This is an appeal against a reassessment, notice
of which is dated March 31, 2014, made by the Minister of National Revenue
(Minister) under the Excise Tax Act (ETA) with respect to
the period from November 1, 2008 to November 30, 2008. In determining
the Appellant’s net tax, the Minister denied input tax credits (ITCs)
The Appellant had claimed these ITCs on the
payment of the value of “instant rebate coupons” (IRCs) on different
Nestlé products sold to consumers at a discount through Costco Wholesale Canada
The Appellant submitted that it is entitled to
ITCs on the IRCs pursuant to subsection 181(5) of the ETA on the basis
that the IRCs are coupons within the meaning of subsection 181(2) of the
The Minister is of the view that the IRCs are
not coupons but are promotional allowances under section 232.1 of the ETA
paid by Nestlé to Costco. Hence, the Minister submits that the ITCs claimed in
respect of the IRCs were properly denied under subsection 181(5) of the
Both parties acknowledge that, if the IRCs are
determined to be coupons instead of promotional allowances,
subsection 181(5) of the ETA allows the Appellant to claim the tax
fraction of the amounts it reimbursed to Costco in respect of the IRCs (i.e., the
ITC amount claimed that is at issue before the Court).
The issue therefore boils down to whether the
IRCs are coupons within the meaning of subsections 181(1), 181(2) and
181(5) of the ETA or promotional allowances pursuant to section 232.1 of
The relevant provisions of the ETA read as
Coupons and Rebates
181. (1) Definitions
— The definitions in this subsection apply in this section.
“coupon” includes a voucher, receipt,
ticket or other device but does not include a gift certificate or a barter unit
(within the meaning of section 181.3).
of a coupon value or of the discount or exchange value of a coupon means
the coupon is accepted in full or partial consideration for a supply made in a
participating province, the fraction
A is the total of the rate set out in subsection 165(1) and the
tax rate for that participating province, and
B is the total of 100% and the percentage determined for A; and
(b) in any
other case, the fraction
C is the rate
set out in subsection 165(1), and
D is the total
of 100% and the percentage determined for C.
of reimbursable coupon — For the purposes of this Part, other than
subsection 223(1), where at any time a registrant accepts, in full or partial
consideration for a taxable supply of property or a service (other than a
zero-rated supply), a coupon that entitles the recipient of the supply to a
reduction of the price of the property or service equal to a fixed dollar
amount specified in the coupon (in this subsection referred to as the “coupon
value”) and the registrant can reasonably expect to be paid an amount for the
redemption of the coupon by another person, the following rules apply:
(a) the tax collectible by the registrant in respect of the
supply shall be deemed to be the tax that would be collectible if the coupon
were not accepted;
(b) the registrant shall be deemed to have collected, at that
time, a portion of the tax collectible equal to the tax fraction of the coupon
(c) the tax payable by the recipient in respect of the supply
shall be deemed to be the amount determined by the formula
A - B
A is the tax collectible
by the registrant in respect of the supply, and
B is the tax
fraction of the coupon value.
(5) Redemption of coupon — For the purposes of this Part, where, in full
or partial consideration for a taxable supply of property or a service, a
supplier who is a registrant accepts a coupon that may be exchanged for the
property or service or that entitles the recipient of the supply to a reduction
of, or a discount on, the price of the property or service and a particular
person at any time pays, in the course of a commercial activity of the
particular person, an amount to the supplier for the redemption of the coupon,
the following rules apply:
(a) the amount shall be deemed not to be consideration for a supply;
(b) the payment and receipt of the amount shall be deemed not to be a
financial service; and
(c) if the supply is not a zero-rated supply and the coupon entitled
the recipient 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 particular person, if a registrant (other than a
registrant who is a prescribed registrant for the purposes of subsection
188(5)) at that time, may claim an input tax credit for the reporting period of
the particular person 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.
