Law Times

Page 16 September 3, 2018 • Law timeS www.lawtimesnews.com conditions in paragraphs (a) and (l) are satisfied." In addition, the supply agree- ment between the two parties provided for a large number of services that allowed the CIBC to issue Visa credit cards, the judge continued. "This included promotion of the Visa brand, indemnification in the event of acquirers default- ing, rule making and adjudica- tion of disputes such as in the case of chargebacks," Rossiter wrote, noting that the agree- ment appeared to be more com- prehensive than a previously liti- gated one involving Costco. "As a result, if paragraph (i) was found to be applicable for Costco, it should also be applica- ble in the present case," he added. However, Rossiter also found that Visa's supply met the ex- clusionary paragraph (t) in the definition, which, according to regulations under the act, pre- vents any administrative service from being characterized as a financial service, regardless of whether it meets other elements of the definition. "The value added service which Visa provides to CIBC is to relieve them of the need to keep track of and then indi- vidually pay merchants for the transactions paid for on credit by CIBC clients. Instead, Visa gives CIBC the ability to offer its clients the option of paying for goods and services on credit while only needing to make one lump sum payment to Visa at the end of every day to settle the transactions undertaken by these clients," Rossiter wrote. "At its most basic level then, the ben- efit that Visa offered CIBC was cost saving and logistical sim- plification. Both of which . . . are quintessentially administrative in nature." Finally, the CIBC sought to rely on a saving provision in the regulations that prevent services from falling under paragraph (t) if they are provided by a "person a risk." The bank argued that Visa's indemnification of participants in the payment network, as well as its exposure to settlement loss and foreign exchange risk, should be enough to engage the saving provision. But Rossiter was not con- vinced, finding that, in reality, Visa's services did not actually put the company at financial risk. Before 2007, when Visa Can- ada was a non-profit association owned by members, the judge found the risk it bore was "almost entirely non-existent," with the greater burden assumed by issu- ing financial institutions and its international parent company. Even after Visa went pub- lic in the same year following a global corporate restructuring, eliminating its ability to short- settle with members, Rossiter wrote that the global company valued its probability adjusted risk exposure at less than $1 million, despite being theoreti- cally on the hook for up to $42 billion in a worst-case scenario. A witness for Visa also admitted it had never had to pay a settle- ment loss. "It would appear that the purely hypothetical remote risks that Visa Canada is subject to are insufficient for them to be con- sidered a person at risk," Rossiter concluded. Armstrong says Rossiter's analysis revealed a practical ap- proach to the person-at-risk test. "Counsel identified risks [that] Visa was theoretically exposed to, but none had ever actually materialized," he says. "Reading between the lines, I'd say that if the risks are so remote that they won't materialize in your lifetime, then it's not suf- ficient to make the person in question one who is at risk." Al Meghji, a partner at Osler Hoskin & Harcourt LLP who acted for the CIBC, declined to comment. The appeal period is still running due to the deci- sion's release over the summer months, but Robert Kreklewetz, a partner at Toronto tax law bou- tique Millar Kreklewetz LLP, says he wouldn't be surprised to see the bank take "one last kick at the can." "There's millions at stake for them," he says. According to Kreklewetz, banks and other financial in- stitutions have an incentive to challenge borderline GST/HST charges because of their own tax status. Since most of the services they deliver are exempt as finan- cial ones, they are also unable to claim input tax credits to recover tax paid on operating expenses related to their commercial ac- tivities. "They're trying to find any safe harbour, because to the ex- tent that a supply is not taxable, it can save them up to 13 per cent or more," he says. In fact, he says, if the deci- sion had gone the other way, a CIBC victory would have indi- rectly triggered a fresh dispute between the federal government and Visa. If the court decided the credit card company was wrongly charging GST/HST because it was delivering a fi- nancial service, then Visa's own input tax credit claims would be called into question. "But whenever you go for that kind of windfall, it's always an uphill battle. Claiming a rebate is different to challenging a CRA assessment for tax you never thought was due in the first place," Kreklewetz says. Overall, he says, Rossiter's decision "makes a lot of sense," since he feels it was "a stretch" for the CIBC to claim that Visa was supplying a financial service. "The chief justice has done a great job matching up the situ- ation with precedent, and the result is a further development of the whole perplexing issue of how to characterize financial service," Kreklewetz says. LT TAX LAW • What is litigation funding and what types of cases are suitable? • How do companies typically use funding, and how does the process work? • Due diligence process • The "nuts and bolts" of a funding relationship and selecting an appropriate funder • Canadian case law, international trends and special issues for arbitration COURSE HIGHLIGHTS: COURSE LEADER: JENNIFER BROWN, MANAGING EDITOR CANADIAN LAWYER INHOUSE/LAW TIMES *Discount applies to in-class only REGISTER BEFORE OCTOBER 26 AND SAVE 25%* LITIGATION FUNDING: A TOOL FOR RISK MITIGATION AND REVENUE GENERATION Toronto & Webinar | November 20 Register online at www.lexpert.ca/legal-programs For questions and group rates, please contact: Toll-Free: 1-877-298-5868 • Direct: 416-609-5868 Fax: 416-609-5841 • • Email: cpd.centre@thomsonreuters.com Litigation funding is increasingly used by companies of all sizes to relieve budget pressure and manage litigation risk. Learn from leaders in the fi eld how this innovative and fl exible tool works in practice through a worked case study. Contributors to this interactive discussion will include experienced litigators, in-house counsel, fi nancial executives, and a litigation funder. Untitled-2 1 2018-08-28 8:45 AM Continued from page 15 'There's millions at stake for them' Neal Armstrong says a recent ruling offers much-needed guidance on the application of the financial service exemption, consid- ering the dearth of case law in the area.

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