11755-7(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
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XXXXX
TIS Team Leader
Client Services Division
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XXXXX
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Dear XXXXX
Further to your telephone discussion with Sara Nixon on July 19, 1995 and your original correspondence of November 30, 1994, the following summarizes our comments as to the application of GST to the transaction described in your memo. We apologize for the delay in our response.
Background
1. A coupon clearing company ("the company") has been set up for the purpose of purchasing and redeeming coupons in bulk quantities.
2. The company will purchase all of the coupons accepted by a particular retailer (e.g. a grocery store), for subsequent redemption to the various manufacturers and other similar persons who initially issued the coupons.
3. The company purchases the coupons from a particular retailer for a price calculated as the face value of the coupon less a handling charge and a commission fee.
4. The advantage to the retailers participating in this transaction is that the company takes on the responsibility of sorting the coupons and organizing them for mailing to the various persons who have agreed to honour their redemption.
5. The company is not acting as agent of the manufacturer or other similar persons who initially issued the coupons and who have agreed to pay out the appropriate proceeds to parties presenting such coupons for redemption.
6. We are assuming from the wording of the background provided to us, that the company is not acting as agent for any of the particular retailers.
Question
You have asked whether the provision of the coupons by the retailers to the company should be treated as a redemption of the coupons or a sale of the right to redeem the coupons for the purposes of GST.
Discussion
As has been discussed during a telephone conversation of July 19, 1995, the transactions presented for our comments were reviewed as part of an audit of a grocery store. No assessment with respect to these particular transactions has been raised. No documentation such as an invoice which would indicate the disclosure given to the various amounts being billed by the company to the grocery store, was obtained, nor were any written agreements which may have been entered into by the grocery store and the company, obtained. There is also no documentation to evidence the relationship existing between the company and parties who have agreed to redeem the coupons. As a consequence, in order to make comments on the application of GST to the transactions, it is necessary to make assumptions. If the supporting documentation does not support our assumptions, our comments would need to be revised.
The circumstances of the transaction described are unusual when compared to the usual operations of a coupon clearing house. Almost all coupons have some sort of wording the purpose of which is to effectively limit any payment of reimbursement to the retailer who initially accepted the coupon. It is quite common that the wording also contains a requirement that any request for reimbursement be accompanied by proof of sales by the retailer. To comply with these requirements and also to minimize the administrative costs of handling large volumes of coupons, retailers frequently enter into agreements with coupon clearing houses which act as their agent for purposes of filing coupon reimbursement requests. At the same time, to reduce administrative costs, it is usual that the manufacturers who have agreed to ultimately redeem coupons submitted by retailers, enter into agreements with third party redemption agents, to act as their agents in accepting coupons presented for reimbursement by coupon clearing houses or other parties. In some instances, the coupon clearing house and the redemption agent are the same person. Given what we have been advised as being the usual transactions of the industry with respect to the redemption of coupons, we are concerned that the details of the transactions presented for our comments, may not be entirely complete. It is difficult to understand how a coupon clearing company such as the one you have described, could redeem coupons when it is not acting as agent for the retailers, however, we accept your statement that the company is not acting as agent for either the retailer or the manufacturer and our comments follow.
Where the company is purchasing coupons from a particular retailer and the company is not acting as agent for the particular retailer but is instead making an outright purchase of the coupons, the company is purchasing property for a price calculated as being the face value of a particular coupon less amounts which are called a handling charge and a commission. The property being purchased is the right to redeem the coupon. The transaction cannot be treated as a redemption of a coupon such that the provisions of subsection 181(5) of the Act would act to deem the amount received by a particular retailer from the company to not be consideration for a supply.
Subsection 181(5) of the Act addresses a transaction which is the redemption of a coupon. For the provision to apply, a supplier who is a registrant, as full or partial consideration for a taxable supply of a property or a service (other than a zero-rated supply), must have accepted a coupon which was exchanged for the property or service or which could have entitled the recipient of the supply to a reduction of, or for a discount on, the price of the property or service and a particular person at any time must have paid, in the course of a commercial activity of the particular person, an amount to the supplier for the redemption of the coupon.
In the particular circumstances under review, the issue is whether the coupon clearing company is paying an amount to the retailers in the course of a commercial activity. The company is purchasing coupons for subsequent redemption. Without any special deeming provisions, the redemption of coupons would be a financial service for the purposes of GST and the coupon clearing company would not be carrying on commercial activities and subsection 181(5) would not be applicable.
Since the company is not acting as agent for any particular retailer from whom the company is purchasing coupons, it must be assumed that the wording on the coupons being purchased does not limit redemption requests to those of retailers who had initially accepted the coupons and that any person who is presenting the coupon for redemption is entitled to receive the redemption amount. Given this assumption, the company has purchased the right of redemption. The supply being made is a financial service and as such, does not attract GST. This is not the incidence of tax which would occur if the company was acting as agent of the retailer and charging a fee for its services as agent.
You should also be aware of how GST will apply to the transaction which will occur between the company which has now purchased the coupons from the retailers, and the manufacturers who have agreed to ultimately redeem the coupons. The provisions of subsection 181(5) will not apply. The manufacturer is not paying the supplier who initially accepted the coupon. As a consequence, the payment by the manufacturer will be the settlement of a debt, which is generally treated as a financial service and which does not attract GST. This will be a significant disadvantage to the manufacturer in that if he had made the payment for the redemption of the coupon to the supplier, the provisions of subsection 181(5) would have allowed an input tax credit claim.
If when you review your particular transactions and it is found that they more closely resemble the traditional transactions between retailers, coupon clearing houses, redemption agents and manufacturers, we would be pleased to provide any further support you may require to analyze the application of tax.
Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are: Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931, and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations XXXXX
Mitch Bloom (signoff)
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