Royal Bank of Canada, 2024 TCC 125: interchange fees from foreign merchants are zero-rated exports, but loyalty point redemptions stay exempt, and a pre-approved ITC method does not bind the Minister

2024 TCC 125 · Tax Court of Canada

Author: Sas Tullo

This is a GST appeal by a bank about input tax credits in its credit card business. When an RBC cardholder buys something from a merchant outside Canada, the bank earns an interchange fee from the foreign merchant’s bank. RBC said that service is an exported, zero-rated financial service, so it could recover GST on the costs of providing it, including the cost of redeeming loyalty points earned on those purchases. The Minister said the whole credit card business is exempt. Smith J. rejected RBC’s argument that a pre-approved allocation method tied the Minister’s hands, accepted that the foreign interchange service is zero-rated because a credit card extends credit rather than lends money, and refused credits for the reward point redemptions.

Facts

RBC appealed an assessment for its reporting period ending October 31, 2012, disallowing ITCs for GST paid on expenses incurred to earn interchange fees from non-resident merchants and to redeem reward points earned on those transactions (para 1). In a typical transaction the issuer pays the merchant acquirer the amount charged less an interchange fee, as consideration for the authorization and payment service, and bills the cardholder at the end of the cycle (para 12, ASF para 11). In fiscal 2012 RBC’s reward card interchange fees, about $1.046 billion, exceeded its net interest and card fee revenue combined (ASF para 17).

An authorization under subsection 141.02(20) of the Excise Tax Act was in effect, placing expenses that varied with transaction volume, including reward program expenses, in a pool whose recovery rate was foreign interchange revenue over total interchange revenue; RBC used the method consistently and the Minister never revoked it (ASF paras 19 to 25, 30, and 31). The Minister nonetheless denied the cards sector ITCs, principally because foreign interchange could never be zero-rated under paragraph 1(a) of Part IX of Schedule VI, and alternatively because the reward program expenses were incurred for exempt credit-granting supplies (ASF paras 32 to 35). The disputed ITCs were $1,777,684, of which $850,164.26 related to reward points (paras 4 and 5).

Issues

The Court identified three issues: whether the Minister was bound by the approved method; if not, whether the foreign interchange service was zero-rated rather than exempt; and whether expenses to redeem reward points earned on foreign transactions were part of an exempt or a zero-rated supply (paras 8 to 10).

Holding

The appeal was allowed and referred back for reassessment (judgment). The Minister was not bound by the method; the foreign interchange service was a zero-rated supply entitling RBC to the related ITCs; and RBC was not entitled to ITCs on the redemption of reward points earned on foreign transactions (para 117).

The court’s reasoning

A Crown objection that the method argument was not pleaded as subsection 301(1.2) requires failed, because the notice of objection described the pre-approved method at length and the Crown suffered no prejudice (paras 14 and 28 to 30).

On the method argument, the Court reviewed section 141.02: a qualifying institution applies for methods, the Minister authorizes or denies them, they must be used consistently, and the institution bears the burden of proving consistent use on appeal (paras 32 to 34). RBC relied on Bank of Montreal v. Canada (Attorney General), 2020 FC 1014, affirmed 2021 FCA 189, where the Federal Court said an audit of a return prepared under an approved method is limited to whether the method was used consistently and correctly (paras 37 and 38). Smith J. held that passage to be obiter, noted that the same decision later said the Minister need not adopt the institution’s characterization of its supplies, and found nothing in the statute precluding an assessment contrary to the method (paras 41 to 46). The authorization letter itself reserved the right to audit and reassess (para 47).

On zero-rating, the Court began from the purpose of section 1 of Part IX of Schedule VI as stated in CIBC World Markets Inc. v. Canada, 2011 FCA 270: to zero-rate exported financial services so that Canadian institutions remain competitive abroad (para 71). RBC is a financial institution supplying a financial service to non-resident merchant acquirers, so the supply was prima facie zero-rated (para 72). The only question was the carve-out in subparagraph 1(a)(ii) for a service that relates to a debt arising from “the lending of money that is primarily for use in Canada.” Relying on Sarvanis v. Canada, 2002 SCC 28, and National Bank Life Insurance Company v. The Queen, 2005 TCC 425, the judge held that the carve-out must be read in context and construed strictly (paras 75 and 76). He drew on Garland v. Consumers’ Gas Co., [1998] 3 SCR 112, Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 10, and Dahl v. Royal Bank of Canada, 2005 BCSC 126, for the distinction between granting credit and lending money: when a card is used, no money passes to the cardholder, a debt for goods is deferred, and interest arises only if the balance is unpaid after the grace period (paras 79 to 85). The definition of financial service lists the granting of credit separately from the lending of money, yet the carve-out mentions only the latter (paras 78 and 89). Because there was no loan, it was unnecessary to decide whether money was used in Canada, and the cardholder’s location did not matter because an international sale takes place at the seller’s residence (paras 86 and 89).

On reward points, the Court applied the definition of commercial activity, which excludes exempt supplies, and the requirement in ONEnergy Inc. v. Canada, 2018 FCA 54, of a sufficient nexus between the input and the commercial activity (paras 103 to 106). Points were earned under the cardholder agreement, could be forfeited if the account was past due, might be redeemed years later, and were redeemed in Canada; they were an integral component of the exempt agreement to extend credit (paras 107 to 109). Accounting treatment of points as deferred revenue was not determinative, under Canderel Ltd. v. Canada and Shell Canada Ltd. v. Canada (para 110). The free supply rule in subsection 141.01(4) failed because RBC had no separate endeavour of providing foreign interchange services, consistent with Amex Bank of Canada v. The King, 2023 TCC 93 (paras 114 and 115).

Practical implications

The decision is significant on three fronts. First, approval of an allocation method under section 141.02 settles the mechanics of apportionment but not the characterization of the underlying supplies; an approval letter is not an advance ruling on tax status. Second, the holding that a credit card transaction grants credit rather than lends money narrows the subparagraph 1(a)(ii) carve-out and supports zero-rating for interchange earned from foreign acquirers across the industry. Third, following Amex Bank, redemption costs belong to the exempt relationship with the cardholder even where the points were earned on a zero-rated transaction.

In my view one tension remains. The Court accepted that reward program expenses varied with transaction volume, the premise on which the Minister had placed them in the interchange pool, yet held that they lacked a sufficient nexus to the zero-rated interchange supply. The reasoning rests on the cardholder agreement rather than on economic causation, and that line will continue to be contested. The treatment of the Bank of Montreal passage as obiter is also notable, since institutions had read it as a limit on audits.

Section 141.02 and paragraph 1(a) of Part IX of Schedule VI were checked on the Justice Laws site (current to 2026-09-30); the text relied on is unchanged. Whether an appeal was taken is not verified here.

For card issuers the result is mixed: foreign interchange revenue should support ITC recovery, redemption costs should not, and a method approval is not immunity from reassessment. Readers should watch for any appeal and for how the CRA applies the granting-of-credit analysis to other products.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Royal Bank of Canada v. The King, 2024 TCC 125, judgment dated September 26, 2024, Smith J.; docket 2019-1362(GST)G; heard at Toronto on February 27 and March 2, 2023. The decision reappeared on the Tax Court’s feed on October 28, 2026, when a translation was posted. Reasons on the Tax Court’s site. Also on CanLII.