Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 182006
Dear [Client]:
Subject: GST/HST RULING
Application of GST/HST to rewards program
Thank you for your letter of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to supplies made under the […] Rewards program. We apologize for the delay in responding.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand the following from the documents provided:
1. The […] (Association) is a GST/HST registered, non-profit organization whose principal business involves selling memberships which entitle its members to receive […][certain] services.
2. The Association operates the […] Rewards loyalty program (Program) which allows its members to earn reward dollars from businesses (Partners) that have agreed to participate in the Program.
3. The Program permits Association members who present their membership card to earn reward dollars from the Partners when purchasing property and services from those Partners:
[…][direct quote from agreement]
4. Reward dollars are described in the Program Terms and Conditions as a gift certificate that allows members to purchase various goods and services from the Association:
[…][direct quote from agreement]
5. The Association has entered into agreements with Partners that govern the Partner’s participation in the Program. Under the Program a Partner purchases reward dollars from the Association to issue to the Partner’s customers who are Association members.
6. Included for our examination was a participation agreement (the Agreement) with a Partner dated [mm/dd/yyyy]. This agreement is understood to be representative of the terms and conditions which apply to all Partners.
7. Section [#] of the Agreement provides that the Partner shall offer discounts, […] expressed in reward dollars or other special offers to its customers who are members, with the amount of reward dollars provided to the member being set out in the […][Appendix] to the Agreement:
[…][direct quote from agreement]
8. Section [#] of the Agreement provides that the Partner shall pay amounts to the registrant as consideration for the supply of gift certificates (the “Program Fees”), with the amount of the Program Fees, as stated in […][the Appendix], being equal to the amount of the reward dollars that are issued:
[…][direct quote from agreement]
9. Each reward dollar may be used by a member to purchase products and services from the Association. There is no requirement to reach a particular threshold in order to redeem rewards dollars, there are no conditions that need to be satisfied to redeem them, but they are non-transferable and cannot be redeemed for money.
10. The Association may cancel some or all of the reward dollars earned by the member on their gift certificates if the Partner advises the Association to void such reward dollars for a valid reason. For example, if the member returned products where a gift certificate was issued or if someone else used the member’s membership card to accumulate them, the registrant may cancel or refuse to recognize a gift certificate if it cannot confirm that they were properly attained. In the event that the member defaults on payments for their co-branded credit card, reward dollars accumulated on those purchases may be revoked. If any pending credited reward dollars are cancelled for any reason, they become void without compensation. Any reward dollars properly accumulated do not expire.
RULING REQUESTED
You would like to confirm that:
1. payments received by the Association from Partners that participate in the Program and who offer reward dollars to Association members represent consideration for the supply of a gift certificate and, as such, the Association is not required to collect GST/HST on the supply of the reward dollars;
2. when reward dollars are used by members to purchase property and services, the Association should treat the reward dollars as money; and
3. if the reward dollars are not considered a gift certificate, the non-reimbursable coupon rules in subsection 181(3) apply in situations where the Association treats the reward dollars as a “partial cash payment that does not reduce the value of the consideration for the supply” so as to allow the Association to claim an input tax credit (ITC) for the tax fraction of the reward dollars.
RULING GIVEN
Based on the facts set out above, we rule that
1. a payment received by the Association from a Partner that participates in the Program and who credits reward dollars to Association members or from a member acquiring additional reward dollars represents consideration for the taxable supply of a coupon rather than a gift certificate and, accordingly, the Association is required to collect GST/HST on the value of the consideration for the supply of the reward dollars;
2. when reward dollars are used by members to purchase property and services, the Association should treat the reward dollars as a reduction of the price of the property or service equal to the fixed dollar amount (the reward dollars) redeemed; and
3. the non-reimbursable coupon rules in subsection 181(3) apply where the Association treats the reward dollars used for a taxable supply of property or a service (other than a zero-rated supply) as a “partial cash payment that does not reduce the value of the consideration for the supply”. In such an instance, paragraph 181(3)(b) and paragraphs 181(2)(a) to (c) would apply allowing the Association to claim an ITC for the tax fraction of the redeemed reward dollars.
EXPLANATION
The Canada Revenue Agency (CRA) has set out its position of what attributes a gift certificate requires in GST/HST Policy Statement P-202, Gift Certificates, updated April 2012.
Reward dollars issued under the Program have similar characteristics of loyalty program points, but without the need to attain a particular threshold before redeeming them. Under a points-based system a member earns points through purchasing supplies from Partners; under the Program, a member earns reward dollars in the same manner. The more a member purchases, the more points they acquire; the same with reward dollars. Additional points can be purchased by members; again, reward dollars can also be purchased by members. Reward dollars are not transferable to another person.
The CRA views the crediting of members with reward dollars to be the issuance of coupons by the Association, and the members’ subsequent use of reward dollars for purchases of goods and services as the acceptance of coupons by the Association. As such, the coupon rules found in section 181 apply when reward dollars are used by members to acquire property or services.
Subsection 181(1) defines “coupon” to include “a voucher, receipt, ticket or other device but does not include a gift certificate”. The CRA has taken the position that the definition of “coupon” encompasses intangible devices that have the characteristics of a traditional paper coupon, including electronic devices. Reward dollars under the Program meet the definition of “coupon” for GST/HST purposes.
The application of section 181 occurs at the time when a coupon is accepted/redeemed. In determining which provision under section 181 applies to reward dollars, the characteristics of the coupon must be taken into consideration. In this case, where the reward dollars are accepted in full or partial consideration for a taxable supply other than a zero-rated supply, subsection 181(3) applies to the treatment of the redeemed reward dollars.
Where the Association treats the redeemed reward dollars as a “partial cash payment that does not reduce the value of the consideration for the supply” that is a taxable supply of property or a service (other than a zero-rated supply) under subparagraph 181(3)(a)(ii), paragraph 181(3)(b) invokes paragraphs 181(2)(a) to (c) to apply in respect of the supply and the redeemed reward dollars and permits the Association to claim an ITC of the tax fraction of the redeemed reward dollars. Under paragraphs 181(2)(a) to (c), the GST/HST collectible is calculated for the supply of the property or service acquired by the member as if the reward dollars were not accepted, the Association is deemed to have collected the tax fraction of the redeemed reward dollars at the time they are redeemed, and the tax payable by the member is the amount the GST/HST collectible exceeds the tax fraction of the redeemed reward dollars.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the rulings given in this letter provided that: none of the issues discussed in the rulings are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-324-7413. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
William Parker
General Operations and Border Issues Division
GST/HST Rulings Directorate
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