009 because, at that time, the TCC had not determined whether Exclusionary Paragraphs (r.4) and (r.5), applied (for the very good reason that they didn't exist yet).

Decision

The TCC agreed with the Crown that the doctrine of res judicata could not apply when the statute underlying the previous decision had subsequently been amended in a respect relevant to the current matter. Retroactive amendments specifically narrowing the scope of services that previously qualified as exempt services require a new legal analysis and determination based on the post-2010 Amendments definition of "financial service". Having determined that doctrines such as issue estoppel and abuse of process did not apply, Justice Hogan ruled that he was not bound to apply the factual findings of the 2009 Decision:

"In the instant case, at best, we are left to speculate on what Justice Lamarre would have decided if she had been tasked to consider the scope of application of the new provisions. The judgment that she has rendered now hangs by a thread because of the new financial services definition. This is hardly a case where the principle of finality requires me to give effect to the issue estoppel and/or abuse of process doctrines."

Arguments on the Rebate Judgment

The Crown argued that the predominant element of the supply made by PCB to the Bank was the Bundle of Rights and that the compound supply of marketing, product design, and promotional services provided by the Employees were secondary elements. According to the Crown, both elements were excluded from the definition of "financial service" in subsection 123(1) of the ETA under both Exclusionary Paragraphs (r.4) and (r.5). In all cases, the supply made by PCB to the Bank was therefore, in the Crown's view, a taxable supply.

The Bank advanced several arguments in response:

  • It argued that PCB was acting as an intermediary "to bring the financial services to customers and [PCB's] major role in the process of providing financial services by [the Bank]". Relying on the 2009 Decision, counsel for the Bank argued that the arrangement between the Bank and PCB consisted in "arranging for" the provision of financial services to PCB's customers and constituted an exempt supply of a financial service within the meaning of Inclusionary Paragraph (l).
  • It asked the TCC to determine first whether PCB's supply was described in Inclusionary Paragraph (l), and as second step, determine whether PCB's supply can be excluded pursuant to Exclusionary Paragraphs (r.4) and (r.5).
  • It also argued that the relationship between the parties was of the nature of a partnership or a joint venture. Though the argument might have proven fruitful (since distributions of revenue to partners or between joint venturers are deemed not to be a supply for GST/HST purposes), it ran up against the wording of the PCF Agreements, which expressly excluded any partnership or joint venture relationship between the parties and was therefore disregarded by Justice Hogan.

Decision

At the outset, Justice Hogan rejected the Bank's suggested approach and ruled that his analysis should start with Exclusionary Paragraphs (r.4) and (r.5), since the application of the Inclusionary Paragraphs would be a moot point if either of the Exclusionary Paragraphs applied. Justice Hogan therefore made sure that the proverbial cart was properly placed behind the proverbial horse.

Justice Hogan then used a "two-step test" developed by the FCA in Global Cash Access (Canada) Inc. v. R. (2013) and Great-West Life Assurance Co. v. R. (2016) to identify the predominant elements of a single compound supply. As a first step, one needs to examine all of the components of the supply that is received. Then, in the event of a compound single supply, the predominant elements of such supply must be identified. This may be achieved by examining the contractual arrangement between the parties, the commercial efficacy of the arrangement and other relevant elements of their business relationship.

Justice Hogan concluded that the main reason the Bank entered into the PCF Agreements was to gain access to Loblaws' clientele. The predominant element of the supply was therefore the Bundle of Rights (which was property, and not a service under the ETA) that enabled the Bank to sell its financial products and services to Loblaws' customers. As such, the supply was a taxable supply of the Bundle of Rights subject to the application of Exclusionary Paragraph (r.5).

For their part, the Employees' contribution – primarily relating to marketing research, promotions and generally ensuring that the arrangement worked out profitably – was "at best, a secondary element of the [the supply made by PCB to the Bank]". In any case, even if they had been the predominant element, these services would also have been excluded but in that case, under Exclusionary Paragraph (r.4), Justice Hogan noted.

Federal Court of Appeal Ruling

The central issues before the FCA were to determine whether Justice Hogan had erred in the Motion Order or the Rebate Judgment.

Motion Order

On appeal, the Bank alleged that the TCC had made the following errors:

  1. finding that the "same issue" requirement was not satisfied for the purposes of issue estoppel and abuse of process;
  2. concluding that the 2010 Amendments allowed the TCC to redetermine the substance of the supply made by PCB;
  3. its interpretation of "service" in subparagraph (ii) of Inclusionary Paragraph (l); or
  4. misconstruing the nature and scope of the TCC judge's residual discretion.

The FCA found that the first three alleged errors were essentially asking the same question, i.e., the effect of the 2010 Amendments on the question whether the 2009 Decision had decided the "same issue" that was at issue in the case at hand. The FCA found that determining whether PCB supplied financial services to the Bank required the TCC to consider the applicable definition of "financial service" in the ETA. In this case, the applicable definition was in fact the definition as modified by the 2010 Amendments as such amendments had a retroactive effect to December 17, 1990.

