Executive Summary: Key Legal and Evidentiary Issues

• Amex Bank of Canada claimed $13,973,869 in input tax credits (ITCs) for GST/HST paid on expenses to operate its Membership Rewards Program (MRP) over an 11-year period ending December 31, 2012.

• The Minister denied the ITCs on the basis that the MRP Expenses were incurred in the course of providing exempt financial services, not commercial activities under the Excise Tax Act.

• Central to the dispute was whether the MRP constituted a separate taxable supply or was an integral component of Amex's single composite supply of exempt credit card financial services to its Members.

• Amex argued the Tax Court misapplied the O.A. Brown single composite supply test and the Characterization test from Global Cash Access and CIBC, and improperly relied on accounting treatment and merchant relationships.

• The Federal Court of Appeal distinguished the President's Choice Bank decision, finding that Amex's MRP was designed to drive spending on Amex Cards by Members and promote loyalty to Amex — not to promote the activities of Participants.

• All three statutory bases for ITCs — subsections 169(1), 181(5), and 141.01(4) of the ETA — were rejected, and the appeal was dismissed with costs in favour of the Crown.

Background and parties involved

Amex Bank of Canada, a Schedule II bank regulated under the Bank Act, issued American Express charge cards and credit cards to members of the public. During the 2002 through 2012 annual reporting periods, Amex operated a loyalty program known as the Membership Rewards Program (MRP), under which cardholders who enrolled as Members accrued points for each dollar of eligible purchases charged to their cards. Those points could be redeemed for rewards such as airline tickets, airline frequent flyer points, hotel chain loyalty points, travel certificates, meals at restaurants, gift cards, and tangible items such as watches, golf clubs, luggage, and headphones. Amex entered into Participation Agreements with suppliers ("Participants") to procure the rewards, paying those suppliers a negotiated amount plus applicable GST/HST. A related entity, Amex Canada Inc. (ACI), an Ontario corporation and member of a closely related group with Amex, carried on the business of providing travel agency services to the public. Under the ACI Participation Agreements, Members could exchange points for Travel Certificates issued by Amex, which could then be redeemed with ACI or an ACI franchised travel agency for travel products or services.

The Membership Rewards Program and card operations

Some Amex cards automatically enrolled holders in the MRP with no additional enrollment fee charged to the cardholder ("MRP-Inclusive Cards"), while other cards ("MRP-Extra Cards") gave the cardholder the option to join the MRP by paying an enrollment fee of $50. Members could also pay a Points Accelerator Fee to be entitled to a higher ratio of points per dollar charged to a card, or purchase additional points for a Points Fee. Amex charged and collected GST/HST on the MRP Enrollment Fee, the Points Accelerator Fee, and the Points Fee. Amex did not charge GST/HST on Card Fees, discount fees, or delinquency charges or interest on late paid account balances, as those were exempt supplies for ETA purposes. In 2009 and 2010, the revenue received from credit and charge card operations was more than 96% of Amex's total revenue, whereas the revenue from the MRP fees accounted for under 0.75% of Amex's total revenue.

The assessments and the Tax Court proceedings

Between 2006 and 2017, the Minister issued eleven Notices of Assessment disallowing ITCs totalling $13,973,869.75 that Amex had claimed in respect of the Participant GST, the Overhead GST, and the Notional GST, less $2,643,833.19 of GST/HST collected by Amex on Enrollment Fees, Points Accelerator Fees, and Points Fees. Amex filed Notices of Objection, and the Minister confirmed each of the Assessments through Notices of Confirmation dated December 10, 2018 and December 17, 2018. Amex appealed to the Tax Court of Canada (2023 TCC 93, Hogan J.). The Tax Court framed the central question as whether the MRP Expenses were incurred in the course of a commercial activity — a prerequisite for claiming ITCs under subsection 169(1) of the Excise Tax Act. Applying the O.A. Brown test for single versus multiple supplies, the Tax Court found the MRP and Amex's credit card operations were deeply intertwined: only cardholders could become Members, points accrued from card spending, and Amex incurred the MRP Expenses to increase the volume of credit card transactions. The Tax Court concluded that all of the elements or components of the MRP were integrated and intertwined components of a composite supply of exempt financial services made by Amex to MRP Cardholders.

