Amex cannot claim tax credits that would help it recover GST/HST it paid on rewards program expenses
The Federal Court of Appeal said a tax court made the right call when it rejected nearly $14 million in tax credits for Amex Canada, which the company claimed for GST/HST that it paid on expenses needed to operate a credit card rewards program.
Under the Excise Tax Act, businesses can claim so-called input tax credits, which allow them to recover the GST/HST they paid on expenses related to commercial activities; however, when a business provides certain “exempt supplies,” that does not count as a commercial activity. Financial services are typically considered exempt supplies.
As a result, businesses usually cannot claim input tax credits to recover GST/HST paid on expenses they incurred while providing financial services.
The Tax Court of Canada drew on this logic when it rejected Amex’s argument that it was entitled to claim input tax credits for expenses related to operating its credit card rewards program. According to the court, the rewards program was not distinct from Amex’s credit card operations, which qualified as financial services rather than commercial activity.
A Federal Court of Appeal panel unanimously sided with the tax court, dismissing Amex’s appeal this week.
The dispute began when the Canada Revenue Agency assessed Amex for the reporting periods from 2002 to 2012. The CRA denied $13.97 million in input tax credits for rewards program expenses and assessed additional net tax, plus penalties and interest.
To determine whether the tax agency’s decision was valid, the tax court considered whether Amex incurred the rewards program expenses in the course of commercial activity.
Amex argued that it should be able to recover GST/HST on its rewards program expenses because the rewards program qualified as commercial activity and was distinct from its credit card operations, which counted as financial services.
The tax court applied the test set out in a 1995 Tax Court of Canada case called O.A. Brown Ltd. v. The Queen, which guides interpretations of the Excise Tax Act in cases “where an arrangement involves the provision of several properties or services.” After considering the relationship between the rewards program and cardholders, the tax court found that it was hard “to imagine a supply where the different elements and components of a supply are more closely intertwined and linked.”
The court also found that Amex incurred rewards program expenses to increase the volume of credit card transactions, and that becoming a rewards member lacks commercial efficacy on its own.
The court concluded that “all of the elements or components” of the rewards program are integrated and intertwined components of a composite supply of exempt financial services made by Amex to [rewards program] cardholders.”
Amex asked the Federal Court of Appeal to review the tax court’s ruling, arguing that it had made legal and factual errors.
But the appellate court said the tax court made no errors, including in its application of the O.A. Brown test.
The CRA declined to comment on the decision on Wednesday, citing confidentiality rules that prevent the disclosure of taxpayer information. The Department of Justice and counsel for Amex did not respond to requests for comment.
