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. RBC submitted that it offered loyalty reward points to its cardholders to entice them to use their cards and increase the volume of interchange fee revenues, so that the costs to it of honouring loyalty points when redeemed were a direct input to generating the interchange fee revenues which, in part (regarding cardholder purchases from foreign merchants) were zero-rated.
In rejecting this position, so that RBC had no input tax credit (ITC) entitlement regarding its GST/HST incurred in honouring points redemptions, Smith J stated (at paras. 107-109):
If the Appellant’s only motivation was to entice cardholders to use their credit cards to generate interchange fees, there would be no need to impose limits or restrictions for the redemption of loyalty reward points.
… [T]he loyalty reward points might not be redeemed for months or even years after the transaction with the non-resident merchant. In addition, there is a geographical consideration in that the Foreign Interchange Service was provided to a non-resident merchant acquirer while expenses to redeem the points are incurred by RBC in Canada.
… [E]xpenses incurred by RBC in the redemption of loyalty reward points were inextricably linked and an integral component of the Appellant’s agreement to extend credit pursuant to the Cardholder Agreement. Although the presentation of the RBC Reward Card triggered the Appellant’s entitlement to the interchange fees, I find that this connection is not sufficient for me to conclude that expenses incurred in the redemption of loyalty reward points earned from transactions involving non-resident merchant–acquirers were part of a taxable or zero-rated supply.