As the FCA wrote:

"The issue is ... whether [the Bank] was paying [PCB] for financial services based on the revised definition of financial service which was not considered (nor could it have been considered) in the 2009 Decision."

The 2010 Amendments included Exclusionary Paragraph (r.5), which specifically excludes a supply of property from the definition of "financial service." In the view of the FCA, this exclusion must have reflected a concern on the part of Parliament that certain supplies of property might, in the absence of this new paragraph, have been considered a financial service. The FCA also noted that the definition of "financial service" in the ETA appears to leave the door open for the inclusion of property in some circumstances – this may explain why Parliament, in 2010, decided that Exclusionary Paragraph (r.5) was needed.

The key question was whether the application of Inclusionary Paragraph (l), which states that "financial service" includes providing or arranging for financial services, would or would not have applied differently as a consequence of the 2010 Amendments. Subparagraph (l)(ii) excludes from this definition any "service" that is referred to in any of the Exclusionary Paragraphs. The Bank's argument was that since Exclusionary Paragraph (r.5) refers to property rather than a service (which, unlike the term "financial service", is defined to specifically exclude property in the ETA), the addition of paragraph (r.5) in the 2010 Amendments did not change the 2009 analysis.

The FCA, like the TCC, agreed with the Bank on that point, as far as it went. But it did not go far enough, since the definition of "financial service" also provides that financial services do not include anything specified in the Exclusionary Paragraphs (whether it is a service or property). This includes paragraph (r.5)'s reference to "property ... that is delivered or made available to a person in conjunction with the rendering by the person of a service referred to" in Inclusionary Paragraph (l). Clearly this was a change that could not have been considered in the 2009 Decision and which, by extension, made it impossible to maintain that the issue in the current case was identical to the issue that was decided then.

The FCA accordingly went on to conclude:

"any property that is delivered or made available to the [Bank] in conjunction with [its] arranging to provide banking or credit services will not be a financial service."

It agreed with the TCC that the addition of new Inclusionary Paragraphs (r.4) and (r.5) as part of the 2010 Amendments raised a new issue of whether, in light of these new provisions, PCB was in fact providing a "financial service" to the Bank and that the 2009 Decision could not account for such new provisions.

Rebate Judgment

Having resolved the "new issue" question, the FCA proceeded to consider the substantive issue of whether the Bank's payments on account of GST/HST should be rebated. The Bank alleged the following errors in the Rebate Judgment:

  1. That it was decided on a basis that was not advanced by either party;
  2. That it incorrectly concluded that the determination of the substance of the supply in the 2009 Decision had been rendered obsolete by the 2010 Amendments; and
  3. That it incorrectly concluded that the substance of the supply under the PCF Agreements was a supply of property.

The first argument was quickly dismissed by the FCA on the ground that the issues in question were all of mixed fact and law and that it is up to the TCC Judge to make findings of fact, which do not need to correspond to the facts as perceived by any of the litigants. His determinations, the FCA noted, were based on the evidence led by the parties, including agreements and witness testimony, as well as on contractual interpretation. Moreover, the Bank had not identified any "theory" of the case that had not been raised by one or other of the parties.

The FCA was of the view that the second argument simply repeated the argument on the appeal of the Motion Order (see above) and should be dismissed in light of the FCA's determination of that appeal.

With respect to the Bank's third argument – that Justice Hogan had erred in his findings on the substance of the supply made by PCB to the Bank – the FCA determined that the standard of review for a question of fact or mixed fact and law, such as this one, is palpable and overriding error. The error that the Bank alleged was that the TCC had found that it had rented premises from PCB, but the FCA held that Justice Hogan had found only that PCB had given the Bank the right to solicit customers inside Loblaws' grocery stores, which was not the same thing as renting the premises. Thus, the allegation of a palpable and overriding error was dismissed, along with the Bank's appeals generally.

Key Takeaways

  • The FCA confirmed the Motion Order and corroborated that the doctrines of issue estoppel (as part of the doctrine of res judicata) and abuse of process should not apply following the enactment of retroactive legislative amendments where such amendments require a set of facts to be analyzed under a legislative framework different from that which was applied to a similar or identical set of facts that were adjudicated prior to the amendments.
  • The introduction of new Exclusionary Paragraphs as part of the 2010 Amendments stemmed from Parliament's concern that judicial findings characterizing certain services as financial services could have the effect of eroding the GST/HST tax base by removing them from the category of taxable supplies. The decision in this case appears to reflect Parliament's intentions, since PCB's "Bundle of Rights" (as predominant element) and the Employees' contribution (as a secondary element) supplied to the Bank all fall within Exclusionary Paragraphs (r.4) and (r.5) introduced as part of the 2010 Amendments and should not, therefore, be characterized as exempt supplies.
  • The FCA ruled that the definition of "financial service" in subsection 123(1) of the ETA does not specifically refer to "service" in its preamble, and even if the definition of "service" in subsection 123(1) means "anything other than ... property," a supply of property could in theory be a financial service (unless it is otherwise excluded under Exclusionary Paragraph (r.5)) since "financial service" has its own definition that does not specifically rely on the definition of "service".

The authors would like to thank Sean Martel, stagiaire, for his collaboration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.