14 June 2007 GST/HST Interpretation 93936 - XXXXX GST/HST Visitor Rebate on Short-term Accommodation

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.

I am writing to clarify our position on various issues identified in your draft response XXXXX that pertain to the GST/HST treatment of coupons. All legal references are to the Excise Tax Act ("ETA") unless otherwise noted.

Our understanding of the situation is as follows:

1. The XXXXX ("***"), a GST/ HST registrant XXXXX located in XXXXX under a licence granted under paragraph 207(1)(b) of the Criminal Code of Canada. *** is not a registered charity and is not a prescribed registrant for the purposes of subsection 188(5).

2. There are currently XXXXX in which XXXXX conducts its XXXXX operations, namely the XXXXXXXXX. Each of these XXXXX is located on a reserve as defined in the Indian Act.

3. A restaurant is located in each of the XXXXX. The restaurant located in the XXXXX is owned and operated by ***. *** reports its net tax for this restaurant in a separate return as authorized under section 239.

4. The restaurants located in the XXXXX are owned and operated by XXXXX ("Co A"). The restaurant located in the XXXXX is owned and operated by XXXXX ("Co B"). All of the outstanding shares of both Co A and Co B are owned by *** and both companies are registered for GST/HST purposes.

5. *** distributes paper coupons that specify either a fixed dollar or fixed percentage discount on a meal or beverage purchased at any of the aforementioned restaurants. In some cases, the coupon may confer a free meal or beverage.

6. *** also issues XXXXX Discount Cards to patrons of the XXXXX. The Cards serve two mutually exclusive functions: (1) XXXXX and (2) the Card entitles the patron to price reductions on rotating food and beverage specials advertised in the restaurants.

7. The points accumulated on the Card cannot be used against restaurant purchases; rather, a patron may be given a price reduction on food and beverages simply by presenting the Card to restaurant staff.

8. The Cards are distributed XXXXX free of charge to any patron who requests one. No personal information is taken from the patron when a Card is issued. The use of the Card cannot be traced to the activities of any person.

9. *** pays amounts to Co A and Co B for the redemption of coupons accepted from their restaurant customers. It also reimburses Co A and Co B for the dollar value of the discounts conferred to Card bearers.

Issues

1. Would ITCs be available under either of subsections 181(3) or 181(5) in respect of the discounts given to patrons who bear Cards?

2. How does the application of subsections 181(3) and 181(5) change where the restaurants accept coupons from individual Indians?

Analysis

1. Coupon vs. Card

As correctly stated in your draft, ITCs may be available to *** when it pays amounts to Co A and Co B for the redemption of a fixed dollar or fixed percentage coupons, subject to subsections 181(3) and 181(5). However, for the latter 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. It is our view that the paper coupons described in point 5 above qualify as a "coupon" for purposes of section 181. However, we do not consider the Card to be a coupon as it lacks the inherent characteristics of a traditional coupon. Specifically, it is our view that the word "other device" in the definition of "coupon" addresses things that are similar to a voucher, receipt or ticket and that the word "device" should have a meaning within that context. In addition, the Card is not surrendered when the discount is given as should normally be the case. Moreover, the Card does not bear the requisite qualities identified in subsections 181(2), 181(3) and 181(5); i.e., that the particular price reduction be specified in the coupon. The Cards do not contain this information; the presentation of a Card merely confers upon the bearer certain price reductions advertised in the restaurant.

As the meal or beverage discounts given to patrons presenting a Card will not fall within section 181, the discounts must be treated in accordance with the general rules of the ETA. Sales of meals and beverages from the XXXXX restaurant (owned by ***) are subject to subsection 153(1), which stipulates that the value of the consideration for a supply is the amount of money charged for the supply. As such, the XXXXX restaurant would deduct the amount of the discount from the regular price of the meal or beverage before calculating tax on the sale ^[ix]footnote 1.

Similarly, the restaurants located in the XXXXX (owned by Co A and Co B) would deduct the amount of the discount from the regular price of the meal or beverage before calculating tax on the sale to the patron in accordance with subsection 153(1) above. However, unlike the XXXXX, it is our view that when these restaurants allow a discount on the regular price of meals and beverages to Card bearers, they are essentially allocating a discount provided by ***. It is further our view that when *** pays amounts to Co A and Co B in lieu of the discounts conferred to the Card bearers, the amounts represent consideration for taxable supplies of meals and beverages by the restaurants to ***. In other words, when a Card bearer takes a discount on a meal or beverage, Co A/ Co B is viewed as making a taxable supply of meals and beverages to *** for which it subsequently receives monetary consideration. Co A/ Co B would be required to collect tax on the supply while *** would be entitled to corresponding ITCs, subject to section 169.