allowances — For the purposes of this Part, if
(a) a particular registrant acquires particular tangible personal
property exclusively for supply by way of sale for a price in money in the
course of commercial activities of the particular registrant, and
(b) another registrant, who has made taxable supplies of the
particular property by way of sale, whether to the particular registrant or
(i) pays to or credits in favour of the particular registrant, or
(ii) allows as a discount on or credit against the price of any property
or service (in this section referred to as the “discounted property or
service”) supplied by the other registrant to the particular registrant,
an amount in return
for the promotion of the particular property by the particular registrant,
the following rules
(c) the amount is deemed not to be consideration for a supply by the
particular registrant to the other registrant,
(d) where the amount is allowed as a discount on or credit against
the price of the discounted property or service,
(i) if the other registrant has previously charged to or collected
from the particular registrant tax under Division II calculated on the
consideration or part of it for the supply of the discounted property or
service, the amount of the discount or credit is deemed to be a reduction in
the consideration for that supply for the purposes of subsection 232(2), and
(ii) in any other case, the value of the consideration for the supply
of the discounted property or service is deemed to be the amount, if any, by
which the value of the consideration as otherwise determined for the purposes
of this Part exceeds the amount of the discount or credit, and
(e) if the amount is not allowed as a discount on or credit against
the price of any discounted property or service supplied to the particular
registrant, the amount is deemed to be a rebate in respect of the particular
property for the purposes of section 181.1.
Statement of Facts
The parties filed an Amended Agreed Statement of
Facts, which is reproduced below (the Exhibits are omitted):
Nestlé Canada Inc. (the “Appellant”) is a
corporation resident in Canada. Its principal place of business is
25 Sheppard Avenue West, 19th Floor, Toronto Ontario, M2N 6S8.
The Notice of Assessment under appeal is dated
December 24, 2010, and covers the reporting period November 1 to
November 30, 2008, and was issued under the Excise Tax Act (Canada)
The Appellant carries on the business of
manufacturing, distributing and selling food and beverages, throughout Canada.
The Appellant is organized into key divisions including Chocolate and
Confectionary, Coffee and Beverages, Nestlé Wafers and Ice Cream, each of which
is involved in developing and marketing some of the country’s best‑known
brands. The Appellant’s products at issue in this appeal are from its Chocolate
and Confectionary division (the “Nestlé Products”) and are sold through various
retailers in Canada including, Costco Wholesale Canada Ltd. (“Costco”). True
copies of sample Nestlé Product packaging are attached as Exhibit “A”.
This appeal relates to sales of the Nestlé Products made at Costco.
The Appellant is registered for GST/HST as a
Costco is a private member wholesale retailer.
In order for customers to purchase goods at a Costco warehouse, they are
required to purchase a membership, which is evidenced by a membership card (the
“Membership Card”). The membership (and Membership Card) grant access to
Costco’s products, which are typically offered at wholesale quantities.
Membership is controlled by the Membership Card, which must be presented by all
customers to gain entrance to the Costco warehouse as well as at the check‑out.
In carrying on its business during the period
May 2006 to October 2008 (the “relevant period”), the Appellant offered paper
coupons (the “Paper Coupons”) that provided consumers with a fixed dollar
discount on the purchase price of Nestlé Products, when the coupons are
accepted by a retailer. The Paper Coupons could be: (a) mailed directly to
consumers, (b) placed on the product shelf for all customers purchasing the
products to pick up, (c) provided to customers at the entrance of a Costco
warehouse or, (d) kept at the store cashier. In the latter case, at the time of
check‑out, the cashier would either clip the coupon for the purchaser or
scan the barcode on the Paper Coupon.
During the relevant period, the Appellant also
offered another type of fixed dollar discount in respect of the Nestlé Products
sold at Costco for which a Paper Coupon was neither: (a) mailed directly to
consumers, (b) placed on the product shelf for all customers purchasing
the products to pick up, (c) kept at the store cashier. This type of promotion
was named “IRC” which stood for “instant rebate coupons” in Nestlé’s contracts
with Costco (the “IRC”). The acronym “IRC” and the terms “promotion” and
“instant rebate coupons” are used neutrally in this partial agreed statement of
fact without admissions by either party as to whether the transaction is a
“coupon”, “promotional allowance” or a “rebate”.
The IRCs provided purchasers with a fixed dollar
discount on the purchase price of taxable Nestlé Products.
In the Costco warehouse, on the product shelf to
which the IRC applied, an 8 ½” x 14” on‑the‑shelf sign card
clearly indicated the purchase price of the Nestlé Product, the product’s
and/or Costco’s barcode for the Nestlé Product, the amount of the fixed dollar
discount provided for by the IRC, the amount the purchaser would have to pay at
the register after application of the discount and a notification that the
applicable taxes would be applied before the amount of the discount was
applied. When an IRC program is run, sales of the associated Nestlé Products
10. A list of all the IRCs offered, during the relevant period, is attached
with true copies, hereto as Exhibit “B”. In addition, Exhibit “B”
lists the Paper Coupons identified in handwriting with “-P” as well as
Halloween promotions identified in hand writing with “WC HALLOWEEN” that were
offered during the relevant period.
11. Costco’s computer system linked the IRCs to the applicable Nestlé
Product such that when the barcode on the Nestlé Products being purchased was
scanned at the cash register, the fixed dollar value of the IRC was accessed
from Costco’s central database and was automatically applied; whether the
customer requested the discount or not.
12. The Costco Membership Card itself did not contain any information
about the specific IRC physically, electronically or otherwise.
13. The cash register receipt issued to the Costco customer clearly
indicated the purchase price of the Nestlé Product, the amount of the IRC and
the GST/HST (applied to the gross purchase price of the Nestlé Products before
the discount was applied). The amount of the IRC applied was specifically identified
on the cash register receipts as CPN and “Coupons Tendered”. A sample true copy
of such a cash register receipt is attached hereto as Exhibit “C”. The
sample receipt pertains to a similar discount on beach towels (not a Nestlé
Product) but for the purpose of this litigation, the parties agree that the
cash receipt would not be materially different.
The receipt as Exhibit “
B” “C” evidences a purchase of
8 towels totaling $111.92. A $24 discount (8 times a $3 discount similar to the
IRC program) was allowed by Costco. The taxable items purchased totaled $236 ($100 +
$6.59 + $111.92 + $17.49). The GST was calculated on the $236 without
taking into account the $24 discount.
14. Other than as indicated above, a customer did not have to do
anything else, in order to obtain the IRC.
15. As between the Appellant and Costco, each IRC was distributed and
documented pursuant to the terms of an individual contract named “CN Coupon
Contract” which was subject to the Costco Standard Terms (the “Contracts”). The
same Contracts were also used when the Appellant and Costco entered into Paper
Coupon arrangements, with the sole difference that the box “Paper” under the
heading “coupon” of the CN Coupon Contract would then be checked. True copies
of some of the individual contracts for the IRCs for the relevant period are
attached hereto as Exhibit “D” and of the Costco Standard Terms are attached as
Exhibit “E”. The Contracts governed both the IRC and the Paper Coupon
arrangements between the Appellant and Costco. The sample Contracts at Exhibit
“D” had not been executed by Costco but for purposes of this litigation, the
parties agree that the Contracts were executed and that when executed by
Costco, Costco assigned a value for “Contract #” and a “Coupon #” for
its own records.
16. The Contract identifies the Nestlé Products for which the IRCs are
issued and includes the IRC value, the time period during which it was
distributed (i.e., start and end date), the Costco warehouse locations at which
the IRC was accepted and the amount of the fixed dollar discount and the
reimbursement. During the relevant period, Costco used the same form of
contract for the IRCs as for the Paper Coupons.
17. The Contracts did not mention that any part of the reimbursements
paid by the Appellant to Costco were on account of tax.
