Federal Court of Appeal Denies Input Tax Credits for Rewards Program Expenses

Date: 20260216 Docket: A-225-23 Citation: 2026 FCA 31 CORAM: [NAME] J.A. [NAME] J.A. [NAME]. BETWEEN: [COMPANY] Appellant and HIS [NAME] Respondent Heard at Toronto, Ontario , on September 5, 2024 . Judgment delivered at Ottawa, Ontario , on February 16, 2026 .

REASONS FOR

JUDGMENT BY: [NAME] J.A. CONCURRED IN BY: [NAME] J.A. [NAME]. Date: 20260216 Docket: A-225-23 Citation: 2026 FCA 31 CORAM: [NAME] J.A. [NAME] J.A. [NAME]. BETWEEN: [COMPANY] Appellant and HIS [NAME] Respondent

REASONS FOR

JUDGMENT [NAME] J.A.

I. Introduction [ 1 ] In this appeal, the appellant ([NAME]) asks this Court to set aside a judgment of the Tax Court of Canada that upheld goods and services tax assessments made under the Excise Tax Act , R.S.C. 1985, c. E-15 (ETA) (2023 [NAME] 93, Hogan J.). The issue involves input tax credits (ITCs) claimed by [NAME] for GST/HST paid on expenses to operate [NAME]’s rewards program related to its credit card operation. The assessments relate to ITCs in the aggregate amount of $13,973,869 that were claimed over an 11-year period ending on December 31, 2012. [ 2 ] The Tax Court determined that the ITCs relating to the rewards program were properly disallowed because the expenses were not made or incurred in the course of a commercial activity. Instead, they were made or incurred in the course of providing financial services, which do not form part of a commercial activity. [ 3 ] In reaching this conclusion, the Tax Court judge considered [NAME]’s services to members of the rewards program, to holders of [NAME] credit cards, and to [NAME] who accept [NAME] credit cards, and whether [NAME] provided marketing services to persons who supply the rewards to [NAME]. The judge rejected [NAME]’s submission that some of these services were taxable supplies and part of [NAME]’s commercial activity. [ 4 ] In this appeal, [NAME] submits that the judge made several errors of law and fact. For the reasons below, I disagree with these submissions and would dismiss the appeal.

II. Background facts [ 5 ] The parties’ Partial Agreed Statement of Facts (PASF) reproduced below provides a useful description of the background facts. Background 1. The Appellant … was incorporated under the Canada Business Corporations Act on June 22, 1987 and continued under the [COMPANY] Act (Canada) on April 25, 1990 and has been thereafter a Schedule II [COMPANY] regulated under the [COMPANY] Act (Canada). 2. [NAME] is, and was throughout [NAME]’s 2002 through 2012 annual reporting periods (the “Relevant Periods”), registered for the Goods and Services Tax/Harmonized Sales Tax (the “GST/HST”) under Part IX of the ETA . 3. [NAME] issued American Express charge cards and credit cards (collectively, “Cards”) to members of the public (“[NAME]”) who applied for and qualified for such Cards. 4. [COMPANY]. (“[NAME]”) is an Ontario corporation and, during the Relevant Periods, was a member of a “closely related group” (as that term is defined in the ETA ) with [NAME].

5. During the Relevant Periods, [NAME] carried on the business of, inter alia , providing travel agency services to the public. The Membership Rewards Program 6. During the Relevant Periods, [NAME] operated a loyalty program known as the Membership Rewards Program (the “MRP”).

7. A [NAME] who was a member of the MRP (a “Member”) accrued and was credited with a certain number of points (the “Points”) by [NAME] for each dollar charged to a Card for the purchase of goods or services.

8. Under the MRP, [NAME] did not credit a Member with Points for amounts charged to a Card for, inter alia , delinquency fees, interest, Card fees, purchases of American Express Travellers Cheques and Gift Cheques, balance transfers, or the purchase of foreign currency.

9. The more dollar value of eligible purchases a [NAME] charged on the Card, the more Points the [NAME] earned.

10. The more Points a [NAME] accumulated, the more Rewards (as defined below) or the higher the value of the Reward a [NAME] could redeem from [NAME]. Becoming a Member of the MRP 11. Participation in the MRP was available only to [NAME]. 12. [NAME] offered a variety of Cards with different rights and obligations attached to each.

13. Some Cards required the [NAME] to pay an annual fee to [NAME] (a “Card Fee”), with different Card Fees payable for different Cards. 14. [NAME] did not charge [NAME]/HST on the Card Fees. MRP Fees 15. Some Cards (the “MRP-Inclusive Cards”) carried with them enrollment of the [NAME] in the MRP with no additional enrollment fee charged to the [NAME].

16. For other Cards (the “MRP-[NAME]”), a [NAME] had the option (but was not required) to join the MRP by paying [NAME] an enrollment fee (the “MRP Enrollment Fee”) (the MRP-Inclusive Cards, together with all MRP-[NAME] whose [NAME] opted to join the MRP, are collectively referred to as “MRP Cards”). 17. [NAME] could enroll in, or withdraw from, the MRP at any time. 18. [NAME] charged [NAME]/HST on the MRP Enrollment Fee.

19. Under some MRP Cards, a Member had the option to pay an [NAME] fee (the “Points Accelerator Fee”) to be entitled to be credited with a higher ratio of Points per dollar charged to a Card. 20. [NAME] charged Members GST/HST on the Points Accelerator Fees. Claiming Rewards 21. A Member was entitled to exchange or redeem his or her accrued Points for various rewards (the “Rewards”) such as airline tickets, airline frequent flyer points, hotel chain loyalty points, travel certificates, meals at restaurants, gift cards and tangible items such as watches, golf clubs, luggage and headphones.

