Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 112537
April 19, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of GST/HST to the purchase and sale of cellular telephones
Thank you for your letter of February 17, 2009, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the purchase and sale of cellular telephones.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
From your submission, we understand the following:
1. A Co., a telecommunications service provider who is registered for GST/HST purposes, undertook a product initiative for cellular telephone equipment and services.
2. For the purpose of this submission the new branded initiative to be offered by A Co. will be referred to as "X".
The Cellular Services
3. X is provided in Canada to A Co.'s customers by A Co. through existing A Co. telecommunication networks, infrastructure and back-office technical and support staff, in the same manner as A Co.'s current cellular telecommunication services. The only difference is that the services are provided with X branding, rather than with "A Co." branding.
4. A Co.'s customers receive invoices with X branding, but the invoices indicate that the telecommunication services are being provided by A Co. GST collection, remittance and reporting requirements are made by A Co.
5. A Co.'s customers who select the X branded product enter into X branded service agreement with A Co. for the provision of telecommunication services (the "Agreement"). Under the Agreement, A Co.'s X branded customers are not required to enter into a long term service agreement. Rather, the telecommunication services are provided on a month-to-month basis.
The Cellular Telephones
6. The cellular telephones (the "Cellular Telephones") are configured to function only with the cellular telecommunication services provided by A Co. They cannot function with any other telecommunication service provider.
7. All new customers who enter into the Agreement to purchase X's telecommunication services must, at the time of entering into the Agreement, also acquire a Cellular Telephone.
8. Sometime after entering into an Agreement, existing X branded customers may decide to purchase a new Cellular Telephone, (e.g., they may wish to upgrade their Cellular Telephones). Customers have the choice of paying the full retail price or redeeming Loyalty Points to do so.
9. The Cellular Telephones are provided by A Co. on a discounted basis for the purpose of facilitating, furthering, and promoting A Co.'s business and the acquisition of A Co.'s X branded telecommunication services.
10. Customers are not required to return the Cellular Telephones to A Co. should they decide to terminate the Agreement.
The Loyalty Points Program
11. In order to promote and encourage customer loyalty, A Co. established and maintained a "points" system (the "Loyalty Points"). Customers may earn points based on the amount of telecommunication services purchased, which may be redeemed towards the purchase of the Cellular Telephones.
12. To track the Loyalty Points, each customer, upon entering into an Agreement, automatically receives a loyalty point account which is set at zero (the "Loyalty Account").
13. The Loyalty Points are set out on the customer's invoice (i.e., 1 point per every $10 worth of telecommunication services in a billing period). Loyalty Points may be awarded to existing X brand customers for other reasons - e.g., Loyalty Points may be awarded on a customer's birthday.
14. Each Loyalty Point earned is equal to $1 discount off the price of Cellular Telephones and can be redeemed in any amount (i.e., the Loyalty Points do not have to reach certain thresholds before they can be redeemed).
15. By virtue of entering into the Agreement, new customers may redeem up to 150 Loyalty Points toward the purchase of a Cellular Telephone. Since these Loyalty Points are tied to future consumption of telecommunication services, new customers who take advantage of the redemption will have their Loyalty Accounts debited by the number of points redeemed creating a negative balance in the Loyalty Accounts.
16. Thus, where a new customer chooses to redeem Loyalty Points in acquiring a Cellular Telephone upon entering into the Agreement, with a purchase price in excess of $150, they must pay the difference. For example, if the Cellular Telephone is priced at $200, the customer may redeem 150 Loyalty Points. The price of the Cellular Telephone will be reduced by $150 and they will incur a debit in their Loyalty Account in the amount of -150 and then they pay the remaining amount $50. Alternatively, the customer may choose to pay more than $50 on the acquisition of a $200 Cellular Telephone by paying $100 and redeeming 100 Loyalty Points, resulting in a balance of -100 in its Loyalty Account. As well, customers may choose not to redeem any Loyalty Points on their purchase of the Cellular Telephone and instead pay the full retail price.
17. Customers may accumulate a positive balance to a maximum of +150 Loyalty Points. These Points accumulated by a customer may be redeemed to purchase a new Cellular Telephone, as long as the debit balance does not exceed -150. For example, a customer with a Loyalty Account balance amount of -25 may acquire a new Cellular Telephone valued at $100 resulting in a Loyalty Account balance of -125.
18. The Loyalty Points can only be used for one purpose - to acquire the Cellular Telephones, on a discounted basis. They may not be used for any other purpose.
19. There is no third party reimbursement for the redemption of the Loyalty Points.
20. Where a customer purchases the Cellular Telephones and redeems Loyalty Points, the value of the consideration for the Cellular Telephones is reduced by the amount of the reduction associated with the Loyalty Points. As a result A Co. collects and remits GST/HST on the net price, if any, paid by the customer for their acquisition of the Cellular Telephone.
Termination of Agreement
21. As noted above, an A Co. customer using A Co.'s X branded cellular telephone services is not obligated to enter into a long-term service agreement and may terminate the Agreement at the end of any month.
22. If a customer terminates an agreement and has a negative balance in the Loyalty Account, the customer is required to pay, as liquidated damages, the amount remaining in the Loyalty Account (the "Liquidated Damages"). For example, a customer who terminates the Agreement with a Loyalty Account balance of -100 must pay A Co. the amount of $100 as Liquidated Damages. The customer must also pay any remaining service charges on their invoice.
23. If a customer terminates an Agreement with a positive Loyalty Account balance, the positive Loyalty Points earned by the customer are not redeemable for cash, tangible personal property or services, and are otherwise without value. For example, a customer who terminates the Agreement with a Loyalty Account balance of +100 will not receive any money or products from A Co. Rather; the Loyalty Account is simply cleared and closed.
Interpretation Requested
You would like to know whether:
The Loyalty Points are coupons for GST/HST purposes and reduce the price of the Cellular Telephones such that GST is payable on the net price, if any, paid by the customer, by virtue of subsection 181(4). As a result, no ITC is available to A Co. with respect to its acceptance of the Loyalty Points.
A Co. is entitled to claim ITC's with respect to its purchase of the Cellular Telephones.
The Loyalty Points are not subject to GST/HST.
A Co. is deemed to have made a taxable supply equal to 100/113 of the amount of the Liquidated Damages and deemed to have collected GST/HST.
Interpretation Given
Based on the information provided, we offer the following comments:
The definition of "coupon" in subsection 181(1) includes a voucher, receipt, ticket or other device. CRA has stated that the redemption of points is viewed as the redemption of a coupon. Therefore, the Loyalty Points awarded to customers as a result of consumption of telecommunication services, on special occasions such as birthdays, or upfront based on the expectation of future consumption of telecommunication services can be viewed as a coupon upon redemption; the awarding of the points to customers is considered a taxable supply that does not attract GST/HST where there is no consideration charged to the customers for the supply.
Subsection 181(3) applies to "non-reimbursable coupons" which entitle the recipient of a taxable supply (other than zero-rated) to a "reduction of the price equal to a fixed dollar amount specified in the coupon or a fixed percentage, specified in the coupon" and the registrant supplier who accepts the coupon can reasonably expect not to be paid an amount for the redemption of the coupon by another person.
The registrant who accepts a non-reimbursable coupon has the option of treating the coupon as a reduction of the value of consideration for the supply or as a partial cash payment that does not reduce the value of consideration for the supply.
Upon redemption of the Loyalty Points, the customers would in fact be redeeming a coupon. Where the coupon confers a fixed dollar price reduction (i.e., $1 discount per point redeemed) towards the purchase of taxable supplies other than zero-rated supplies, and A Co. does not expect to be reimbursed for the redemption of the coupon, A Co. may charge the GST/HST on the amount, if any, by which the value of consideration exceeds the value of the coupon (i.e., the net price) and cannot claim an ITC in respect of the redemptions. Where A Co. treats the coupon as a partial cash payment, the coupon value is considered to be a tax inclusive amount and A Co. should charge the GST/HST on the full consideration for the supply. An amount equal to the tax fraction of the coupon value must be included in the supplier's net tax for the reporting period in which the coupon was accepted regardless of when the remainder of the tax becomes payable under section 168. A Co. may claim an ITC on the tax fraction of the coupon value.
Generally, under section 169, where a person acquires or imports property or a service and, during a reporting period of the person in which the person is a registrant, the GST/HST in respect of the property or service becomes payable by the person or is paid by the person without having become payable, that person will be eligible to claim an ITC in respect of the tax to the extent (expressed as a percentage) the property or service is acquired or imported for consumption, use or supply in the course of the person's commercial activities. Subject to the requirements of section 169 being met, A Co. will be able to claim an ITC with respect to the purchase of the Cellular Telephones.
Subsection 182(1) may apply where, as a consequence of the breach, modification or termination of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant, an amount is paid or forfeited to that registrant otherwise than as consideration for that supply.
The amounts referred to as Liquidated Damages are paid by the customers to bring the negative balances of the Loyalty Accounts to nil upon termination of their Agreement. This only happens when customers have not purchased sufficient telecommunication services to earn enough points to offset previous price discounts given on purchases of Cellular Telephones.
There is a distinct possibility that these amounts could be viewed as consideration for a taxable supply of points and as such would attract GST/HST; otherwise, these amounts would fall within the purview of subsection 182(1). Hence, where these amounts are paid otherwise than as consideration as a consequence of the termination of an agreement for the making of a taxable supply of telecommunication services, the customers would be deemed to have paid an amount of consideration for the supply equal to 100/113 of the Liquidated Damages, and A Co. would be deemed to have collected and the customers deemed to have paid GST/HST equal to 13/113 of the same amounts where the place of supply is in Ontario.
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 ETA, 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 613-952-1512. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Constantin Constant
Specialty Tax Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED