14 September 1999 GST/HST Ruling HQR0001829 - Application of the GST/HST to a Grocery Rewards Program

Dear Sir:

Thank you for your letter of January 20, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the XXXXX rewards program.

Statement of Facts

Our understanding of the facts is as follows:

XXXXX operates a number of grocery stores both within and outside the participating provinces.

•   XXXXX sells both zero-rated groceries and non zero-rated items (i.e. supplies taxable at either 7 or 15 percent).

•   Customers may join a rewards program known as XXXXX members accumulate points based upon the purchase of specified items. These items vary from week to week and usually consist of both zero-rated basic groceries and non zero-rated items. For example, the purchase of a zero-rated basic grocery item may result in the customer being credited with XXXXX while the purchase of a non zero-rated item may result in the customer being credited with an additional XXXXX[.]

•   It is possible for XXXXX members to accumulate points through the use of third party persons. For example, a XXXXX member may receive a coupon entitling the person to XXXXX points in exchange for purchasing XXXXX[.]

•   Once the XXXXX member has accumulated, XXXXX a "voucher" is generated which entitles the member to XXXXX off their next purchase at XXXXX[.]

•   Currently, when a "voucher" is redeemed, XXXXX is treating this "voucher" in a manner similar to cash, that is, if a customers total owing is XXXXX [t]axes included), the "voucher" is used to reduce the amount owing to XXXXX with no adjustment being made for the GST/HST applicable to the gross amount of the taxable goods.

•   Should a customer use this "voucher" for an amount less than XXXXX the customer is refunded cash for the difference.

•   In order to be redeemed, the "voucher" must be used against the purchase of goods, that is, the coupon cannot be exchanged for XXXXX cash.

•   This "voucher" can currently be used for any goods sold through a XXXXX store.

•   XXXXX is not reimbursed by a third party for the value of the "vouchers" redeemed.

•   When redeemed the "vouchers" are not currently attributed to a specific supply.

XXXXX has recently modified its automated point-of-sale system in a number of retail locations and this point-of-sale system can provide for an immediate discount when the requisite point threshold is reached. Where a retail location is not so equipped, the non-automated "voucher" system described herein will continue to apply.

Ruling Requested

1. Is an ITC currently available to XXXXX under subsection 181(3) when a customer redeems the coupon against the purchase of items which are both zero-rated and non zero-rated? In such a situation the coupon would be used as partial consideration against the multiple supplies made by XXXXX which of course include non zero-rated goods. If yes, is the ITC equal to 15/115 or 7/107 of the face value of the coupon, or is the ITC to be calculated as the percentage of non zero-rated goods to the total consideration owing?

2. If an ITC is not currently available to XXXXX would an ITC be available if the coupon were somehow attributed only to the non zero-rated items in a customer's order? If yes, are there any documentation or procedure requirements that must be adhered to in order to substantiate the claiming of the ITC?

3. In addition to the above questions, you requested a ruling on the availability of an ITC under subsection 181(3) if the coupon were redeemed and treated as a partial cash payment in the following specific situations.

Situation 1:

A customers total grocery order comes to XXXXX[.] Included in the order are non zero-rated goods totaling at least XXXXX (tax included).

Situation 2:

A customers total grocery order comes to XXXXX. Included in the order are non zero-rated goods totaling less than XXXXX (tax included).

Ruling Given

Based on the facts set out above, we rule that:

1. No ITC is available to XXXXX under subsection 181(3) of the Excise Tax Act (the Act). The amount of the discount provided by the XXXXX points will reduce the value of the consideration for each of the goods purchased, further to subsection 181(4). Where a XXXXX member redeems XXXXX points and applies them against the purchase of taxable items which are both zero-rated and non zero-rated (i.e. taxable at 7 or 15 percent), the subsequent discount will apply to all items proportionally, based on the value of the consideration for each item.

2. The Department's position would not differ if the XXXXX points are somehow attributed only to the taxable supplies that are non zero-rated. No ITC is available to XXXXX under subsection 181(3) of the Act.

3. As stated previously, no ITC is available to XXXXX under subsection 181(3).

Explanation

Subsection 181(1) of the Act defines "coupon" to include "a voucher, receipt, ticket or other device but does not include a gift certificate". The Department has taken the position that the definition of "coupon" encompasses intangible devices that have the characteristics of a traditional paper coupon. Therefore, the points awarded under the XXXXX rewards program would meet the definition of "coupon".

The Department has also taken the position that where points are accumulated and redeemed after certain thresholds are met subsection 181(3) of the Act does not apply. The rationale is that a "point" does not entitle the recipient of the supply to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon or a fixed percentage specified in the coupon. These conditions are necessary in order for subsection 181(3) of the Act to apply.

Subsection 181(4) of the Act, however, would apply. Subsection 181(4) provides:

For the purposes of this Part, where a registrant accepts, in full or partial consideration for a supply of property or a service, a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and subsection (2) does not apply in respect of the coupon, the value of the consideration for the supply shall be deemed to be the amount, if any, by which the value of the consideration for the supply as otherwise determined for the purposes of this Part exceeds the discount or exchange value of the coupon.

Where a XXXXX member purchases property and redeems points, the value of the consideration is reduced by the amount of the discount associated with those points. As the XXXXX rewards program currently applies to the purchase of both non zero-rated and zero-rated supplies, any discount must apply to both where both are purchased by a XXXXX member. The amount of the discount would need to be prorated among each of the items purchased based upon the value of the consideration for each item.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Although there have been proposed amendments to subsections 181(1) and 181(4) of the Act, the current wording of those proposed amendments would not change the ruling provided herein. Any change, however, to the wording of the proposed amendments or any future proposed amendments to the Excise Tax Act, if enacted, could have an effect on this ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-3413.

Yours truly,

Philippe Nault
A/Senior Technical Analyst
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

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