The Minister denied the input tax credit (“ITC”) claims of Amex Bank of Canada’s (“Amex”) for its 2002 to 2012 taxations years for GST/HST paid on expenses arising in connection with the administration and operation of Amex’s Membership Rewards Program (“MRP”), including expenses incurred for the purpose of providing its cardholders who were members of the MRP (“Members”) with rewards on the redemption of points earned by them mostly through making purchases on their cards.
Hogan J, in dismissing Amex’s appeal, found (at paras. 59) that “all of the elements and components of the MRP are inherently intertwined and connected with the exempt supply of financial services made by the Appellant to its Members and merchants.” In particular, he found that Amex incurred such expenses “for the purpose of earning greater [GST/HST-exempt] merchant discount revenue in its credit card business.”
Amex submitted that the free supply rule in s. 141.01(4) applied to characterize the supply of rewards as a taxable supply, on the basis that (i) the supply of rewards to Members was made for no consideration, and (ii) the purpose of making such supply was to facilitate the activities of the Members. Hogan J rejected the first branch, i.e., found that Amex in fact was not making free supplies since it made its supply of rewards “in satisfaction of a redemption liability that is extinguished on completion of the transaction” (para. 81). In also rejecting the second branch, he found that if there was any free supply, its predominant purpose was facilitating the generation of revenues from Amex’s exempt credit card activities.