28 March 2002 GST/HST Interpretation 34565 - Air Miles Award Tickets

Dear XXXXX:

Thank you for your letter of February 6, 2001, and attachments mailed October 30, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to airline tickets sold abroad and air miles award tickets.

Please note that all legislative references are to the Excise Tax Act and regulations thereunder, unless otherwise specified.

Our understanding of the facts is as follows. You are a member in the XXXXX frequent flyer award program of XXXXX and XXXXX. Your mileage credits, known as XXXXX Miles, were accumulated by flying on XXXXX member or partner airlines, against eligible fully paid tickets. Your query is with respect to an award ticket issued to you by XXXXX office for travel on XXXXX from Montreal to Chicago to Denver and then return from Denver to Chicago to Toronto. There was no fee charged to you for exchanging your XXXXX Miles for the award ticket. You were required to pay various airport taxes as well as the GST ($44 U.S. funds) in respect of your award ticket.

Interpretation Given

You would like to know the following:

1. Are non-resident airline companies obliged to charge the GST/HST on tickets issued abroad for travel from Canada to the U.S.A.?

Generally, the GST/HST is applied to the consideration paid or payable for taxable supplies that are made in Canada, or deemed to be made in Canada, unless a legislative provision specifically exempts the supply. Section 165 imposes on every recipient of a taxable supply the obligation to pay tax in respect of that supply. Taxable supplies, other than zero-rated supplies, made in Canada are subject to the GST at a rate of 7% when made in a non-participating province, and to the HST at the rate of 15% when made in a participating province (New Brunswick, Nova Scotia, or Newfoundland and Labrador). Zero-rated supplies are taxable supplies enumerated in Schedule VI and are subject to the GST at a rate of 0%.

The supply of an air passenger transportation service is made in Canada if the service is, or is to be, performed in whole or in part in Canada pursuant to paragraph 142(1)(g). The supply of an air passenger transportation service made in Canada is generally taxable at the rate of 7%, or 15% if made in a participating province, unless it is part of a continuous journey that is zero-rated in accordance with section 3 of Part VII of Schedule VI.

Section 3 of Part VII of Schedule VI zero-rates the following:

"A supply of a passenger transportation service that is provided to an individual or a group of individuals and that is part of a continuous journey of the individual or group that includes transportation by air, where

(a) the origin or termination of the continuous journey, or any stopover in respect thereof, is outside the taxation area;

([b]) the origin and termination of the continuous journey, and all stopovers in respect thereof, are outside Canada;

([c]) the origin of the continuous journey is within the taxation area, but outside Canada; or

([d]) all places at which the individual or group embarks or disembarks an aircraft are outside Canada and the origin or termination of the continuous journey, or any stopover in respect thereof, is outside Canada."

The taxation area means Canada, the U.S.A. (except Hawaii), and the islands of St. Pierre and Miquelon.

The term "continuous journey" is important for determining whether a passenger transportation service qualifies as zero-rated under section 3 of Part VII of Schedule VI. It is not uncommon for an individual to have a single ticket in respect of two or more transportation services. Where multiple transportation services are provided on a single ticket, each of the services is treated as part of a continuous journey and accorded the same GST/HST status. In the case where separate tickets are issued to an individual for different portions of a journey, special rules apply.

The information you submitted indicates that you purchased a single ticket and, as such, all of the transportation services on the ticket are part of a continuous journey. As the origin of your continuous journey is Montreal, Canada, and the termination of your continuous journey is Toronto, Canada, the supply of your air passenger transportation service is taxable for GST purposes at a rate of 7% as both the origin and termination of the continuous journey are within the taxation area, and in Canada (but not in a participating province). As a GST/HST registrant, a non-resident airline company would be required to collect the 7% GST on the value of the consideration for the supply.

2. If non-resident airline companies are obliged to charge the GST/HST on tickets issued abroad for travel from Canada to the U.S.A., are award tickets issued against accumulated mileage credits under frequent flier programs also subject to the GST/HST, and on what value is the tax calculated?

