15 May 2007 GST/HST Interpretation 65393 - Redemption of Points at Retailer

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 XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to revenues received by XXXXX from fees in respect to the XXXXX (Card). We apologize for the delay in responding to your enquiry.

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

Statement of Facts

We understand the facts to be as follows, based on the copy of the XXXXX Marketing Agreement you provided, the XXXXX product XXXXX (Website), and our telephone conversation:

1. XXXXX is a corporation incorporated pursuant to the laws of the Province of XXXXX and is a GST/HST registrant.

2. XXXXX has entered into the XXXXX (Marketing Agreement) between XYZ XXXXX (XYZ), ABC Inc. (ABC) and Financial Company (Financial).

3. XXXXX;

4. Based on XXXXX the Marketing Agreement, XYZ and ABC engage XXXXX to conduct a marketing program targeted specifically at XXXXX.

5. Based on the Marketing Agreement, XYZ and ABC are responsible for the design and setup of the Card, the welcome kits, the platform to process and load the Cards, the customer agents and XXXXX support, 1 day training of XXXXX employees, on-line statements to Cardholders, preparing the card applications and cardholder agreements as well as management services to Financial.

6. Under the terms of the Marketing Agreement, Financial enters into agreements with cardholders (Cardholder Agreement) and is responsible for the daily settlement with XXXXX of all transactions related to the Cards. Once an applicant for a Card is approved, Financial will issue the Card. XXXXX.

7. A copy of the Cardholder Agreement is available on the Website. XXXXX lists a series of fees that the Cardholder may be charged in respect to the Card.

8. All fees payable by the Cardholder are deducted from the balance of the Card as required.

9. The responsibilities of XXXXX in respect to the marketing program are stated in XXXXX the Marketing Agreement, as follows:

XXXXX.

10. More specifically, under XXXXX the Marketing Agreement, XXXXX is responsible for providing Card design to XYZ and ABC, draft advertising, promotion and sales material in relation to the marketing directed to XXXXX Customers. The marketing material is specifically described in XXXXX the Marketing Agreement to include, print, audio, video and website.

11. XXXXX the Marketing Agreement provides that for all services provided by XXXXX under the Marketing Agreement, XXXXX will receive a commission based on a percentage of the XXXXX interchange fee. The percentage can vary depending on the number of Cards issued.

12. XXXXX the Marketing Agreement provides that XYZ and ABC will pay XXXXX the monthly commission XXXXX.

13. According to the Marketing Agreement all the marketing efforts made by XXXXX seem to be targeted at XXXXX. The Website for the Card seems to be addressed specifically to the potential cardholders.

14. On the Website the following is provided:

•   information on how to apply for a Card;

•   product information;

•   questions and answers in relation to the Card;

•   XXXXX;

•   the cardholder agreement;

•   XXXXX.

15. According to the Website, the Card is also available by mail in which case an application form must be printed, filled and mailed to XXXXX. When an application is sent by mail, XXXXX will complete the registration and will contact the prospected cardholder for any missing information.

Ruling Requested

You would like to know whether GST/HST applies to the services supplied by XXXXX to XYZ and ABC under XXXXX the Marketing Agreement.

Ruling Given

Based on the facts set out above, we rule that the supply of services by XXXXX to XYZ and ABC under XXXXX the Marketing Agreement is a taxable supply and is subject to GST/HST.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

Based on XXXXX the Marketing Agreement, XYZ and ABC engage XXXXX to conduct a marketing program targeted specifically at XXXXX.

As stated in the Marketing Agreement XXXXX undertakes to provide services to XYZ and ABC which consist, in part, of the following activities: providing a sample Card design, providing graphics and marketing materials.

For these services XXXXX is compensated as stated in XXXXX the Marketing Agreement. Specifically, XXXXX will receive a commission based on a percentage of the interchange fee that can vary depending on the number of Cards issued.

XXXXX the Marketing Agreement provides that XYZ and ABC will pay XXXXX the monthly commission XXXXX out of the fees that XYZ collects from the cardholders.

The services provided by XXXXX under the Marketing Agreement may be characterized as a single supply of marketing services in respect to the Cards. Design, website development, marketing and promotional services are generally taxable supplies for GST/HST purposes.

The supply of services by XXXXX to XYZ and ABC under XXXXX the Marketing Agreement is a taxable supply and is subject to GST/HST.

