Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 94077
July 29, 2008
Subject:
GST/HST RULING
GST/HST treatment of XXXXX rewards vouchers
Dear XXXXX
Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX issued by XXXXX
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
We understand the facts as follows.
Facts
1. XXXXX is a XXXXX supplier of various taxable property and services, including zero-rated supplies. XXXXX is a GST/HST registrant.
2. XXXXX.
3. XXXXX.
4. XXXXX XXXXX.
5. XXXXX
6. XXXXX.
7. The reward is stated on the voucher as a specified amount that may be applied against most XXXXX including taxable supplies at both 5% and 0%. The voucher is not specific to any particular product or service.
8. XXXXX.
9. XXXXX.
10. Under the current XXXXX agreements, a reward voucher may not be tendered for cash. However, you confirmed in our telephone conversation XXXXX that XXXXX.
Rulings Requested
1. The rewards voucher is not a gift certificate.
2. The voucher is a non-reimbursable coupon that is subject to subsection 181(3).
3. Where XXXXX chooses under subsection 181(3) to treat the rewards voucher as a reimbursable coupon, the vouchers are subject to subsection 181(2), and a corresponding input tax credit ("ITC") entitlement arises under subsection 181(5).
4. In the alternative, the rewards voucher is a rebate in respect of which section 181.1 applies.
Rulings Given
1. The rewards voucher is not a gift certificate.
2. The rewards voucher is a coupon in respect of which subsection 181(4) applies.
3. Subsection 181(2) is not applicable and no ITC entitlement arises under subsection 181(5).
4. The provisions of section 181.1 do not apply in respect of the rewards voucher.
These rulings are subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested these rulings.
Analysis
Gift certificate
While the ETA does not provide a definition for the meaning of the term, "gift certificate", GST/HST Policy Statement P-202 stipulates that a gift certificate is a "device" (e.g. voucher, receipt, ticket):
• that has a stated monetary value.
• that can be redeemed on the purchase of property or a service from a particular supplier; that is, the supplier agrees to accept the device as consideration, or a part hereof, in respect of the purchase of property or a service,
• for which consideration is given, and
• that has no intrinsic value.
Under the circumstances, we agree that the rewards voucher is not a gift certificate since the third criterion above is not met. The amount of the reward is calculated as a percentage of certain purchases made by the XXXXX. XXXXX does not sell the voucher and no consideration is given for it; therefore, the third criterion above is not met and the voucher fails to qualify as a gift certificate.
Coupon
Subsection 181(1) defines the word "coupon" to include a voucher, receipt, ticket or other device but does not include a gift certificate. Our position is that vouchers, receipts and tickets generally take the form of a physical certificate documenting some right or privilege in favour of the bearer. It is further our position that the words "other device" in the definition address things that are similar to a voucher, receipt or ticket and that the word "device" should have a meaning within that context. As the rewards voucher identifies the amount accruing to a particular XXXXX pursuant to their XXXXX agreement, it qualifies as a "coupon" under subsection 181(1).
Subsection 181(2) describes the tax treatment of reimbursable, fixed dollar coupons accepted in connection with the supply of a good or service. The provisions of subsection 181(2) may also apply where, pursuant to subsection 181(3), a registrant vendor of a non-zero-rated supply accepts a non-reimbursable coupon specifying a fixed dollar or fixed percentage discount and opts to treat the coupon as a partial cash payment that does not reduce the value of the consideration for the supply. While the rewards voucher may bear the attributes of a "coupon" as stated above, it lacks certain qualities identified in subsection 181(3), which applies when:
"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... and the registrant can reasonably expect not to be paid an amount for the redemption of the coupon by another person"
The qualifying provisions of subsection 181(2) are similar to those in 181(3). Subsection 181(2) applies when:
"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"
Subsections 181(2) and (3) essentially require that the coupon be accepted in respect of a non-zero-rated supply of a property or a service whose price is reduced by the amount of the coupon. As such, our interpretive view of subsections 181(2) and (3) is that the coupon would have to be designated for use towards the purchase of non-zero-rated supplies. In the present case, however, the value of the voucher may be used against the purchase price of diverse supplies whose GST/HST treatments differ. The fact that the rewards voucher is not supply-specific makes it possible that the voucher may be used against the price of zero-rated supplies, which would directly contravene the requirements of the aforementioned provisions. Given that the rewards voucher is not specific to a particular supply, it is our view that the criteria outlined in subsections 181(2) and (3) are not met. Accordingly, XXXXX will not qualify for the ITCs otherwise accorded by subsection 181(5).
Although the rewards vouchers do not fall within the purview of subsection 181(2) and (3), we nevertheless view them as falling within subsection 181(4). This subsection provides that where a coupon is accepted by a registrant vendor, the value of the consideration for the supply is deemed to be the amount, if any, by which the value of the consideration for the supply as otherwise determined exceeds the discount or exchange value of the coupon. As such, XXXXX would treat the rewards voucher as a reduction in the amount on which GST/HST is calculated at the time of sale. No input tax credit is available with respect to the acceptance of the voucher.
Rebates
Section 181.1 applies to certain rebates paid in respect of property or a service. Under this section, a registrant supplier may claim an ITC in respect of the tax fraction of a rebate paid by the supplier where:
(a) the registrant makes a taxable supply in Canada of property or a service that is not a zero-rated supply,
(b) a particular person acquires the property or service, either from the registrant or from another person,
(c) the registrant pays, at any time, a rebate in respect of the property or service to the particular person and provides written indication that a portion of the rebate is an amount on account of tax, and
(d) subsection 232(3) does not apply to the rebate.
Where these conditions are met, paragraph 181.1(e) provides that the registrant may claim an ITC for the reporting period that includes the time when the rebate was paid. The ITC is equal to the tax fraction in respect of the rebate (5/105 for GST or 13/113 for HST) multiplied by the rebate amount.
Similar to the treatment of coupons in subsections 181(2) and 181(3), section 181.1 precludes an ITC claim for a rebate that is paid in respect of a zero-rated supply. Essentially, the rebate must be paid in connection with a non-zero-rated supply of a particular property or a service. More specifically, paragraph 181.1(c) expressly requires that the rebate be paid with respect to the supply of the particular property specified in paragraphs (a) and (b). Similar to subsections 181(2) and (3) and their application to coupons, our interpretive view of the present provisions is that the rebate would need to be paid in connection with a specific non-zero-rated supply of property or a service. Since the value of the rewards voucher is not specific to a particular supply, it is our view that the criteria of section 181.1 are not met.
ADDITIONAL ANALYSIS
Patronage dividends
A "patronage dividend" is defined in subsection 123(1) as:
"An amount that is deductible under section 135 of the Income Tax Act in computing, for the purposes of that Act, the income of the person paying the amount"
Briefly, subsection 135(1) of the Income Tax Act may allow a taxpayer to deduct patronage dividends issued to customers in computing the taxpayer's income for a taxation year. While the taxpayer involved is usually a cooperative corporation, ordinary corporations may also qualify for the deduction. Income tax bulletin IT-362R, Patronage Dividends (copy enclosed), discusses the conditions set forth in section 135 of the Income Tax Act that must be met in order to deduct the amount of the payments ifootnote 1.
Where it is determined that an amount is deductible under section 135 of the Income Tax Act, the GST/HST treatment of the amount will be subject to the provisions of section 233 of the ETA. Under section 233, a registrant issuer of a patronage dividend is generally required to treat the dividend as having reduced the total consideration for non-zero-rated supplies made by the registrant to its customers during a fiscal year, which in turn gives rise to the appropriate GST/HST adjustment, subject to section 232.
Specifically, where a registrant issues a patronage dividend to another person, all or part of which is in respect of supplies that are non-zero-rated supplies made by the registrant to the person, subsection 233(2) deems the registrant to have reduced the total price of the non-zero-rated supplies purchased over the fiscal year and to have made the appropriate GST/HST adjustment, refund or credit in favour of the person (discussed below). Paragraph 233(2)(a) provides a standard method of calculating the aforementioned price adjustment, but also provides an alternative method that the registrant may elect to use.