22. A Member was required to redeem a specific number of Points to claim any [NAME]. 23. [NAME] determined the number of Points required for each Reward.

24. It was [NAME] that determined limitations on MRP Point redemptions for a Reward.

25. Subject to certain conditions, if a Member did not have enough Points to claim a [NAME], the Member could purchase from [NAME] for a fee (the “Points Fee”) the additional Points required. 26. [NAME] charged Members GST/HST on the Points Fee. The Participation Agreements 27. To ensure that there were Rewards available for its Members, [NAME] entered into agreements (“Participation Agreements”) with suppliers (the “[NAME]”) of various Rewards.

28. Under each Participation Agreement, [NAME] agreed to pay the Participant a negotiated amount of money for providing the Rewards.

29. The Rewards purchased by [NAME] from the various [NAME] are offered and provided to the [NAME], in exchange for Points.

30. The Members did not pay [NAME] or the [NAME] for obtaining the Rewards (other than by redeeming Points and/or purchasing additional Points).

31. The [NAME] charged [NAME] and [NAME] paid the [NAME]/HST where applicable (the “Participant GST”), in respect of the [NAME]’ supplies of goods and services that are being used as Rewards. The [NAME] 32. [NAME] and [NAME] also entered into Participation Agreements that were in place throughout the Relevant Periods (the “[NAME]”).

33. Under the [NAME], a Member could exchange a specific number of Points for a certificate (a “Travel Certificate”) from [NAME] that would have a fixed face value (e.g., $100, $500, etc.).

34. A Member who acquired a Travel Certificate from [NAME] could redeem it with [NAME] or an [NAME] franchised travel agency (collectively, “[NAME]”) up to the fixed face value to pay for all or part of travel products or services (with the Member paying [NAME] for any remaining costs).

35. If a Member used a Travel Certificate as aforesaid, [NAME] would invoice [NAME] for the Travel Certificate, which [NAME] would pay to [NAME] (the “Travel Certificate Payments”).

36. It was [NAME] that determined the denominations for Travel Certificates that may be issued. [NAME]’s Card Operations 37. A [NAME] could present a Card to a store as payment instead of cash. [NAME] would pay the Canadian store the amount charged on the Card (less a discount or [NAME] fee). [NAME] would then send the [NAME] a monthly statement with the total of all payments charged by that [NAME] to that Card that month (the “Card Operations”).

38. Most of [NAME]’s domestic supplies made in the course of its Card Operations during the Relevant Periods were “exempt supplies” for ETA purposes such that no GST/HST was charged by [NAME] on Card Fees, discount fees and delinquency charges or interest on late paid account balances. [NAME]’s MRP Operations 39. In the course of operating the MRP, [NAME] paid system maintenance and other overhead costs (the “Overhead”) used in connection with the MRP. 40. [NAME] self-assessed, under Division IV of the ETA , GST/HST on the Overhead (the “Overhead GST”). [NAME]’s Revenue and Expenses 41. At all relevant times, [NAME] earned substantial revenue from credit card and charge card operations.

42. In 2009 and 2010, the revenue received from the credit/charge cards was more than 96% of [NAME]’s total revenue, whereas the revenue from the MRP fees accounted for under 0.75% of [NAME]’s total revenue.

43. At all relevant times, interest income, transaction charges, and discount revenue earned from the credit/charge card operations were [NAME]’s largest revenue sources.

44. The more a [NAME] spent using an [NAME], the more discount revenue [NAME] earned.

45. At all relevant times, MRP Points redemption cost was an expense of [NAME] on its income statement.

46. At all relevant times, reserves for the estimated cost of anticipated MRP Points redemption were recorded as a liability on [NAME]’s balance sheet. Calculation of Net Tax 47. For the Relevant Periods, [NAME] filed its GST/HST returns.

48. In calculating its net tax for each Relevant Period, [NAME] claimed ITCs on the Participant GST and the Overhead GST, and claimed ITCs under subsection 181(5) in respect of GST/HST (the “Notional GST”) that [NAME] was deemed to have paid in respect of the Travel Certificate Payments.

49. With respect to the Participant GST, [NAME] claimed ITCs as follows: (i) in its GST/HST returns for its 2002 through 2012 reporting periods, a portion of the Participant GST based on the percentage of the [NAME] to the total of all MRP Cards issued (the “[NAME]”); and (ii) in its GST/HST returns for its 2005 and 2008 reporting periods, [NAME] also claimed the balance of the Participant GST paid and not claimed in those years and in the immediately two preceding years it applied the [NAME]. The Assessments 50. By Notices of Assessment dated: (i) May 1, 2006 with Reference Number 05CP0119127 for the reporting period ending December 31, 2002; (ii) December 20, 2007 with Reference Number 04063000170100001 for the reporting period ending December 31, 2003; (iii) June 2, 2008 with Reference Number 05090000970100031 for the reporting period ending December 31, 2004; (iv) April 16, 2012 with Reference Number 06116011312370001 for the reporting period ending December 31, 2005; (v) April 16, 2012 with Reference Number 07113000172360903 for the reporting period ending December 31, 2006; (vi) March 19, 2012 with Reference Number 08091000172360196 for the reporting period ending December 31, 2007; (vii) March 10, 2014 with Reference Number 13008001212370001 for the reporting period ending December 31, 2008; (viii) March 20, 2014 with Reference Number 14024004212370001 for the reporting period ending December 31, 2009; (ix) September 3, 2015 with Reference Number 13184005712370001 for the reporting period ending December 31, 2010; (x) June 6, 2016 with Reference Number 13150000112370001 for the reporting period ending December 31, 2011; and (xi) August 29, 2017 with Reference Number 13196004612370001 for the reporting period ending December 31, 2012, (collectively, the “Assessments”), the [Minister] assessed [NAME] in respect of the Relevant Periods by, inter alia , denying ITCs claimed in each Relevant Period in respect of the Participant GST, the Overhead GST and the Notional GST less $2,643,833.19 of GST/HST collected by [NAME] on Enrollment Fees, Points Accelerator Fees and Points Fees in the amounts set out below: Period ITCs Disallowed January 1–December 31, 2002 $1,533,218.06 January 1–December 31, 2003 $1,102,733.30 January 1–December 31, 2004 $1,249,498.95 January 1–December 31, 2005 $4,759,312.45 January 1–December 31, 2006 $463,515.30 January 1–December 31, 2007 $398,217.85 January 1–December 31, 2008 $2,904,774.56 January 1–December 31, 2009 $234,593.00 January 1–December 31, 2010 $496,527.00 January 1–December 31, 2011 $418,945.93 January 1–December 31, 2012 $412,533.35 Total: $13,973,869.75 51. In making the Assessments, the Minister denied the above noted ITCs and, as a result of such denials and other adjustments that are not being appealed, assessed [NAME] additional net tax plus penalties and interest. 52. [NAME] filed Notices of Objection to the Assessments.

