27 January 2000 External T.I. 1999-0006755 - POINT BASED REWARD PROGRAM

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a corporation that carries on a retail business is entitled to deduct the liability (based on a number of cents per point earned by each customer who is a member of the program) owing to an administrator of a point based reward program.

POSITION: There seems to be no provision that would deny such a deduction in computing the corporation's profit from the retail business. We would need to see the documents before giving an opinion in the situation where the retailer undertakes his own point system.

Reasons: There seems to be a genuine liability for a legitimate business expense. However, we would need to see the documents where the corporation has its own point system and is simply using a third party as an administrator.

XXXXXXXXXX 1999-000675
J. E. Grisé
Attention: XXXXXXXXXX

January 27, 2000

Dear Sirs:

Re: Point Based Reward Program

This is in reply to your letter of November 16, 1999, requesting a technical interpretation concerning the tax consequence of a corporation (the corporation) that carries on a retail business in Canada participating in a point based reward program.

For a minimal cost, the corporation joins the reward program which is administered by another corporation (Rewardco). When the corporation makes a sale to a customer who participates in the program, it is required to make a payment to Rewardco (a certain number of cents per point) in respect of the number of points earned by the customer. Amounts paid by the corporation to Rewardco fulfil the corporation's obligations under the program. No amounts paid by the corporation to Rewardco are ever returned to the corporation.

You have indicated that the only purpose for the corporation joining the reward program is to increase sales by attracting reward program customers and to maintain competitive advantage. You further state that the corporation's obligation in respect of the reward program is final and absolute and no portion of the expense is contingent in nature.

Based on the information you have provided, the amounts appear to be laid out in the course of earning income from a business and would likely be deductible for income tax purposes. The amounts would be deductible for income tax purposes as sales to customers participating in the reward program are made, since, as you have indicated, this would be the time where an amount is owing to Rewardco in respect of the points earned by the customer.

You would also appreciate our views with respect to a situation where the corporation is a multiple location retailer and establishes its own reward program for its customers. The corporation would hire Rewardco to administer the reward program. We are not prepared to offer an opinion on this scenario without examining documents establishing the rights and obligations between the corporation and Rewardco.

The above comments are general in nature and, accordingly, do not apply to a particular taxpayer or transaction. In order to give a more definitive response we would have to examine all of the documentation.

We hope our comments are helpful.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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