Notwithstanding that the fee for the supply provided by XXXXX under the Marketing Agreement is calculated based on fees collected by XYZ from cardholders, the supply provided by XXXXX remains subject to GST/HST.

XXXXX is required to charge and collect GST/HST on the fees received from XYZ and ABC for services rendered under the Marketing Agreement.

Whether GST (at 6%) or HST (at 14%) should be collected in respect of the services performed by XXXXX depends on where the particular service is supplied.

Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

Except for certain exceptions, section 2 of Part V of Schedule IX deems the supply of a service to be made in a province if all or substantially all (90% or more) of the Canadian element of the service is performed in that province, or if the place of negotiation of the supply is in the province and it is not the case that all or substantially all of the service is performed outside the province.

For purposes of determining the place of supply, the place of negotiation of a supply means the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works, or to which that individual ordinarily reports, in the performance of the individual's duties in relation to the activities of the supplier in the course of which the supply is made. For the purposes of this definition, "negotiating" includes the making or acceptance of an offer.

Based on the information provided it appears that section 144.1 will apply to deem the supply to be made in a non-participating province and the amounts received by XXXXX under Marketing Agreement will be taxable at 6% pursuant to subsection 165(1).

Technical Information Bulletin B-078, Place of Supply Rules Under the HST, provides further explanation on these rules.

Additional Information

Generally, when a financial institution sets up an account and operates and maintains such an account, the services provided by the financial institution to the cardholder in that respect will generally be exempt as it is making a supply of a financial service pursuant to paragraph (b) of the definition of "financial service" in subsection 123(1), i.e. " the operation or maintenance of a savings, chequing, deposit, loan, charge or other account". When Financial sets up an account for the Cardholder it appears that Financial supplies a financial service that would likely fall under paragraph (b) of the definition of "financial service" in subsection 123(1).

Paragraph (l) of the definition of "financial service" in subsection 123(1) includes in that definition the "agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i)" of that definition unless it is excluded by any of paragraphs (n) to (t).

Whether the supply by XXXXX is considered to be a supply of a service within the meaning of paragraph (l) of the definition of "financial service" in subsection 123(1) depends on the degree of involvement of XXXXX as an intermediary in the supply of opening and maintaining the account by Financial to the cardholder.

Policy Statement P-239, Meaning of the term "arranging for" as provided in the definition of "financial service" outlines the meaning of "arranging for" for the purposes of determining whether a service is considered to be arranging for a financial service. Generally, an "arranging for" service can be described as the activities of one or more intermediaries as "go-betweens" in bringing together two (or more) persons for the supply of a financial service by one person to the other.

According to the Website, the Card is also available by mail in which case an application form must be printed, completed and mailed to XXXXX.

Where XXXXX provides a separate supply of a service of reviewing the application in the context of an application for a XXXXX card, XXXXX may be directly involved in the process of bringing together prospective Cardholders for the purpose of Financial providing the Cardholder a supply of financial service, included in paragraphs (a) to (i) of the definition of "financial service" in subsection 123(1). As such, the service provided by XXXXX in respect of the application process, would fall within paragraph (l) of the definition of "financial service" in subsection 123(1) and would not be excluded by any of paragraphs (n) to (t) of that definition. Therefore, consideration paid to XXXXX in respect of the application process would be for "arranging for" a financial service as stated in paragraph (l) of subsection 123(1). XXXXX would not be required to collect GST/HST on the consideration received for this supply. The provision of this supply would be an exempt financial service pursuant to section 1 of Part VII of Schedule V unless it is zero-rated under Part IX of Schedule VI. Additional information on zero-rated financial services is available in GST memorandum 300-3-9, Financial Service.

It is important to note that XXXXX may not be eligible to claim input tax credits (ITCs) in respect of property or services acquired to provide exempt supplies.

A registrant involved in both commercial activities and the making of exempt supplies, may be required to apportion the GST/HST paid or payable in respect of inputs used in both types of activities. The ETA does not prescribe any method that registrants must use to allocate their ITCs, but the method used must be reasonable, given the registrant's circumstances, and be used consistently throughout the year. For additional information on ITC allocation please refer to the GST/HST guide, General Information for GST/HST Registrants.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-0328.

Yours truly,

Hélène Bustamante
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2007/08/09 — RITS 86167 — GST Paid on XXXXX Ticket