A corporation (“PC Bank”) in the Loblaw group, whose business was to grant credit through the operation of a MasterCard program, obtained the right to issue loyalty points (“PCB Points”) from an affiliate (the owner of rights to the program) and then started issuing PCB Points to its cardholders which could be applied by them towards purchases at Loblaw-branded stores. PC Bank received payments of $0.0075 from Loblaws for each $1.00 of sales made by Loblaws to such cardholders (that generated such points). When the PCB Points were so redeemed by the cardholders for purchases from Loblaws, PC Bank was obligated to pay the cash value of the points to Loblaws. Loblaw also agreed to pay $0.35 to PC Bank for every $1.00 of notional value of PCB Points accumulated by a PC cardholder to the extent redeemed.
Goyette JA found that that the Tax Court had made two errors of law in finding that PC Bank’s payments of the redemption amounts did not entitle it to notional input tax credits (“NITCs”) pursuant to s. 181(5) (based on the tax fraction thereof) because such amounts did not satisfy the s. 181(5) requirement of being paid “in the course of a commercial activity” of PC Bank. First, the Tax Court considered that the phrase “in the course of a commercial activity” entails an either/or test (whereas instead it did not matter that PC Bank paid those amounts in the course of its financial services business because they were also paid in the course of its commercial activity of “driving customers to Loblaws” (para. 24)) . Second, the Tax Court erred in considering profitability (i.e., that PC Bank made a net loss for every point it redeemed) in finding that the redemptions did not occur in the course of a commercial activity.
Regarding the first point, she noted that the redemption amount was not required by s. 181(5) to be paid “exclusively” or “primarily” in the course of a commercial activity, and stated (at para. 26):
Unlike the words exclusively and primarily, the phrase “in the course of” has a broad meaning; it means “incidental to” or “connected to” directly or indirectly … .
She further stated (at para. 36):
In drafting subsection 181(5), Parliament did not include explicit language that the credit be allocated only “to the extent” that the person made the payment in the course of a commercial activity. The absence of this allocative language indicates that Parliament intended to grant an NITC on the entire amount of a coupon redemption payment from the moment the payment was made in the course of a commercial activity.
She concluded (at para. 60):
Because PC Bank makes the Redemption Payment in the course of its commercial activity, it is entitled to claim NITCs.
In the course of his extended dissenting reasons, Webb JA stated (at para. 125):
Just as the scheme of the ETA does not contemplate that 100% of a particular property or service that is acquired can be considered to be used in both a commercial activity and a business of making exempt supplies, Parliament did not intend that 100% of a single payment that is made could be considered to be made in both the course of a commercial activity and in the making of exempt supplies.