When cardholders of credit cards issued by the appellant (RBC) used their cards for purchases from a foreign merchant, RBC would earn an “interchange fee” from the foreign bank (or other “merchant acquirer”) of the foreign merchant for accepting the charge. Upon such acceptance, the cardholder discharged their purchase obligation to the merchant, RBC advanced the amount charged (less its interchange fee) to the merchant acquirer for crediting to the merchant’s account, and RBC would then request payment of the balance from the cardholder at the end of the applicable billing cycle.
Smith J rejected the Crown position that such interchange financial services supplied by RBC to the non-resident merchant acquirer (found at para. 87 to be the recipient) were not zero-rated under Sched. VI, Pt. IX, s. 1 by virtue of the exclusion in para. 1(a) thereof for a “service [that] relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”. He found (at para. 76) that “the phrase ‘relate to’ should be narrowly construed as a broad interpretation of the carve-outs would defeat the policy objectives”. He noted that, in contrast to para. (g) of the financial service definition, which referred to “the making of any advance, the granting of any credit or the lending of money”, the carve-out in subpara. 1(a)(ii) referred only to the “lending of money”. He then stated (at paras. 79, 81-84):
[T]he jurisprudence has recognized a clear distinction between the granting of credit and the lending of money. …
Dahl … v. Royal Bank of Canada, 2005 BCSC 126 … affirmed in 2006 CBCA 369 … noted that because the “cardholder is permitted to defer payment of the debt, credit is advanced on the date of the purchase or service” and “this deferral of debt results in an extension of credit” …
[U]nlike a loan, “such credit is not initially paid out to the debtor in the form of money.” …
As indicated in Dahl … “the cardholder’s liability to the merchant is discharged by the merchant’s acceptance of the credit card” and “the Bank becomes liable to the merchant, and the cardholder becomes liable to the Bank.”
I thus agree with the Appellant that “when a cardholder uses a credit card to purchase goods or services, there is no transfer of money from the credit card issuer to the cardholder” and therefore there is no loan that arises from the lending of money.
Accordingly, the foreign interchange fees were zero-rated, and it was not necessary to determine whether funds were relevantly used in Canada.