18. For both the IRCs and the Paper Coupons, Nestlé had a contractual
obligation to reimburse Costco for 100% of the IRC value or the Paper Coupon
value accepted by Costco.
19. When it sold its Nestlé Product to Costco:
a) the Appellant collected GST/HST on the full price without
taking into consideration the IRCs; and
b) the Appellant did not credit or refund Costco for the
GST/HST that was collected on the part of the consideration that was eventually
reduced by the IRCs.
20. Costco invoiced the Appellant for the value of the IRCs via a
Billing Detail debit memorandum, which set out the “Coupon #” (the number
assigned by Costco for each CN coupon contract), type (i.e., the IRCs referred
to as “I‑coupon” or Paper Coupons referred to as “P‑CPN”, “WC‑Nestlé
Halloween promotion” or “WC‑Halloween $2.00 off promo”), the amount of
the IRC or Paper Coupon value as well as the effective date. A list of all the
debit memorandums pertaining to the IRCs for the relevant period (as well as
the Paper Coupons and WC‑Nestlé Halloween promotions), are attached with
true copies hereto as Exhibit “F”.
21. The payments or credits of the IRC by the Appellant to Costco were
not accompanied by a written indication that any portion of the payment was on
account of tax.
22. During the relevant period, Costco charged customers GST/HST on the
full purchase price of the Nestlé Products, before application of the IRC
(e.g., Costco charged GST/HST as if the IRCs were coupons). Costco did the same
for the Paper Coupons. A representative sample of the invoice of such a
transaction is attached hereto as Exhibit “C”.
23. Both parties acknowledge that if this Court finds that the IRCs are
“coupons”, subsection 181(2) of the ETA would apply and the GST/HST would
have applied as Costco calculated it.
24. In calculating its net tax during the relevant period, the Appellant
claimed input tax credits (“ITCs”) by treating the IRCs as coupons.
25. Both parties acknowledge that if this Court finds that the IRCs are
“coupons”, subsection 181(5) of the ETA would apply to allow the Appellant
to claim the tax fraction of the amounts it reimbursed Costco in respect of the
IRCs (the “ITCs claimed”).
26. By Notice of (Re)Assessment dated December 24, 2010 (the
“Assessment”), the Minister assessed the Appellant in respect of the relevant
period, to deny the ITCs Claimed in respect of . . . all [the] IRCs
it reimbursed to Costco except for the ITCs related to the Paper Coupons. The
net tax denied by the Assessment totaled $109,970.17.
27. During the relevant period, the ITCs claimed in respect of Paper
Coupons totaling $11,812.33 were allowed by the Minister. This amount is not in
dispute in these proceedings.
28. Nestlé objected to the Assessment and by letter dated March 31,
2014, a true copy of which is attached as Exhibit “G”, and Notice of
(Re)Assessment dated March 31, 2014, the Canada Revenue Agency disallowed
In the Appellant’s view, the IRCs are no
different than the paper coupons, for which the Minister did not deny the ITCs.
According to the Appellant, the IRCs are electronic versions of paper coupons,
as they provide purchasers with a fixed dollar discount on the purchase price
of taxable Nestlé products. The IRCs were electronically linked to the corresponding
Nestlé product through Costco’s computer system when the product barcode was
presented and scanned at the cash register. Through the barcode, the linked
coupon was accessed from Costco’s central database and the discount provided by
the coupon was approved.
