"Characterization", "Unbundling" and the Nature of "The Transaction"


On January 22, 2021, the Federal Court of Appeal delivered its decision in a GST/HST case concerning whether certain fees paid by the Canadian Imperial Bank of Commerce were for "financial" or "administrative" services (Canadian Imperial Bank of Commerce v. The Queen, 2021 FCA 10).

The former, "financial services" are exempt from the GST/HST, but the latter, "administrative services", are not.  In light of the terms and implications of the statutory significance of these two kinds of services at the heart of the case was an issue of much broader application in the tax world including its substrata dealing with "transfer pricing", namely:  What is the "transaction"?  This not merely a consumption tax or GST/HST question; it is a tax, including and income tax, question.  How the Court resolved the "characterization" issue here conceivably is instructive in tax analysis generally.

The Court, as had the parties themselves, acknowledged the "compound" nature of the supply, and with it the intrinsic indivisibility of streams of commercial interaction, aspects of which could be described as either a "financial service" or an "administrative service". But it was in the nature of the services provided by VISA to the CIBC that the Court was called on to determine the most apt characterization of the "bundle", in other words its primary or most prominent character even though its inherent economic features might have suggested that, too, those economic features should have been parsed for tax purposes or alternatively that the "administrative service" aspect would have trumped.

Indeed, the Court, in paragraph 32 of their reasons, put the essence of the "what is the transaction?" issue in this perspective:

[32] Before the Tax Court, the parties agreed, and the Tax Court judge accepted, that the supply provided by Visa was a single compound supply, comprising several distinct but indivisible components. Consistent with the guidance given by this Court, the Tax Court judge then sought (beginning at paragraph 56 of his reasons) to determine the predominant elements of that single supply, since only the predominant elements may be taken into account in applying the inclusions and exclusions in the definition of “financial service”: Global Cash Access (Canada) Inc. v. Canada, 2013 FCA 269 at paras. 25-26, 37-38; Great-West Life Assurance Company v. Canada, 2016 FCA 316 (“GWL FCA”) at paras. 43, 46-48.

The Court decided that the "predominant" feature of VISA's service to the CIBC was "financial".  In so doing, it construed the statutory terms in light of the relevant commercial context, in effecting evaluating the "why" underlying the CIBC's objective and resulting benefit in procuring those services as what the Court regarded as key elements of its business notably when seen through the lens of its interface with its customers and the relationship of its financial business with those customers' interests.

Followers of the OECD's work on the transfer pricing component of BEPS ("Base Erosion and Profit Shifting", including most recently proposals in Pillar 1 concerning transactional elements that would engage  what amounts to a "super" or an enhanced transfer pricing analysis of "customer facing businesses" and "automated digital services", and indeed of transfer pricing more generally, will know that a critical step in the analysis of the tax outcomes of commercial conduct is deciding what is "the transaction".  This is a determination made more difficult when there are intrinsic "intangibles" from with which overall transactional value may be said to originate.  In that context, tax authorities may seek to "unbundle" implied transfers occurring in a transactional solution, what the parties here with the Court referred to as a "compound" transaction.  The core of the CRA's practice in this regard may be found in TPM-06 even though as it says, it has not been recently updated. Essentially, what the TPM is getting at are "compound" transactions in the sense that there are identifiable separate transfers taking place contemporaneously which in context are and are meant to be seen as and could have been expressed as separate legal transfers even though "bundled" in how they are delivered and documented.  The Supreme Court of Canada, in an understated aspect of its important transfer pricing decision in the GlaxoSmithKline case, revealingly though perhaps subtly in paragraphs 55 to 60 of its reasons acknowledged that not all transfers to which the tax law applies necessarily may be written as such in typical bespoke contracts and may, indeed, be embedded in other transfers that are expressed in writing and in suitable circumstances no doubt as evidence would determine be assessed for tax purposes as separate transfers.  More recently, reflecting possibly more benign antecedents, the OECD's Transfer Pricing Guidelines include, in their BEPS - based 2017 amendments, guidance to first "accurately delineate" transactions, before taking the next steps of evaluating their "commercial rationality" and their contributions to "value creation".

The efficient analysis of legal and factual parameters with reference to what the evidence in the CIBC GST/HST case disclosed to be the appropriate "delineation" of the transaction informed by its "commercial context" including the "commercial rationality" on the part of the CIBC to engage VISA's services, in relation to the value those services contributed to its core business, is an instructive legal analysis of what is a "transaction" despite undeniable and inevitable, in fact, implicit elements that did not legally, actually or in context rise to or deserve to be treated as separate though maybe parallel transfers.  The "predominant" nature of the transaction - its "characterization", taking account of all of its pertinent legal and factual context, prevailed.

Though not a transfer pricing case, the determination of what is "the" transaction in a tax analysis is not exclusively a transfer pricing issue.  This seemingly specific and fairly narrow GST/HST case may have much more significance than its legislative provenance would suggest.


  - Professor Scott Wilkie (Distinguished Professor of Practice, Osgoode Hall Law School)