Standard method
A registrant issuer of a patronage dividend must generally determine the amount of the price reduction by first calculating the proportion of the dividend attributable to non-zero-rated supplies made by the registrant to its customers during the immediately preceding fiscal year. This proportion is described in subsection 233(1) as the "specified amount", and is calculated by dividing the fiscal year's total of all non-zero-rated supplies (including applicable tax) by the total of that year's taxable supplies (including zero-rated supplies and any applicable tax calculated on non-zero-rated supplies), then multiplying this quotient by the total amount of the patronage dividend. The resulting product is the "specified amount".
Subparagraph 233(2)(a)(ii) provides a formula for determining the portion of the specified amount made in a non-participating province. This is achieved by dividing the non-zero-rated supplies made during the fiscal year in a non-participating province (plus the corresponding GST) by the sum of all non-zero-rated supplies made in both participating and non-participating provinces (plus the corresponding GST/HST). This quotient is then multiplied by the "specified amount", the product of which is multiplied by the consideration fraction, 100/105. The resulting amount is treated as a price adjustment to which the rules of subsection 232(2) apply. Under subsection 232(2), the tax previously collected on the amount of the price adjustment would be treated as a refund of GST paid to the XXXXX, which may be recovered by the registrant in its periodic tax return.
Where supplies were made in a participating province, subparagraph 233(2)(a)(i) would require the "specified amount" to be prorated for supplies made in the participating province. This is calculated in the same manner as described in paragraph 233(2)(a)(ii) above, except that the relevant consideration fraction is 100/113, to reflect the HST rate of the participating province. Again, the price adjustment would be subject to the rules of subsection 232(2), and the HST previously collected on the amount of the adjustment would be treated as a refund of HST paid to the XXXXX, which may be recovered by the registrant.
Election - subsection 233(2)
A registrant issuer of patronage dividends may elect under subsection 233(2) to treat the dividends as individual price adjustments that are based on each customer's purchases of non-zero-rated supplies. Whereas the standard method described above entails calculating the "specified amount" (which employs an aggregate ratio of non-zero-rated supplies to total taxable supplies made by the supplier to all customers during a fiscal year), an election made pursuant to subsection 233(2) would not involve such a calculation.
Instead, the registrant would be required to calculate the subsection 233(2) price adjustment by multiplying the patronage dividend attributable to each customer's non-zero-rated purchases made in a participating province (including the applicable tax) by 100/113, and those non-zero-rated taxable purchases made in a non-participating province (including the applicable tax) by 100/105. The sum of these products is treated as a price adjustment to which the rules in subsection 232(2) apply. The tax previously collected on the adjustment would be treated as a refund of tax paid to the customer, which may be recovered by the registrant in its periodic tax return.
Note the registrant must make the election before any patronage dividend is paid in the fiscal year in which the election is to take effect. The election would apply to all patronage dividends paid by the registrant in a fiscal year, and all patronage dividends paid would be treated in the same manner for GST/HST purposes. The registrant would not be required to file an election form with the CRA, but would still be required to maintain such records as would enable a determination of whether the registrant has elected for the treatment under paragraph 233(2)(a).
Election - subsection 233(3)
Under subsection 233(3), a registrant may elect to avoid calculating the price adjustment as required under subsection 233(2). Under this election, the patronage dividends would not be treated as price adjustments, and the registrant would not be entitled to any deductions in determining its net tax since the dividend would no longer result in a deemed reduction of the consideration for any supplies.
As in the case of the election under paragraph 233(2)(a), the registrant must make the election before any patronage dividend is paid in the fiscal year in which the election is to take effect. The election would apply to all patronage dividends paid by the registrant in a fiscal year, and all patronage dividends paid during the fiscal year would be treated in the same manner. Again, the registrant would not be required to file an election form with the CRA but would still be required to maintain records as would enable a determination of whether the registrant has elected for the treatment under subsection 233(3).
With the exception of the above rulings, the foregoing comments represent our general views with respect to the subject matter of your request. Those comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service.
If you require clarification with respect to any of the issues discussed in this letter, please call me at 613-952-8816.
Yours truly,
Paul Hawtin
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. The question of whether XXXXX may make deductions pursuant to section 135 of the ITA is within the purview of the Income Tax Rulings Directorate.
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