8 December 2005 GST/HST Interpretation 63606 - Used Movie Video/DVD Exchanged for Credits

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.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to used movie videos/DVDs accepted by your unidentified client in exchange for credits against future purchases or rentals.

All legislative references are to the Excise Tax Act ("ETA") and the regulations therein, unless otherwise specified.

We understand the facts are as follows:

•   Your client ("the Company") is a Canadian resident corporation with operations throughout Canada that is engaged in the movie video rental business. The Company is registered for GST/HST purposes.

•   The Company's customers ("Customers") are primarily individuals who are not registered for GST/HST purposes.

•   All Customers have an account ("Account") with the Company in order to rent movies. This Account tracks all the rentals a Customer makes and records any debits (e.g. late fees, etc.).

•   The Company has recently introduced a used movie video trade-in program ("Program"). Customers must register for a Trade Account to participate in this program. A Trade Account is an extension of the Account number.

•   Pursuant to the Program, Customers can bring their used movie videos/DVDs or Game Software to their local Company store and trade them in on new Company products (e.g. rentals of movie videos/DVDs or game software, purchases of movie videos/DVDs or purchases of various snack food products.

•   There is no requirement that the used movie video/DVD or Game Software being traded in be originally acquired from the Company.

•   The Company has established a schedule reflecting how much credit ("credit") a particular movie video/DVD/Game Software trade-in will yield (e.g. a used movie video tape from 1995 in good condition = $XXXXX).

•   This credit is provided to Customer in one of two ways, namely (1) Customer receives a credit in their Account, or (2) Customer can receive a "re-loadable trade card" ("Card") that keeps track of all credits earned by Customer. In either case, Customer also receives a receipt from the Company identifying the amount of the credit.

•   Credits remain (in the Account or on the Card) indefinitely and can be applied against future rentals or purchases as well as any other applicable charges.

•   There are no requirements on the "redemption" of the credit by the Customer. For greater certainty, there are not any requirements that the Customer rent/purchase a specified amount before the credit can be applied (such as rent two movies before a $XXXXX credit can be used).

•   When a Customer that has previously traded in a used movie video/DVD or Game Software subsequently rents a movie at a Company store (or otherwise makes a purchase), any credit in the Customer's account will automatically be applied against that rental or purchase.

Interpretation Requested

You would like to know how the GST/HST would apply to the exchange of used movie videos/DVDs or game Software for credits and the use of credits to purchase or rent movies/DVDs or other goods as described above.

Interpretation Given

Based on the information provided,

(1) The exchange of used movie videos/DVDs or Game Software for credit is considered to be a sale of goods by the Customers to the Company. Where the Customer is not a registrant, GST/HST is not payable in respect of the sale, and the Company is not entitled to an ITC in respect of the purchase.

(2) A supply made by the Company and paid in full or in part by Customers with the credits in an Account or in a Card is a supply made for consideration equal to the price charged for the item before the credit is taken into account.

Explanations

You have mentioned four options in the GST/HST treatment of the case at hand:

1. Option 1: Application of section 153(4) "Used tangible personal property trade-ins"

As you anticipated in your letter, this section is not applicable because the condition that the supplier accepts the trade-in "at the time the supplier makes a supply of tangible personal property to a recipient" is not met. This condition restricts "trade-ins" for purposes of GST/HST to trade-ins that happen at the same time as the new supply.

2. Option 2: Reduction of Consideration

You are suggesting that, "as a matter of general principles," the amount credited to the Customer could be considered to be a reduction of the consideration paid by the Customer for the new rental/purchase, and GST/HST would apply on the reduced amount. The GST/HST treatment you describe under this option is the same as the one in Option 1 ("trade-ins"), but it is justified by a different rationale, namely general principles.

We do not share the view that general principles could justify a reduction of consideration for the new supply. "Consideration" is defined under the ETA as including any amount payable for the supply by operation of law. The credits provided to the Company by the Customers have value (e.g. they can be used to pay in part or in full for goods available at a Company store) and they had to be surrendered by the Customer to pay in full or in part for the new supply by the Company to the Customer. Consequently, they are or form part of an amount "payable" for the new supply and part of consideration for the supply.

3. Option 3: Section 181.2 Gift Certificate

This option usually produces the same results as the GST/HST treatment indicated in our Interpretation Given, except in the few instances where the Customer is a registrant.

As indicated in the Facts section above, your representation is that credits are provided by the Company to a Customer who trades in his (her) used videos / DVDs/games. Such credits are not what is commonly understood to be a gift certificate.

4. Option 4: Subsection 181(3) Non-reimbursable Coupon

In this option, you are suggesting that the store credits can be considered coupons for purposes of section 181. However, coupons are normally distributed free of charge, while the store credits at issue are provided in exchange for used videos / DVDs / games. The purpose of the trade-in program is to encourage potential customers to bring in their used videos/ DVDs/games for a credit towards a purchase at a Company store. The receipt or the Card provided in exchange for the used videos/DVDs/games is not a coupon, but evidence of store credit.

5. CRA position: Sale of used movie videos/DVDs/Games for credits

The exchange of used videos/DVDs/games for credits against future purchases is a supply of goods by way of sale, as a transfer of ownership is a sale under the definition of "sale" in subsection 123(1). It is subject to GST/HST under subsection 165(1), payable by the recipient of the supply, i.e. the Company. The consideration for the supply is the value of the credit.

The Company is entitled to claim an input tax credit (ITC) in respect of tax paid or payable, if any, on these purchases, if the used goods are for supply to the public in the course of commercial activities of the Company. Where the Customers who trade in their videos/DVDs/games for credits are not registered for GST/HST purposes, i.e. there was no GST/HST charged, the trade-ins would not give rise to any ITC for the Company.

When the Customers use the credits to obtain a supply from the Company, the supply is treated as a regular supply. For example, if the Customer pays for a DVD rental with a credit ($XXXXX value), the Company is required to account for GST/HST as if it received a $XXXXX payment for the DVD rental.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-1433.

Yours truly,

Bao Tran
Specialty tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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