53. The Minister confirmed each of the Assessments with respect to the denial of ITCs related to the MRP through Notices of Confirmation dated December 10, 2018 and December 17, 2018 (the “Confirmations”).

54. Throughout the Relevant Periods, [NAME] and [NAME] were parties to an election under section 150 of the ETA and did not revoke such election throughout the Relevant Periods. [ 6 ] In these reasons, defined terms have the meanings assigned to them in the PASF. In addition, the term “MRP Expenses” encompasses Overhead expenses, Travel Certificate Payments, and [NAME]’s cost of acquiring Rewards. The term “MRP Terms and Conditions” means the agreement with [NAME] relating to the MRP.

III. Applicable law A. Introduction [ 7 ] The ETA generally permits suppliers of goods and services to claim deductions from tax, ITCs, with respect to their inputs, that is, property or services acquired for consumption, use or supply in the course of the [NAME]’s commercial activities. As described by the Tax Court, commercial activities do not include the provision of exempt supplies. Further, financial services are generally exempt supplies.

Accordingly, ITCs typically cannot be claimed with respect to GST/HST paid on inputs to provide financial services. [ 8 ] This section outlines the main statutory provisions relied on by [NAME]—subsections 169(1), 181(5) and 141.01(4) of the ETA. The section also briefly describes the leading jurisprudence regarding single composite supplies. I begin with the jurisprudence as it provides the foundation for the statutory analysis. B. Jurisprudence regarding single composite supplies [ 9 ] In the infancy of the GST, the Tax Court of Canada in O.A. Brown Ltd. v. The Queen , [1995] G.S.T.C. 40 [ [NAME] ] adopted principles developed in England to provide a commonsense approach to applying the ETA where an arrangement involves the provision of several properties or services. These principles were more recently adopted by the Supreme Court of Canada in Calgary (City) v. Canada , 2012 SCC 20 [ City of Calgary ]. The relevant excerpt from City of Calgary is set out below: [35] [NAME] established the following test to determine whether a [NAME] set of facts revealed single or multiple supplies for the purposes of the ETA: The test to be distilled from the English authorities is whether, in substance and reality, the alleged separate supply is an integral part, integrant or component of the overall supply. One must examine the true nature of the transaction to determine the tax consequences. [36] When reaching his decision, Justice Rip made the following observation: . . . one should look at the degree to which the services alleged to constitute a single supply are interconnected, the extent of their interdependence and intertwining, whether each is an integral part or component of a composite whole. [37] Justice Rip also noted the importance of common sense when the determination is made. [NAME]. made a similar observation in [COMPANY]. v. R. , 2007 [NAME] 223, [2007] G.S.T.C. 56, at para. 18: From a review of the case law, the question of whether two elements constitute a single supply or two or multiple supplies requires an analysis of the true nature of the transactions and it is a question of fact determined with a generous application of common sense. [ 10 ] Accordingly, the provision of multiple interconnected properties or services is generally considered to be a single supply for GST purposes. This is sometimes referred to as a single composite supply. [ 11 ] [ADDRESS] subsequently addressed how a single composite supply that includes a financial service may be characterized as an exempt or taxable supply for GST purposes: [COMPANY]. v. Canada , 2013 FCA 269 [ Global Cash Access ]. In that decision, the Court concluded that the nature of the composite supply may be determined for purposes of the ETA by the supply’s predominant element. In determining the predominant element, one must identify all the elements of the single composite supply and then identify the element that is predominant ( Global Cash Access at para. 26). [ 12 ] In connection with determining the essence or nature of the supply, the Tax Court noted that the parties agree that one must take into account the perspective of the [NAME] of the supply (reasons at para. 66). This principle was enunciated by this Court in [COMPANY] of [NAME] v. Canada , 2021 FCA 96 at para. 33 [ CIBC ]. [ 13 ] For completeness, I note that the Tax Court made the very same comment for purposes of determining whether there is a single composite supply or multiple supplies in accordance with [NAME] (reasons at para. 37). However, this was not addressed in CIBC where there was no dispute the supply was a single composite supply. [ 14 ] This is a useful reminder that the inquiries in City of Calgary and Global Cash Access are quite different. As illustrated above, the Tax Court’s reasons appeared to blur the distinction at times, but that does not affect the outcome of this appeal. In order to limit further confusion, in these reasons I adopt the following defined terms—the “ [NAME] test” and the “Characterization test” . C. Statutory provisions [ 15 ] As mentioned, [NAME] mainly relied on three provisions in the ETA: ss. 169(1), 181(5) and 141.01(4). [ 16 ] Subsection 169(1) provides the general method for calculating ITCs. It reads in relevant part, with emphasis added: Input Tax Credits Crédit de taxe sur les intrants General rule for credits Règle générale 169 (1) Subject to this Part, where a person acquires or imports property or a service or brings it into a participating province and, during a reporting period of the person during which the person is a [NAME], tax in respect of the supply, importation or bringing in becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period: A × B 169 (1) Sous réserve des autres dispositions de la présente partie, un crédit de taxe sur les intrants d’une [NAME], pour sa période de déclaration au cours de laquelle [NAME] est un [NAME], relativement à un bien ou à un service qu’[NAME] acquiert, importe ou transfère dans une province participante, correspond au résultat du calcul suivant si, au cours de cette période, la taxe relative à la fourniture, à l’importation ou au transfert devient payable par [NAME] ou est payée par [NAME] sans qu’[NAME] soit devenue payable : A × B where où : A is the tax in respect of the supply, importation or bringing in, as the case may be, that becomes payable by the person during the reporting period or that is paid by the person during the period without having become payable; and A représente la taxe relative à la fourniture, à l’importation ou au transfert, selon le cas, qui, au cours de la période de déclaration, devient payable par [NAME] ou est payée par [NAME] sans qu’[NAME] soit devenue payable; B is B : … … (c) in any other case, the extent (expressed as a percentage) to which the person acquired or imported the property or service or brought it into the participating province, as the case may be, for consumption, use or supply in the course of commercial activities of the person. c) dans les autres cas, le pourcentage qui représente la mesure dans laquelle [NAME] a acquis ou importé le bien ou le service, ou l’a transféré dans la province, selon le cas, pour consommation, utilisation ou fourniture dans le cadre de ses activités commerciales. [ 17 ] Accordingly, in order to qualify for ITCs under subsection 169(1), the inputs must be “for consumption, use or supply in the course of commercial activities.” [ 18 ] “Commercial activity” generally includes a business, broadly defined, except to the extent that the business involves the making of exempt supplies, including financial services. The definition in subsection 123(1) of the ETA reads in relevant part: Interpretation Définitions et interprétation Definitions Définitions 123 (1) In section 121, this Part and Schedules V to X, 123 (1) Les définitions qui suivent s’appliquent à l’article 121, à la présente partie et aux annexes V à X. … […] commercial activity  of a person means activité commerciale  Constituent des activités commerciales exercées par une [NAME] : (a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a [COMPANY] or a [NAME], all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person, a) l’exploitation d’une entreprise (à l’exception d’une entreprise exploitée sans attente raisonnable de profit par un [NAME], une [NAME] ou une [NAME] dont l’ensemble des associés sont des [NAME]), sauf dans la mesure où l’entreprise comporte la réalisation par [NAME] de fournitures exonérées; … […] [ 19 ] Therefore, the GST/HST paid on inputs acquired in the course of providing financial services generally does not qualify for ITCs. [ 20 ] Subsection 181(5) of the ETA, commonly known as the “notional ITC rule” , is another ITC provision relied on by [NAME]. It provides for the calculation of ITCs relating to a redemption of a coupon. The definition of “coupon” in subsection 181(1) of the ETA would include the Travel Certificates. Subsection 181(5) reads, with emphasis added: Coupons and Rebates Bons et remises Redemption of coupon Rachat 181 (5) For the purposes of this Part, where, in full or partial consideration for a taxable supply of property or a service, a [NAME] who is a [NAME] accepts a coupon that may be exchanged for the property or service or that entitles the [NAME] of the supply to a reduction of, or a discount on, the price of the property or service and a [NAME] at any time pays, in the course of a commercial activity of the [NAME], an amount to the [NAME] for the redemption of the coupon, the following rules apply: 181 (5) Pour l’application de la présente partie, lorsqu’un [NAME] qui est un [NAME] accepte, en contrepartie, même partielle, de la fourniture taxable d’un bien ou d’un service, un bon qui est échangeable contre le bien ou le service ou qui permet à l’[NAME] de bénéficier d’une réduction ou d’un rabais sur le prix du bien ou du service, et qu’une [NAME] verse dans le cadre de ses activités commerciales un montant au [NAME] pour racheter le bon, les règles suivantes s’appliquent : (a) the amount shall be deemed not to be consideration for a supply; a) le montant est réputé ne pas être la contrepartie d’une fourniture; (b) the payment and receipt of the amount shall be deemed not to be a financial service; and b) le versement et la réception du montant sont réputés ne pas être des services financiers; (c) if the supply is not a zero-rated supply and the coupon entitled the [NAME] to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon (in this paragraph referred to as the “coupon value”), the [NAME], if a [NAME] (other than a [NAME] who is a prescribed [NAME] for the purposes of subsection 188(5)) at that time, may claim an input tax credit for the reporting period of the [NAME] that includes that time equal to the tax fraction of the coupon value, unless all or part of that coupon value is an amount of an adjustment, refund or credit to which subsection 232(3) applies. c) lorsque la fourniture n’est pas une fourniture détaxée et que le bon permet à l’[NAME] de bénéficier d’une réduction sur le prix du bien ou du service égale au montant fixe indiqué sur le bon (appelé « valeur du bon » au présent alinéa), l’[NAME], si [NAME] est un [NAME] (sauf un [NAME] visé par règlement pour l’application du paragraphe 188(5)) au moment du versement, peut demander, pour sa période de déclaration qui comprend ce moment, un crédit de taxe sur les intrants égal à la fraction de taxe de la valeur du bon, sauf si tout ou partie de cette valeur représente le montant d’un redressement, d’un remboursement ou d’un crédit auquel s’applique le paragraphe 232(3). [ 21 ] Subsection 141.01(4) of the ETA, often referred to as the free supply rule, is also relied on by [NAME]. The provision generally operates to recharacterize a taxable supply that is a free supply to take into account the purpose of another supply. It provides: Free supplies Fournitures gratuites 141.01 (4) Where 141.01 (4) Lorsqu’un [NAME] effectue, dans le cadre de son initiative, la fourniture taxable (appelée « fourniture gratuite » au présent paragraphe) d’un bien ou d’un service sans contrepartie ou pour une contrepartie symbolique et qu’il est raisonnable de considérer que la fourniture gratuite a pour objet notamment de faciliter, de favoriser ou de promouvoir soit une initiative, soit l’acquisition, la consommation ou l’utilisation d’autres biens ou services par une [NAME], les présomptions suivantes s’appliquent : (a) a [NAME] makes a taxable supply (in this subsection referred to as a “free supply”) of property or a service for no consideration or nominal consideration in the course of a [NAME] endeavour of the [NAME], and a) pour l’application du paragraphe (2), le [NAME] est réputé, dans la mesure où il a acquis ou importé un bien ou un service, ou l’a transféré dans une province participante, afin d’en effectuer la fourniture gratuite ou afin de le consommer ou de l’utiliser dans le cadre de pareille fourniture, avoir acquis ou importé ce bien ou ce service, ou l’avoir transféré dans la province, selon le cas, à la fois : BLANK (i) afin de l’utiliser dans le cadre de son initiative, BLANK (ii) aux fins auxquelles la fourniture gratuite est effectuée et non pas afin d’effectuer cette fourniture; (b) it can reasonably be regarded that among the purposes (in this subsection referred to as the “specified purposes”) for which the free supply is made is the purpose of facilitating, furthering or promoting b) pour l’application du paragraphe (3), le [NAME] est réputé, dans la mesure où il a consommé ou utilisé un bien ou un service afin d’effectuer la fourniture gratuite, avoir consommé ou utilisé ce bien ou ce service aux fins auxquelles la fourniture gratuite est effectuée et non pas afin d’effectuer cette fourniture. (i) the acquisition, consumption or use of other property or services by any other person, or VIDE (ii) an endeavour of any person, VIDE the following rules apply: VIDE (c) to the extent that the [NAME] acquired or imported a [NAME] property or service or brought it into a participating province for the purpose of making the free supply of that property or service or for consumption or use in