24 August 2000 GST/HST Ruling 7277/HQR0000883 - Coupons Issued Under Co-promotion Agreement

Dear XXXXX:

This is in response to the letter from XXXXX of your office, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the facts described below. We apologize for the delay in responding to your request.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency.

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. Your client, XXXXX enters into a co-promotional agreement with XXXXX. The agreement allows XXXXX to include a coupon with the supply of XXXXX[.]

2. XXXXX charges customers an all-inclusive price for XXXXX The coupon cannot be sold separately.

3. The coupon is redeemable by the purchaser of XXXXX for XXXXX. The price of XXXXX.

4. The co-promotion agreement indicates an amount of monetary consideration is payable by XXXXX to XXXXX based upon the number of coupons redeemed by XXXXX purchasers to obtain XXXXX.

5. There are two particular coupons designed for use under the co-promotion agreement. One coupon (hereinafter referred to as Coupon A) indicates that it is valid for XXXXX. The other coupon (hereinafter referred to as Coupon B) indicates that it is valid for XXXXX.

Ruling Requested

You have requested clarification as to how the provisions of section 181 of the Excise Tax Act (ETA) apply to the two particular coupons described above.

You have also specifically requested confirmation tha tXXXXX payment to XXXXX is deemed not to be consideration for a supply under paragraph 181(5)(a) and that XXXXX is allowed an input tax credit under paragraph 181(5)(c).

Ruling Given

Based on the facts stated above, we rule that:

1. Both Coupon A and Coupon B would be considered as a type of coupon to which subsection 181(4) of the ETA applies.

2. Subsection 181(5) is not applicable to this situation. Accordingly, the deeming rule in paragraph 181(5)(a) does not apply to the amount paid by XXXXX. Further, XXXXX would not be entitled to claim input tax credits under paragraph 181(5)(c).

Explanation

1. There are three types of coupons identified under section 181 of the ETA:

Subsection 181(2) applies to "reimbursable coupons" which entitle the recipient of a taxable supply (other than zero-rated) to a "reduction of the price ... equal to a fixed dollar amount specified in the coupon" and the registrant supplier who accepts the coupon can "reasonably expect to be paid an amount for the redemption of the coupon by another person".

Subsection 181(3) applies to "non-reimbursable coupons" which entitle the recipient of a taxable supply (other than zero-rated) to a "reduction of the price equal to a fixed dollar amount specified in the coupon or a fixed percentage, specified in the coupon" and the registrant supplier who accepts the coupon can reasonably expect not to be paid an amount for the redemption of the coupon by another person.

Subsection 181(4) applies to all other coupons.

Coupon A entitles the recipient to XXXXX[.] There is no fixed dollar amount or fixed percentage specified in the coupon.

While Coupon B does contain a reference to a fixed dollar amount, there is no indication in the coupon that this entitles the recipient to a reduction in price of this amount. Rather, the reference to XXXXX in the coupon merely refers to the value of XXXXX to which the coupon entitles the recipient. In our view, Coupons A and B are identical. Consequently, neither subsection 181(2) nor 181(3) applies. Therefore, subsection 181(4) would apply.

2. It is also our view that XXXXX is not receiving an amount from XXXXX "for the redemption of the coupon". The term "redemption" refers to repurchasing or buying back. The amount paid by XXXXX (which is based upon the number of coupons used by XXXXX customers to obtain XXXXX) is not paid to buy back the coupons, it is the consideration paid to XXXXX under the agreement which allows XXXXX to supply the coupons to their customers XXXXX[.] Therefore, this amount paid to XXXXX under the co-promotion agreement is regarded as consideration for a taxable supply made by XXXXX. It is our view that this supply would be regarded as XXXXX. As stated above, subsection 181(5) is not applicable and therefore the deeming rule in paragraph 181(5)(a) does not apply to the amount paid by XXXXX and there is no entitlement to input tax credits by XXXXX under paragraph 181(5)(c).

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 our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-1512.

Yours truly,

Mark Seigel
Corporate Reorganizations Unit
Financial institutions and Real Property Division