For both paper coupons and IRCs, Nestlé had a
contractual obligation to reimburse Costco 100% of the coupon value accepted by
The Appellant submits that the IRCs fit within the
definition of coupon in subsection 181(1) of the ETA as being an “other
device”. The Appellant referred to the Tax Court of Canada (TCC)
decision in Tele-Mobile Company Partnership v. The Queen, 2012 TCC
256 (affirmed 2013 FCA 149), in which the Court analyzed the use of the
word “device” as follows (although, in that case, the taxpayer’s discount did
not fit within the definition of “coupon”):
generic term “device” defined in Webster’s On-line Dictionary as “a mechanism
designed to serve a special purpose or perform a special function
. . . an electronic device” broadens considerably any notion that
“coupon” must be limited to any traditional view. The use of device suggests
that the legislators acknowledged commerce has entered a technological age
where paper may indeed become completely outdated. As the Appellant suggested,
the standard commercial practice has evolved with the advent of e-commerce and
instead of issuing a paper coupon, a customer’s entitlement to a reduction in
purchase price can be effected electronically. I do not see how this approach,
however, helps the Appellant, as it has pointed to nothing held by the
customer, electronically or otherwise, entitling the customer to the credit.
The customer simply gets it.
With respect to the fixed dollar amount coupon requirement
set out in subsection 181(2) and with regard to what constitutes a coupon,
the TCC stated at paragraph 35:
. . . I do not read the requirement so narrowly as
to require that only if TELUS is presented with a written coupon with a fixed
dollar amount on it is the requirement met. In this day and age of
electronic commerce and the use of purchase and sale devices not contemplated
20 years ago, I am of the view that where the fixed amount is clearly known to
both sides, and is evidenced in writing, as hard copy or electronically, that
can be offered by a customer as partial consideration, the requirement has been
met. . . .
This interpretation was accepted by the Federal Court of Appeal (FCA)
at paragraph 11 of its reasons.
The Appellant submits that the IRCs meet all the
requirements for being considered as coupons. As long as the fixed amount of
the coupon value is clearly known to both sides (which is the case here through
the on‑the-shelf sign card and through the cash register receipt given to
customers) and evidenced in writing, as hard copy or electronically, there is a
The Appellant asserted that there is no express
requirement in the language of section 181 that the purchaser of goods be
in physical possession of a tangible coupon that is physically separate from
the product being supplied, or that the purchaser must present any such
separate coupon to a retailer, in order for that provision to apply.
In the Appellant’s view, commercially and
economically, the electronic coupon is the modern equivalent of (a) placing
paper coupons on the product shelf for all customers who purchase the Nestlé products
to pick up and bring with them to the cashier, or (b) keeping paper coupons at
the checkout such that the cashier can clip the coupon for the purchaser or
scan the barcode on the coupon at the point of sale (Appellant’s submissions,
at para. 72).
The Appellant concluded that the IRCs have the
characteristics of paper coupons: they were offered pursuant to the same
contract between Costco and Nestlé; for GST/HST purposes, they were treated the
same by Costco; the customer was alerted to the e‑coupons and the fixed
dollar discount by the on‑the‑shelf sign – the only difference was that the
customer did not have to hand over a piece of paper in addition to the Nestlé product
and the membership card (Appellant’s submissions, at para. 84).
The Respondent argued that the IRCs are not
coupons but promotional allowances pursuant to section 232.1 of the ETA.
The Respondent relies on the fact that, in the case of the IRCs, the purchaser
did not tender a coupon for acceptance in order to get the reduction on the
price of a taxable Nestlé product. The customer did not hold anything,
electronic or otherwise, in his hand that entitled him to the reduction. The
customer simply received it. Referring to Tele‑Mobile, supra,
at paragraph 32, the Crown argued that the thing entitling the customer to
the reduction was not a coupon but the mere existence of that reduction. The
discount shown on the shelf was nothing more than the advertisement of a
Under section 181, a coupon must be a
physical or an electronic device which the purchaser can submit for acceptance
as full or partial consideration for a taxable supply of property and which
entitles the purchaser to a reduction of the price of the property equal to the
fixed dollar amount specified on the physical or electronic device. In the
Respondent’s view, an advertised discount, without more, does not meet the
Neither the barcode on the Nestlé product nor
the Costco membership card contained any reference to a fixed dollar amount
discount, which is a requirement under section 181 in order for there to
be a coupon. The cash register receipt and the advertising on the shelf showing
the discount are not coupons because they are not tendered by the customer for
acceptance. They only show the discount given to the purchaser. Finally, the
coupon contract between Costco and Nestlé (paragraph 15 of the Amended Agreed
Statement of Facts) was entered into without the knowledge of the customer and
obviously could not be tendered by him for acceptance.