The characterization of the supply and the role of merchants

Having determined the supply was a single composite supply, the Tax Court applied the Characterization test from Global Cash Access to identify its predominant element. Taking into account the perspective of the recipient — the cardholder — as required by CIBC, the Tax Court held that the predominant element was the extension of credit by Amex to a Member. The evidence revealed that the accumulated points were an additional benefit to the credit card, and that the commercial efficacy of the supply, from the cardholder's perspective, was credit that allowed the MRP Cardholder to procure goods and services without using cash savings or borrowing funds from a different source. The Tax Court further determined that Amex provided a financial service to merchants by making arrangements to pay for the goods and services Members acquired using their credit cards, and rejected Amex's argument that it provided marketing services to the Participants who supplied the rewards. As a result, ITCs under subsection 169(1) were denied, the notional ITC claim under subsection 181(5) for Travel Certificate Payments was likewise refused because the redemption expense was incurred in respect of a liability that arose because of the supply of an exempt financial service, and the free supply rule under subsection 141.01(4) was found not to support Amex's position.

Amex's arguments on appeal

Before the Federal Court of Appeal, Amex raised several grounds of error. First, it contended the Tax Court misapplied the Characterization test by failing to separately analyze the MRP Terms and Conditions apart from the credit card agreements. The Federal Court of Appeal rejected this, explaining that the Characterization test only applies once it has been determined that there is a single composite supply — it does not apply to one agreement if that agreement is simply a component of a larger composite supply. Second, Amex argued it was a legal error for the Tax Court to consider how the MRP Expenses were reflected in Amex's financial statements, which deferred the discount revenue and matched it with MRP Expenses as Points were redeemed. The Federal Court of Appeal found the financial statements were not the basis for the determination but were merely considered relevant and consistent with the judge's view of the evidence. Third, Amex flagged the Tax Court's reference to "MRP Terms and Conditions of the merchant agreement," an agreement that was not before the Court, but the Federal Court of Appeal held this error in misnaming the merchant agreement was not significant.

The President's Choice Bank distinction

A significant element of the appeal involved the decision in President's Choice Bank v. The King, 2024 FCA 135, released approximately two weeks before the hearing of this appeal. In that case, the majority determined that the redemption payments were made in the course of a commercial activity conducted by President's Choice Bank, described as participation in a program that aims to drive retail traffic to Loblaws, a related grocer, and thus qualified for notional ITCs. Amex argued the decision should be followed and was not distinguishable on its facts. The Federal Court of Appeal disagreed, finding the cases factually distinguishable. The Tax Court had found that the purpose of the MRP was to "drive spending on Amex Cards by Members and promote loyalty" to Amex. The Tax Court had also expressly rejected Amex's claim that one of the purposes of the Rewards was to promote the activities of Participants. The appellate court held these conclusions were grounded in the evidence, and that unlike the bank in PC Bank FCA, Amex did not incur the MRP Expenses to make any taxable supply.

Ruling and outcome

The Federal Court of Appeal, in a unanimous decision authored by Woods J.A. and concurred in by Laskin J.A. and Monaghan J.A., dismissed Amex's appeal with costs. The Court concluded that the Tax Court did not err in concluding that Amex's ITC claim should be denied, confirming that all MRP Expenses were incurred in the course of providing exempt financial services and not in the course of any commercial activity. None of the three statutory provisions invoked by Amex — subsections 169(1), 181(5), or 141.01(4) of the Excise Tax Act — supported its claim. His Majesty the King was the successful party, and the disallowed ITCs in the aggregate assessed amount of $13,973,869.75, together with additional net tax plus penalties and interest, were upheld.