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.
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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 114083
July 29, 2010
Subject:
GST/HST INTERPRETATION
Exchange of rewards points for goods
Dear XXXXX:
This is in response to your XXXXX, and further to our telephone conversation on XXXXX, concerning the GST/HST treatment of reward point exchanges made under customer loyalty programs.
During our conversation, we discussed the GST/HST treatment of transactions involving a straight exchange of rewards points for goods, and how the tax treatment of such an exchange would compare to the use of a fixed-value, paper coupon against the price of same goods. Specifically, you have asked us to comment on whether a customer would be required to pay GST/HST in transactions where:
1. paper coupons that confer a fixed dollar price reduction specified in the coupon are presented to the vendor, and
2. a loyalty program that entitles a participant to redeem a specified number of "air miles" points for a specific good with no cash required to be tendered.
While we cannot provide a definitive response to your query without the specific terms and conditions of the relevant programs, we are pleased to provide the following general comments concerning these two situations.
All legislative references are to the Excise Tax Act.
Legislation
As you know, the legislation relevant to the transactions at issue is contained in section 181, which describes the rules governing coupon redemptions. In the present case, any of subsections 181(2), (3) or (4) may be relevant, depending on the terms and conditions of the program in question. However, for these provisions to apply, the particular "coupon" must first fall within the meaning assigned to that term by subsection 181(1).
Subsection 181(1) defines a "coupon" to include a voucher, receipt, ticket or other device that may be exchanged for a property or service or that entitles the purchaser thereof to a reduction of the purchase price of property or a service, but does not include a gift certificate or a barter unit.
A paper voucher bearing those attributes will be subject to the terms and conditions of subsections 181(2), (3) or (4) above. Also, it is our position that where a participant in a loyalty program is entitled to redeem a specified number of points for a specific product with no cash required to be tendered, the redemption of points for the product is treated as the redemption of a "coupon" as contemplated in subsection 181(1).
Under subsection 181(2), where a registrant vendor accepts a coupon that entitles the recipient of a taxable supply (other than a zero-rated supply) to a reduction in the price of the supply equal to a fixed-dollar amount and the vendor can reasonably expect to be reimbursed for the redemption of the coupon by another person, the supplier is required to collect and remit tax on the full amount of the sale price; i.e., without reducing the price for the value of the coupon iFootnote 1.
The treatment under subsection 181(2) may also apply where, pursuant to subsection 181(3), a registrant vendor of a taxable supply (other than a 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. In this case, the provisions of subsection 181(2) apply to require the supplier to collect tax from the recipient based on the full amount of the sale price without reference to the value of the coupon iiFootnote 2. However, the vendor may also opt under subsection 181(3) to treat the coupon as reducing the value of consideration for the supply as provided for under subsection 181(4), in which case the recipient would be required to pay tax to the vendor on the net consideration for the supply after deducting the exchange value of the coupon. This is described further below.
Under subsection 181(4), when a registrant accepts, in full or partial consideration for a supply of a property or service, 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 subsection 181(2) does not apply in respect of the coupon, 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 exceeds the discount or exchange value of the coupon. In other words, the recipient of the supply would be required to pay tax on the net consideration for the supply after deducting the value of the coupon. iiiFootnote 3
Interpretation
Paper coupons
Bearing these legislative provisions in mind, paper coupons that confer a fixed dollar price reduction specified in the coupon might fall under one of subsections 181(2) or (3), depending on whether or not the vendor of the good can reasonably expect to be reimbursed for the redemption of the coupon by another person. If so, then the provisions of 181(2) would apply to require the vendor to collect tax from the recipient based on the full value of consideration for the supply; i.e., without reference to the value of the coupon.
Where the vendor could not reasonably expect to be reimbursed for the redemption of the coupon, then the vendor could choose to treat the coupon as a partial cash payment that does not reduce the value of the consideration for the supply. If the vendor chose to do so, the provisions of subsection 181(2) would apply to require the vendor to collect tax on the full value of consideration without reference to the value of the coupon. Alternatively, the vendor could opt to treat the non-reimbursable coupon as reducing the value of the consideration for the supply as provided for in subsection 181(4). In that case, the recipient of the supply would be required to pay tax on the net value of consideration after deducting the coupon value.
Points
As stated above, where a participant of a loyalty program is entitled to redeem a specified number of "air miles" points for a specific product with no cash required to be tendered, the redemption of points for the product is treated as the redemption of a "coupon" as contemplated in subsection 181(1). In such cases, it is also our position that subsection 181(4) will apply. As such, if the value of the consideration for the supply of the specific good in question is fully reduced by the number of points exchanged, the net consideration on which tax would apply would be zero, and the recipient of the supply would pay no tax.
The foregoing comments represent our general views with respect to the subject matter of your request. These 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 Canada Revenue Agency with respect to a particular situation. Future changes to the Excise Tax Act, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly 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. Pursuant to paragraph 181(2)(b), an amount equal to the "tax fraction" of the coupon would be included in the supplier's net tax for the reporting period in which the coupon was accepted. The tax fraction collectible by the supplier under paragraph 181(2)(b) might then be recoverable as an input tax credit by the person who pays the reimbursement, subject to the terms of subsection 181(5).
ii 2. Paragraph 181(3)(b) would allow the supplier to claim an input tax credit equal to the "tax fraction" of the coupon value.
iii 3. No input tax credits are available in respect of redemptions of coupons that fall under subsection 181(4).
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UNCLASSIFIED
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