As I mentioned previously, this case boils down
to determining whether Nestlé’s discount offered on its products to Costco’s
customers through the IRCs fits within the requirements for a coupon set out in
section 181 of the ETA, or whether it should be characterized as a
promotional allowance under section 232.1 of the ETA. In the latter case,
Nestlé will be denied input tax credits because it did not structure its
transactions in a way that conforms with the promotional allowance framework.
On the other hand, if the IRCs qualify as coupons pursuant to section 181
of the ETA, Nestlé would be entitled to its ITCs for any excess GST/HST paid by
the consumer when that consumer purchased a Nestlé product at Costco.
Driedger’s modern rule of statutory
interpretation states that “the words of an Act are to be read in their entire
context and in their grammatical and ordinary sense harmoniously with the
scheme of the Act, the object of the Act, and the intention of Parliament.” To the extent that not requiring the customer to tender a coupon
for acceptance would allow almost any advertised discount to be a coupon, as
stated by the FCA in Tele‑Mobile, at paragraph 11, it would
make the promotional allowance regime set out in section 232.1 redundant. An
interpretation that makes legislative provisions redundant would seem to run
counter to the intentions of Parliament and accordingly would normally be
It is presumed
that every feature of a legislative text has been deliberately chosen and has a
particular role to play in the legislative design. The legislature does not
include unnecessary or meaningless language in its statutes; it does not use
words solely for rhetorical or aesthetic effect; it does not make the same
point twice. This is what is meant when it is said that the legislature “does
not speak in vain.”
The term “coupon” is defined in
subsection 181(1) to include a “voucher”, “receipt” or “other device”. It
does not include a “gift certificate” or a “barter unit”.
The Appellant argues that the IRCs fall within the
definition of “coupon” as being included in the expression “other device”.
C. Miller J. (TCC) noted that the use of the word “device” suggests
that the legislators have acknowledged that commerce has entered a
technological age where paper may indeed become completely outdated (para. 27).
This position is also supported by the Supreme
Court of Canada, which noted that, generally, statutory categories are “held to
include things unknown when the statute was enacted” (Perka v. The Queen,
 2 S.C.R. 232, at 265).
Further, the definition of “coupon” is said to include,
among other things, an “other device”. Parliament’s use of the term “includes”
suggests that the definition is meant to be expansive (The Queen v. Mansour,
 2 S.C.R. 916, at 920).
However, in Tele‑Mobile, the TCC
and the FCA held that a “coupon” must be a physical or an electronic device
which the purchaser can submit for acceptance. Let us now apply this
interpretation to the present situation: for the redemptor of the coupon
(Nestlé) to obtain the benefit of an ITC for the GST/HST paid over and above
the amount applicable to the discounted sale price, it would be required that
the recipient of the supply (a Costco customer) tender a coupon. This is a requirement
that distinguishes the coupon regime found in section 181 from the
promotional allowance regime found in section 232.1. As I mentioned previously,
the FCA, in Tele‑Mobile, held that not requiring that the customer
tender a coupon would “allow just about any advertised discount to be
considered as a ‘coupon’ for the purposes of section 181 of the [ETA]”
(FCA decision, para. 11).
What makes matters confusing in the present
situation is that, during the relevant period, Nestlé made available to Costco
customers paper coupons (which were handed out to customers when they entered
the Costco warehouses, as stated in the Appellant’s written submissions at para. 12),
and it is not disputed that the IRCs were considered by Nestlé as having the
same characteristics as the paper coupons. This is reflected by the fact that
the GST/HST charged to the Costco customers who benefited from IRCs was charged
on the pre‑discount price, as is required by subsection 181(2) when
a registrant accepts as consideration for a taxable supply a coupon that
entitles the recipient of the supply to a reduction of the price equal to a fixed
dollar amount specified on the coupon. Furthermore, the Nestlé-Costco
transaction seemed to imply a coupon arrangement for both the paper coupons and
the IRCs, as they were governed by the terms of the same contract between
Nestlé and Costco.