the course of making the free supply, the [NAME] shall be deemed, for the purposes of subsection (2), to have acquired or imported the [NAME] property or service or brought it into the province, as the case may be, VIDE (i) for use in the course of the [NAME] endeavour, and VIDE (ii) for the specified purposes and not for the purpose of making the free supply, and VIDE (d) to the extent that the [NAME] consumed or used a [NAME] property or service for the purpose of making the free supply, the [NAME] shall be deemed, for the purposes of subsection (3), to have consumed or used the [NAME] property or service for the specified purposes and not for the purpose of making the free supply. VIDE IV. Tax Court of Canada [ 22 ] The main findings of the Tax Court relevant to this appeal are summarized below. A. Overview [ 23 ] In its overview, the Tax Court stated that the key issue was whether ITCs may be claimed with respect to the MRP Expenses. The Tax Court then cited the general tests under subsections 169(1) and 181(5): Are the MRP Expenses incurred in the course of a commercial activity? [ 24 ] [ADDRESS] then addressed [NAME]’s main argument—the MRP Expenses qualify for ITCs because the supplies to Members under the MRP were taxable supplies, separate and distinct from [NAME]’s exempt supplies. The Tax Court disagreed. It determined that supplies to Members under the MRP were not separate and distinct from [NAME]’s credit card operations. Instead, they were all components of a single composite supply by [NAME] to Members. The Tax Court then characterized that supply as an exempt supply of a financial service. [ 25 ] The Tax Court also found that [NAME] did not make supplies of marketing services to persons who sold reward products to [NAME], and further, that [NAME]’s supplies to [NAME] are exempt supplies. [ 26 ] At the outset, the Tax Court judge described the framework to be followed in determining the nature of the supplies to Members (reasons at paras. 30-31). First, he was required to determine whether the MRP Expenses were incurred in the course of a single composite supply made to Members. If they were, second, he was required to determine the nature of the supply having regard to its predominant element. B. [NAME] test [ 27 ] In applying the [NAME] test, the judge made the following findings: (a) When the credit card is accepted by a [NAME] extends credit to the [NAME]. This is a supply of a financial service (reasons at para. 45). (b) After considering the links between the MRP and the status as a [NAME], the judge concluded that it was hard “to imagine a supply where the different elements and components of a supply are more closely intertwined and linked” (para. 47). (c) There is a link between the discount revenue that [NAME] received from [NAME] and a [NAME]’s use of a credit card (para. 44). (d) [NAME] incurred the MRP Expenses to increase the volume of credit card transactions (para. 50). (e) Becoming a Member does not have commercial efficacy on its own (para. 53). (f) As for transactions between [NAME] and [NAME], the Court characterized these as a supply of financial services by [NAME] to [NAME] (para. 44). [ 28 ] The Tax Court summarized these findings by stating that the elements of the MRP are “intertwined and connected with the exempt supply of financial services made by [[NAME]] to its Members and [NAME]” (reasons at para. 59). The suggestion in this paragraph that the services provided to Members and [NAME] constitute one supply is clearly a slip. When the reasons are read as a whole, including paragraphs 57 and 70, the Tax Court concluded that [NAME] provided two exempt supplies—an exempt supply to Members and an exempt supply to [NAME]. [ 29 ] Finally, the Tax Court judge made the following finding: “With this backdrop in mind, I conclude that all of the elements or components of the MRP are integrated and intertwined components of a composite supply of exempt financial services made by [NAME] to [NAME]” (reasons at para. 60). C. Characterization test [ 30 ] In determining the nature of the single composite supply made by [NAME] to Members, the Tax Court adopted the Characterization test (reasons at paras. 61-65). In addition, as mentioned earlier, the Tax Court added that, “in determining the essence or nature of the supply, the parties agree that the law requires one to take into account the perspective of the [NAME] of the supply” (reasons at para. 66). [ 31 ] The Tax Court judge concluded that “all of the facts considered above and relied on by me to determine that all of the elements and components of the MRP are elements of a composite supply also establish that the predominant element of that supply is the extension of credit by [NAME] to a Member” (reasons at para. 68, see also para. 76). He explained that the evidence revealed that the accumulated Points are an additional benefit to the credit card. Further, he determined that the “commercial efficacy of the supply, from the [NAME]’s perspective, is credit … that allows the [NAME] to procure goods and services without using cash savings or borrowing funds from a different source” (reasons at para. 69). [ 32 ] [ADDRESS] then turned to discuss other possible supplies made by [NAME] that could affect ITCs under subsection 169(1). [ 33 ] During oral argument in the Tax Court, the Court asked counsel for the Crown whether it was relevant that he consider supplies to [NAME]. Counsel indicated that it would be relevant in the context of considering [NAME]’s commercial activity. [ADDRESS] adopted this approach and determined that [NAME] provided a financial service to [NAME] by making arrangements to pay for the goods and services Members acquired using their credit cards (reasons at paras. 70 and 45, including footnote 26). [ 34 ] In addition, the Court addressed [NAME]’s argument that one of the elements of the supply to [NAME] that are [NAME] (suppliers of Rewards) was the marketing and promotion of the [NAME]’ products and services (reasons at paras. 9-19, 72). The Tax Court came back to this issue later in the reasons and concluded that [NAME] did not provide any such services to [NAME] (reasons at para. 89). [ 35 ] Based on these findings, the Court concluded that subsection 169(1) does not apply because the MRP Expenses were not made or incurred in the course of a commercial activity (reasons at para. 74). [ 36 ] Turning to the notional ITC rule (subsection 181(5)) which provides for a separate calculation of ITCs where coupons have been redeemed, [NAME] submitted that this calculation applied to the redemption of Travel Certificates. The Tax Court determined that this rule does not apply because the redemption expense is incurred “in respect of a liability that arose because of the supply of an exempt financial service” (reasons at para. 75). [ 37 ] Finally, with respect to the free supply rule in subsection 141.01(4), the Tax Court’s analysis is at paragraphs 80-91 of the reasons. I will not repeat the analysis here. The Tax Court concluded that this provision does not support [NAME]’s position. [ 38 ] Accordingly, [NAME]’s appeal to the Tax Court was dismissed.