2. Section 181 and supplies to individual Indians

As you know, Technical Information Bulletin B-039R3 allows an individual Indian to acquire property on a reserve without paying tax, subject to the specific circumstances outlined in the Bulletin. An individual Indian acquiring taxable food or beverages in one of the restaurants would therefore not be responsible for the tax otherwise payable under section 165 and, since no tax would be payable, no tax would become collectible by the supplier.

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 taxable 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.

The deeming provisions of subsection 181(2) state the obligations of the supplier (restaurant) and recipient in terms of the tax collectible on the supply, and ensure that the supplier collects and remits tax on the full amount of the sale price without reference to the coupon. Pursuant to paragraph 181(2)(b), an amount equal to the "tax fraction" ^[x]footnote 2 of the coupon must be included in the vendor's net tax for the reporting period in which the coupon was accepted, regardless of when the remainder of the tax on the supply becomes payable under section 168. The tax fraction collectible by the supplier under paragraph 181(2)(b) is then generally recoverable as an ITC subject to subsections 181(3) and (5).

Subsections 181(3) and (5) describe, among other things, the circumstances under which an ITC may be claimed when a coupon is accepted in connection with a taxable (other than a zero-rated) supply. Subsection 181(3), applicable to non-reimbursable coupons of fixed percentage or fixed dollar amounts, states, in part:

(b) where the registrant [supplier] treats the coupon as a partial cash payment that does not reduce the value of the consideration for the supply, paragraphs (2)(a) to (c) apply in respect of the supply and the coupon and the registrant may claim an input tax credit for the registrant's reporting period that includes that time equal to the tax fraction of the coupon value.

Subsection 181(5), applicable to reimbursable coupons conferring a fixed dollar discount or price reduction on a taxable supply, states, in part, the following:

(c) if the supply is not a zero-rated supply and the coupon entitled the recipient to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon (in this paragraph referred to as the "coupon value"), the particular person [the coupon issuer], if a registrant ... at that time, may claim an input tax credit for the reporting period of the particular person that includes that time equal to the tax fraction of the coupon value ...

Both subsections 181(3) and (5) preclude ITC eligibility where the supply at issue is zero-rated. This measure is necessary in order to avoid a scenario whereby the tax collectible under paragraph 181(2)(a) is zero yet the ITC, calculated with reference to the "tax fraction" of the coupon, is an amount greater than zero. In other words, the provisions of subsections 181(3) and (5) were designed to allow an ITC as long as the tax collectible under subsection 181(2) is not zero.

On that basis, it is clear that the intent of the legislation is not to accord an ITC under paragraphs 181(3)(b) or 181(5)(c) where the tax otherwise collectible under subsection 181(2) is nullified by section 87 of the Indian Act. While the meals and beverages in the present case are not zero-rated supplies, the effect of section 87 of the Indian Act on paragraph 181(2)(a) is that the tax collectible on those taxable supplies becomes zero. As this result does not bear out the legislative intent of the subject provisions, it is our view that an ITC cannot be claimed where a restaurant accepts a coupon from an individual Indian in circumstances where the administrative policy B-039R3 prevails.

3. Free meal or beverage coupons

As stated in point 5 above, *** distributes, in addition to paper coupons specifying either a fixed dollar or fixed percentage discount, coupons that may confer a free meal or beverage. As these coupons do not specify a fixed percentage or fixed dollar discount/price reduction, they will not fall within the purview of subsections 181(2) or 181(3). Instead, they fall within subsection 181(4), which deems the value of the consideration for the supply to be the amount, if any, by which the value of the consideration for the supply as otherwise determined exceeds the exchange value of the coupon (i.e., the GST/HST applies to the price net of the coupon value). Accordingly, where a coupon confers a free meal or beverage to the user, subsection 181(4) essentially deems the value of consideration for the supply to be zero, and no tax will be payable on the supply. No ITC would be available with respect to the acceptance of such a coupon.

I trust that this is the information that you require. If you need further assistance, I may be reached at 613-952-8816.

2007/06/12 — RITS 94176 — Eligibility for Accommodation Rebate