But even though Nestlé and Costco treated the
IRCs as coupons, this is not sufficient for them to be characterized as such.
For them to be so characterized, the terms of section 181 must be met. The
FCA, in Tele‑Mobile, made it clear that there cannot be a coupon unless
something is submitted by the purchaser for acceptance as full or partial
consideration for the taxable supply, and the coupon thus tendered, whether physical
or electronic, must entitle the purchaser to a reduction of the price equal to
a fixed dollar amount specified on the physical or electronic device.
In the present case, when the Nestlé product was
purchased by the customer, the customer did not tender any coupon (physical or
electronic) to the cashier. The Costco membership card, although it granted
access to Costco products, did not contain any specific information about the
IRCs, as no fixed dollar amount reduction for the particular Nestlé product was
specified on that card.
In Tele‑Mobile, C. Miller J.
held that where the fixed dollar amount is clearly known to both sides and
evidenced in writing by either a hard or an electronic copy that can be offered
by a customer as partial consideration, the requirement has been met (para. 35).
It is true that here there was an 8 1/2” x 14” on‑the‑shelf
sign and a purchase receipt that indicated the purchase price and the amount of
the fixed dollar discount provided by the IRC on the Nestlé product.
However, to paraphrase what
C. Miller J. said in Tele‑Mobile at paragraph 39,
this represents what Nestlé was offering to the customer; it was not something
the customer was offering to the supplier of the Nestlé product. I also find
it difficult to say that the above-mentioned information combined with the
membership card must be viewed as the equivalent of a coupon (otherwise, paper
coupons would be completely useless). In my view, Costco was merely advertising
the discount. I am not prepared to accept the Appellant’s submission that the
combination of those two ingredients fits within the definition of “coupon” in
that they constitute an “other device”.
Section 232.1: promotional allowances
While one important requirement in order for
there to be a coupon under section 181 is missing,
namely, the existence of a physical or an electronic device which the purchaser
can submit to Costco for acceptance, the wording found in section 232.1 with
respect to promotional allowances seems to apply perfectly to the facts here.
Indeed, paragraph 232.1(a) applies
when “a particular registrant (Costco) acquires particular tangible personal
property (Nestlé products) exclusively for supply by way of sale for a price in
money in the course of commercial activities of the particular registrant
(Costco)”. This requirement has been met. Paragraph 232.1(b)
additionally requires that “another registrant (Nestlé), who has made taxable
supplies of the particular property (Nestlé products) by way of sale, whether
to the particular registrant (Costco) or another person”, have either “(i) [paid]
to or [credited] in favour of the particular registrant (Costco)”, or “(ii) [allowed]
as a discount on or a credit against the price of any property or service”
supplied by the other registrant (Nestlé), an amount in return for the
promotion of the particular property (Nestlé products) by the particular
Here, Nestlé did not contest the Minister’s
assertion that Nestlé’s repayments of the IRCs were credited against future
Nestlé product purchases by Costco (Transcript at pp. 36‑37, and
Billing Detail documents submitted in evidence with the Amended Agreed Statement
of Facts, at Tab F). So the requirements under subsection 232.1(b)
are also met.
I note here that, while section 232.1
permits credits on future purchases, a legalistic reading of section 181
would seem to prohibit Nestlé’s giving credit to Costco for future Nestlé product
purchases (as subsection 181(2) states that “the registrant (Costco) can
reasonably expect to be paid an amount for the redemption of the coupon by
another person (Nestlé)”.
The conclusion that the IRCs fit better within the
definition of a promotional allowance than of a coupon also makes sense as a
matter of policy.