V. Standard of review [ 39 ] The Tax Court judgment is subject to appellate standards of review as set out in [NAME] v. [NAME] , 2002 SCC 33. Determinations of fact and mixed fact and law are entitled to a high degree of deference and attract the palpable and overriding error standard of review. Determinations of law (including extricable legal questions) are subject to correctness review.

VI. Analysis [ 40 ] The issue in this appeal is whether the Tax Court erred in disallowing [NAME]’s claim for ITCs with respect to the MRP Expenses. [NAME] submits that the judge made legal and factual errors in disallowing the claim. [ 41 ] The analysis below is organized under the statutory provisions that [NAME] relies on, subsections 169(1), 181(5) and 141.01(4) of the ETA. A. Subsection 169(1) (1) Introduction [ 42 ] As mentioned, the general ITC rule in subsection 169(1) requires that the relevant inputs not be used to make exempt supplies. [NAME]’s position is that the MRP Expenses satisfy this requirement because the MRP provides only taxable supplies to Members, separate and distinct from [NAME]’s exempt supplies of credit cards. (2) Did the Tax Court make errors of law? (a) Characterization test [ 43 ] In this Court, [NAME] forcefully argues that the Tax Court did not properly apply the Characterization test. It relies on Global Cash Access at paragraph 26 and CIBC at paragraph 33, referred to above. [ 44 ] In my view, no such error was made. The Tax Court judge properly applied the relevant principles at paragraphs 66-69 of the reasons. He identified the elements of the composite supply by [NAME] to Members which he supported by a detailed review of the relevant agreements (reasons at paras. 38-43, 45-47). The judge then determined that the predominant element was the extension of credit to [NAME] in accordance with Global Cash Access at paragraph 26. The predominant element was determined from the perspective of the Members in accordance with CIBC at paragraph. 33. [ 45 ] [NAME] submits that the Tax Court should have applied the Characterization test separately to the MRP Terms and Conditions. This submission fails to appreciate that the Characterization test only applies once it has been determined that there is a single composite supply. It does not apply to one agreement if that agreement is simply a component of a larger composite supply. The judge adopted the proper approach by first examining what was supplied by [NAME] to Members under the key agreements in the single composite supply (reasons at para. 67). [ 46 ] [NAME] suggests that the judge’s analysis merely pays lip service to the proper test and actually focussed on [NAME]’s agreements with [NAME]. This suggestion has no merit. [NAME] submits that its position is supported by paragraph 71 of the reasons where the Tax Court judge asks: “Why do [NAME] compensate [NAME] by paying a [NAME] discount?” [NAME]’s submission misinterprets paragraph 71 because it has nothing to do with supplies to Members. Paragraphs 70-74 of the reasons discuss whether [NAME] made supplies to other persons that could affect the ITC calculation at issue. The question about [NAME] was asked in the context of whether [NAME] made supplies to [NAME]. As mentioned earlier, the focus on supplies to [NAME] was relevant to the Court’s overall conclusion that the MRP Expenses were not made or incurred in the course of a commercial activity. [ 47 ] In addition to focussing on the Characterization test, [NAME] appears to suggest that the Tax Court erred in applying the [NAME] test by not following the principle from paragraph 33 of CIBC that one must consider the perspective of the [NAME]. To illustrate, [NAME] refers to paragraphs 44-46 of the reasons which focus on [NAME]. However, as mentioned earlier, there was no dispute in CIBC that the supply was a single composite supply. The [NAME] test was not at issue. (b) Relevance of accounting treatment [ 48 ] [NAME] submits that the judge made a legal error by considering how the MRP Expenses are reflected in [NAME]’s financial statements. The Tax Court found these statements reflected a connection between [NAME] discounts paid to [NAME] and the MRP Expenses because the financial statements deferred the discount revenue and matched it with MRP Expenses as Points were redeemed. [ 49 ] [NAME] argues that financial statements cannot alter, let alone be the basis for, making a determination under the [NAME] test. Nor can they alter the determination under the Characterization test. [ 50 ] The Tax Court judge agreed that the law governs (reasons at para. 58). Indeed, the judge’s reasons demonstrate that he properly applied the law. The financial statements were not the basis for the determination but merely considered relevant and consistent with the judge’s view of the evidence. The evidence revealed that the MRP is designed to increase use of the credit card, and use of the card increases [NAME]’s [NAME] discount revenue (reasons at para. 50). [ 51 ] In my view, the judge did not make a legal error in considering the financial statements. (c) Reference to a “[NAME] agreement” [ 52 ] [NAME] submits that the Tax Court judge made “a glaring error of law” by referring to an agreement that was not before him. At paragraphs 44 and 46 of the reasons, the judge erred by using the term “MRP Terms and Conditions of the [NAME] agreement.” [ 53 ] [NAME] is correct that there is no such agreement in evidence. It appears that the Tax Court used the term for [NAME]’s agreement with Members regarding the MRP when referring to the separate [NAME] agreement. [ 54 ] The Tax Court’s error in misnaming the [NAME] agreement is not significant. The fact that there was a contract with [NAME] is not controversial. (3) Did the Tax Court make errors of fact? [ 55 ] [NAME] submits that the Tax Court made errors of fact, or mixed fact and law, in its application of subsection 169(1). Such errors are subject to the palpable and overriding error standard of review. (a) [NAME] test [ 56 ] [NAME] submits that the Tax Court did not properly apply the [NAME] test—[NAME]’s arrangement with [NAME] was irrelevant to the analysis, and the Tax Court failed to consider that the card services were a standalone, valuable supply and the MRP was not a condition to receive the card services. [ 57 ] In my view, the Tax Court did not err by considering [NAME]. The judge summarizes his findings at paragraph 59 of the reasons. He concludes that the elements of the MRP were “inherently intertwined and connected” with the credit card services provided to Members and also with services provided by [NAME] to [NAME]. The tie with [NAME] is described in clause (iv) of that paragraph: iv. [NAME]’s Points Reward liability rises and falls in tandem with the amount of credit that it extends to [NAME]. Similarly, the amount of [NAME] discount revenue earned by [NAME] rises and falls in tandem with [NAME]’ spending. [ 58 ] In this case, the judge made no error in referring to [NAME] and [NAME] discounts in considering the [NAME] test. Having an understanding of the [NAME]’ role in the arrangement between [NAME] and [NAME] explains the tie between the MRP and the credit cards. [ 59 ] With respect to the argument that the Tax Court failed to properly consider that the credit card operation was a useful supply on its own, the Tax Court understood that to be [NAME]’s position but was more persuaded by the fact that a person can only become a Member if the person holds an [NAME] credit card (reasons at para. 40). The Tax Court pointed to several other features of the MRP that tie it to the holding and use of an [NAME] credit card (reasons at paras. 41-43, 50-52). [NAME]’s argument essentially asks this Court to reweigh the evidence and substitute our own view for that of the Tax Court. [ADDRESS] can only interfere if there is a palpable and overriding error ( [COMPANY]. v. Canada , 2024 FCA 1 at para. 22). There is no such error. [ 60 ] In summary, the Tax Court judge did not make a palpable and overriding error in the application of the [NAME] test. (b) Did Tax Court err in finding that consideration under the MRP was nominal? [ 61 ] [NAME] submits that the Tax Court made a palpable and overriding error in labelling the consideration under the MRP Terms and Conditions, especially the $50 enrollment fee to join the MRP, as nominal (reasons at para. 53). [NAME] submits that since the payments are not nominal, [NAME]’s supplies under the MRP are separate supplies which should be characterized as taxable supplies. [ 62 ] This argument has no merit. While a $50 fee may be more than a pittance, the Tax Court did not err in determining that the fee is very low in comparison to the value of the MRP and thus insufficient to support a conclusion the Members received anything other than a single composite supply of exempt financial services. B. Subsection 181(5) (notional ITCs) (1) General [ 63 ] As noted above, subsection 181(5) of the ETA, commonly known as the “notional ITC rule” , is an exception to the general calculation of ITCs in subsection 169(1). [NAME] submits that subsection 181(5) permits it to claim notional ITCs in respect of Travel Certificate Payments, which are included as MRP Expenses and are described in paragraphs 34-35 of the PASF:

35. If a Member used a Travel Certificate as aforesaid, [NAME] would invoice [NAME] for the Travel Certificate, which [NAME] would pay to [NAME] (the “Travel Certificate Payments”). [ 64 ] For clarity, as explained in the Tax Court’s reasons at paragraph 24, [NAME] only claimed notional ITCs with respect to Travel Certificates redeemed by [NAME] franchisees. No claim was made for redemptions by [NAME] itself. Nothing in the appeal turns on this. [ 65 ] The Tax Court denied the notional ITCs because [NAME] failed to satisfy one of the conditions of the provision—that the Travel Certificate Payments be made “in the course of a commercial activity [of [NAME]]” (reasons at paras. 75). As with all MRP Expenses, the Court concluded that the Travel Certificate Payments were made in the course of making a single composite supply of exempt financial services. [ 66 ] In this Court, [NAME] submits that Travel Certificate Payments are linked to taxable supplies. The Tax Court determined otherwise and there is no basis to conclude that the Tax Court erred. (2) Can notional ITCs be claimed pursuant to [COMPANY] ? [ 67 ] In considering notional ITCs, the Tax Court judge cited his previous decision in [COMPANY] v. [NAME] , 2022 [NAME] 84 (reasons at para. 75). That decision also concerned notional ITCs in the context of redemption payments under a loyalty program. The judge concluded that his analysis in that prior decision was also applicable to the Travel Certificate Payments made by [NAME]. [ 68 ] That Tax Court decision was reversed by this Court approximately two weeks before the hearing of this appeal: [COMPANY] v. [NAME] , 2024 FCA 135 [ PC [COMPANY] ]. The decision of the majority in PC [COMPANY] determined that the redemption payments in that case were made in the course of a commercial activity conducted by [COMPANY] and thus qualified for ITCs. The commercial activity was described as another business conducted by [COMPANY] which consisted of participation in “a program that aims to drive retail traffic to [NAME]” ( PC [COMPANY] at para. 56). [NAME], the grocer, is related to [COMPANY]. The supplies [COMPANY] made in that other business were determined to be taxable supplies which qualified for notional ITCs. [ 69 ] [NAME] took the view that PC [COMPANY] was applicable in this case, and accordingly the appeal should be allowed. As PC [COMPANY] had recently been released at the time of the hearing, the Court sought and received post-hearing written submissions from the parties. [ 70 ] [NAME] argues that PC [COMPANY] should be followed and is not distinguishable on its facts. It submits that the MRP drives traffic to [NAME], just as the loyalty program at issue in PC [COMPANY] drove traffic to [NAME]. [ 71 ] I agree with the Crown that PC [COMPANY] is distinguishable on its facts. While I need not address all the factual differences, the Tax Court judge found that the purpose of the MRP was to “drive spending on [NAME] by Members and promote loyalty” to [NAME] (reasons at para. 18). He expressly rejected [NAME]’s claim that “one of the purposes of the Rewards is to promote the activities of [NAME]” (reasons at para. 89). These conclusions were grounded in the evidence. [ 72 ] In this case, unlike the [COMPANY] in PC [COMPANY] , [NAME] did not incur the MRP Expenses to make any taxable supply. PC [COMPANY] does not assist [NAME] in this appeal. There is no need to consider other arguments made by the parties in their post-hearing submissions. [ 73 ] In summary, I conclude that the Tax Court made no error in rejecting [NAME]’s claim for notional ITCs. C. Paragraph 141.01(4) (free supplies) [ 74 ] Subsection 141.01(4) of the ETA, the free supply rule, may characterize a free supply by the nature of another supply to which the free supply is related. [NAME] submits that this provision characterizes its free supply of Rewards as taxable supplies because it can reasonably be regarded that one of the purposes of the free supplies is to provide a taxable supply, namely, the promotion of the business of the [NAME]. [ 75 ] The Tax Court disagreed that one of the purposes of the Rewards is to promote the activities of [NAME]. In this Court, [NAME] submits that a palpable and overriding error was made in reaching this conclusion. [NAME] relies on documentation provided to [NAME] and submits that the Tax Court improperly evaluated the testimony of one of [NAME]’s key witnesses. [ 76 ] In my view, [NAME] overreaches with these submissions. The Tax Court provided ample reasons for rejecting this evidence at paragraphs 9-19 of the reasons. No palpable and overriding error was made.

VII. Disposition [ 77 ] I conclude that the Tax Court did not err in concluding that [NAME]’s ITC claim should be denied.

I would dismiss the appeal, with costs. "[NAME]" J.A. “I agree. [NAME].” “I agree. [NAME].” FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKET: A-225-23 STYLE OF CAUSE: [COMPANY] v. HIS [NAME] OF HEARING: Toronto, Ontario DATE OF HEARING: September 5, 2024

REASONS FOR

JUDGMENT BY: [NAME] J.A. CONCURRED IN BY: [NAME] J.A. [NAME]. DATED: february 16, 2026 APPEARANCES : [NAME] For The Appellant [NAME] For The Respondent SOLICITORS OF RECORD : [COMPANY], Ontario For The Appellant [NAME] of Canada For The Respondent