The Goods and Services Tax (“GST”) is a significant consideration for businesses in Canada, particularly when it comes to transactions involving royalty points. Royalty points, often earned through customer loyalty programs accrued by customers based on their spending, can be used to redeem goods or services, raising questions about their tax treatment.
This article explores the treatment of royalty points based on the recent rulings provided by the Tax Court of Canada (“TCC”) in the matter of Toronto-Dominion Bank v. His Majesty the King (“TD ruling”) and the Federal Court of Appeal (“FCA”) in the matter of Canadian Imperial Bank of Commerce v. Canada (“CIBC ruling”). [1]
CIBC ruling
In 2021, the FCA in the matter of Canadian Imperial Bank of Commerce v. Canada, determined that the Aeroplan Miles provided by Aeroplan to Canadian Imperial Bank of Commerce (“CIBC”) is subject to GST as Aeroplan Miles qualifies as promotional and marketing services.
CIBC and Aeroplan entered into an agreement that facilitated the credit card holders of CIBC to accumulate Aeroplan points which can be redeemed while booking flights. Under this agreement, Aeroplan provided membership to cardholders of CIBC and credited Aeroplan Miles when they made purchases. Aeroplan would receive payments from CIBC a) for supply of Aeroplan miles and b) for supply of referral and marketing services provided to CIBC for promoting its credit card.
Aeroplan charged GST/HST on these transactions, considering the transfer of Aeroplan Miles as taxable supplies. However, CIBC considered the Aeroplan supplies were financial services and therefore should be exempt from GST/HST. CIBC paid taxes on the invoices and filed an application to avail GST rebate under section 261 of the Excise Tax Act (“ETA”)[2], which was rejected by the Canada Revenue Agency (“CRA”).
CIBC filed an appeal before the TCC, arguing that Aeroplan Mile Program is a “gift certificate” as per section 181.2 of the ETA and thus CIBC is not liable to pay GST/HST. The TCC dismissed the matter and held that Aeroplan Mile Program does not qualify as “gift certificates” and thus CIBC is liable to pay GST/HST.
During its appeal before the FCA, it was vehemently argued by CIBC that the supply of Aeroplan Miles by Aeroplan to CIBC’s credit card holders is the predominant supply. FCA rejected the argument on the ground that CIBC was liable to pay the consideration to Aeroplan given that CIBC and Aeroplan had an agreement and Aeroplan did not enter into an agreement with CIBC’s customers. Further, the agreement between Aeroplan and CIBC stipulated that Aeroplan shall provide promoting and marketing services to CIBC and Aeroplan Miles were incidental to it. Thus, the predominant element of supply was promotional and marketing activities and Aeroplan Miles were incidental to it.
The TCC deliberated on whether Aeroplan Miles qualified as “gift certificates”, however, the FCA did not address the issue to determine whether Aeroplan Miles qualified as “gift certificate” as
- the classification of Aeroplan Miles (as gift certificate or coupon or otherwise) will impact the credit card holders of CIBC who redeem Aeroplan Miles and it will also impact Aeroplan, who will be accepting such Miles as consideration for GST/HST).
- The CIBC card holders using Aeroplan Miles and Aeroplan are not parties to the appeal
- The TCC judge stated that there is lack of clarity on how Aeroplan treats the redemption of Aeroplan points.
At the FCA, a dissenting opinion was presented by Justice Stratas who held that Aeroplan Miles qualified as “gift certificates” in the commercial world as Aeroplan Miles are an exchange device which are used as consideration for property or services in the same way as money or a gift certificate.
TD Bank
Fast forward to 2024, the issue about GST implications on loyalty rewards program persists. The TCC in the matter of the Toronto-Dominion Bank v. His Majesty the King[3] held that TD Bank is subject to pay GST/HST on Aeroplan Miles availed from Aeroplan as the supply does not qualify as “gift certificates”.
In the matter of TD Bank, like CIBC, in a previous related case, TD Bank entered into a commercial agreement with Aeroplan with the aim of enhancing its credit card offerings, particularly those related to frequent flyer rewards. TD Bank sought to leverage the Aeroplan loyalty program to attract and retain customers. Under this agreement, TD Bank made payments to Aeroplan in exchange for certain services. The primary issue was determining what was the predominant/primary supply: was it a supply of marketing and promotional services, as claimed by the CRA, or was it the issuance of Aeroplan Miles, which TD Bank argued should be treated as gift certificates and thus exempt from GST/HST.
The TCC rejected TD’s claim that the payments were primarily for the issuance of Aeroplan Miles. The court emphasized that the supply of the miles was incidental to the broader supply of marketing services. Although the miles were of value to TD Bank and its customers, the primary purpose of the payments was to access Aeroplan's membership base and encourage credit card sign-ups from customers. The TCC drew this conclusion after analysing the contractual agreement between TD Bank and Aeroplan.
TCC went at great lengths to explain what qualifies as gift certificates. A greater emphasis was provided by the TCC on the contractual arrangement between TD and Aeroplan. that the supply made by Aeroplan was predominantly promotional and marketing services. The contract between TD Bank and Aeroplan was such that Aeroplan was responsible for promoting TD Bank’s credit cards to its members, facilitating card applications, and encouraging existing cardholders to consolidate their spending on TD Bank’s credit cards. Thus, the primary element of supply was marketing services and Aeroplan Miles were secondary to it.
The TCC found that Aeroplan Miles did not qualify as gift certificates under section 181.2 of the ETA as gift certificates are items with a stated monetary value that can be applied to the purchase of goods or services. Aeroplan Miles, while redeemable for travel and other rewards, do not have a fixed monetary value on their face. The court noted that the value of Aeroplan Miles fluctuates and can vary depending on how and when they are redeemed. As such, the miles did not meet the necessary criteria to be treated as gift certificates, and the payments made by TD Bank were subject to GST/HST as consideration for taxable services.
What distinguishes CIBC ruling from TD
In the author’s opinion, the FCA focused solely on what was the predominant element of supply for the supply of Aeroplan Miles in the CIBC ruling. The FCA did not deliberate on what constitutes as “gift certificates” and it was an important element and factor which could have been discussed in detail.
In TD, the TCC explained in detail as to what constitutes as “gift certificates” and laid down an important parameter that only those cards or coupons which has fixed monetary value which could be redeemed for a value would qualify as gift certificate.
Further. The TCC in the ruling of TD Bank provides important guidance on the interpretation of contracts and the characterization of supplies for tax purposes, particularly in the context of loyalty programs and promotional agreements. The TCC affirmed that contractual language plays a crucial role in determining the nature of a supply, even when the commercial substance of the transaction may suggest a different interpretation.
Implications
The TCC decision in the matter of TD underscores the importance of carefully drafted contracts. A well defined and drafted agreement will clearly define the nature of the supply being provided. In cases where a supply involves multiple elements, such as marketing services and loyalty rewards, the courts are likely to rely on the express terms of the agreement to determine which element is predominant. Thus, any businesses should ensure that there is clarity in their contractual agreements about what should constitute as the primary and predominant element of contract and what elements could be construed as ancillary or incidental to the contract.
[1] 2021 FCA 96 and 2024 TCC 50.
[2] R.S.C., 1985, c. E-15.
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