Under subsection 181(2), Costco is required to
collect GST/HST on the pre-discount price of the Nestlé products.
Subsection 181(2) thus requires the
customer to overpay GST/HST on the Nestlé products and then deems the customer to
have paid only the GST/HST attributable to the post-discount price. The reason
for implementing this practice was explained by counsel for the Respondent in his
oral submissions, in which he referred the Court to the policy underlying the
treatment of discount coupons. The object of the practice was to simplify the
treatment of coupons for small grocers, who, in the 1990s, did not have easy
access to cash registers that, for the purpose of the application of the GST/HST,
could distinguish between coupons for taxable supplies and coupons for non-taxable
(or zero-rated) supplies.
This excess GST/HST does not go to the
government however. Instead, subsection 181(5) allows the provider of the
coupon, here Nestlé, to obtain an input tax credit for the excess GST/HST paid
by the Costco customer.
The benefit represented by this additional input
tax credit, received at the customer’s expense, is why Nestlé is claiming that
its transactions fit within the section 181 coupon regime, instead of the
section 232.1 promotional allowance regime. By contrast, under the section
232.1 promotional allowance regime, the customer pays GST/HST on the reduced
price of the supply.
In the present case, Nestlé and Costco treated
the discount as falling under the coupon regime at the customer’s expense.
The Federal Court of Appeal, in Tele-Mobile,
was concerned that a relaxation of the tendering requirement would allow any discount
arrangement to be considered a coupon, which in turn would require the customer to overpay GST/HST and result
in the provider of the coupon obtaining the benefit of this excess payment
through an input tax credit. Such an interpretation would diminish the significance
of the – arguably token – formality of the tendering requirement that
must be met in order for the supplier to obtain the input tax credit. Thus,
customers would always pay too much GST/HST and coupon providers would always
get the benefit of an input tax credit, which, from a certain perspective, is
like the government providing a quasi-subsidy to coupon providers through the
GST/HST regime. Such an interpretation of the legislation would also render one
provision, here section 232.1, virtually meaningless and would thus be contrary
to the statutory interpretation guidelines established by the Supreme Court of
Canada (See Canada (Attorney General) v. JTI-Macdonald Corp., supra).
According to the interpretation of section 181
set out in the Tele-Mobile case, Parliament requires the customer to
tender some kind of coupon as a bright‑line condition that must be met
before the provider of the coupon can obtain the benefit of an input tax credit
for the excess GST/HST paid by the customer. If this requirement is not met,
the transaction will fall under the promotional allowances regime, which constitutes
a residual category.
I accordingly conclude that the IRCs were promotional
allowances, not coupons. Nestlé will therefore not be able to claim ITCs on the
IRCs and the customer will not recover the tax overpaid. In a promotional
allowance context, GST/HST should have been collected only on the post‑discount
price. In that context, I realize that the Minister has received a windfall.
C. Miller J. of the Tax Court addressed that issue in Tele‑Mobile,
stating (at para. 30) that, although he was troubled by the
windfall, it did not justify “torturing the language” of the statute:
. . . I
am troubled by the result that the Government may have got a windfall in this
situation. But the purpose is not met by torturing the language to, as one of
my favourite expressions puts it, fit a round peg into a square hole: TELUS
cannot make the square hole big enough. S.181 of the ETA is a recognition that
while tax is collectible on the price charged by a vendor for a service or
supply, if that price is partially covered by the vendor, it would be
unreasonable to consider that portion as part of the value of the consideration
from the recipient for the supply: but only if the Registrant plays by the
rules and can point to a coupon or device. I suggest the Registrant, in this
case, is attempting to bend the rules to overcome a result brought on by itself
by establishing a program without due consideration of GST ramifications.
I conclude that the IRCs were not coupons
pursuant to section 181 of the ETA and consequently the Appellant is not
entitled to ITCs on the IRCs.
The appeal is dismissed with costs to the
Signed at Ottawa,
Canada, this 17th day of March 2017.