It is always a question of fact as to how any particular provision of the Excise Tax Act will apply to the accumulation and exchange of credits under a reward program, including frequent flyer programs. The application of the GST/HST to reward programs depends on the individual program, the program parameters, the contractual agreements relating to the program, and the manner in which the program is operated. As you can appreciate, we are unable to provide a conclusive response as to whether the GST/HST was correctly charged, due to the limited information provided. Nonetheless, assuming that our understanding of the XXXXX program and the transaction with XXXXX is correct, it does not appear that GST/HST should have been charged on the award ticket where such an award ticket was issued in exchange for accumulated credits (i.e. XXXXX miles in this instance).

For the purposes of section 181, a "coupon" includes a voucher, receipt, ticket or other device that may be exchanged for a property or service or that entitles the purchaser thereof to a reduction of the purchase price of property or a service, but it does not include a gift certificate or a barter unit. The Canada Customs and Revenue Agency (CCRA) has taken the position that the definition of "coupon" encompasses intangible devices that have the characteristics of a traditional paper coupon. Given the preceding, the type of mileage credit issued under the XXXXX program (i.e. XXXXX Miles) is considered a type of coupon.

The rules found in subsection 181(2) apply to reimbursable coupons that entitle holders to a reduction in the purchase price of taxable goods or services (other than zero-rated goods or services) equal to a fixed dollar amount specified in the coupon. The rules found in subsection 181(3) apply to non-reimbursable coupons that entitle holders to a reduction in the purchase price of taxable goods or services (other than zero-rated goods or services) equal to either a fixed dollar amount specified in the coupon or a fixed percentage reduction specified in the coupon. Lastly, the rules found in subsection 181(4) apply to all other coupons that do not meet the requirements of subsections 181(2) or 181(3).

The CCRA has taken the position that subsection 181(4) applies to coupons that are accumulated and redeemed after certain thresholds are met (e.g. points, award miles or other similar devices). Under this provision, where a coupon is accepted by a registrant vendor, the value of the consideration for the supply (in your case, the award ticket) is deemed to be the amount, if any, by which the value of the consideration for the supply as otherwise determined exceeds the discount or exchange value of the coupon. In other words, the registrant vendor who accepted the coupon treats the coupon as a reduction in the amount on which GST/HST is calculated at the time of sale. The GST/HST is applied to the price net of the coupon value.

Therefore, airlines that are registrants for GST/HST purposes would be required to collect the GST/HST on the net value of the consideration for the award ticket once the accumulated mileage credits have been applied to reduce the value of the consideration for the supply. When a coupon is accepted as the total consideration for a supply, then no GST/HST is payable. However, if an amount is required to be paid by the recipient in addition to the coupon, then GST/HST is payable at the rate of 7% or 15% of the amount that is payable.

It should be noted that with respect to air passenger transportation services certain charges that are payable in respect of an award ticket may be consideration for the transportation service for GST/HST purposes. In such a case, GST/HST would be payable on those amounts.

Please note that we contacted XXXXX officials to discuss, in general terms, the application of the GST/HST to award tickets issued under the XXXXX program. We have been informed by XXXXX of XXXXX office that the GST/HST would not normally be payable on an award ticket (subject to any GST/HST that may be payable on service charges, as noted above). As such, you may wish to contact XXXXX to discuss whether a refund of tax is warranted in your particular circumstances. XXXXX has also indicated that your local XXXXX representatives can contact her directly, should they require additional clarification on the application of the GST/HST to your award ticket. XXXXX may be reached at XXXXX.

Further to this, pursuant to subsection 232(1), where a person has paid an amount as or on account of tax in error, the person may seek a refund or credit of the amount from the supplier within two years after the date the amount was charged or collected by the supplier. If the supplier chooses not to refund or credit an amount of tax collected in error, then the purchaser may apply for a rebate of the amount under subsection 261(1). An application for this rebate must be filed within two years from the day the amount in question was paid. Further information is provided in the enclosed guide General Application for GST/HST Rebates.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9588.

Yours truly,

Doris Rist
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate