7 April 2022 CBA Roundtable, Q.19

Company A sells goods in taxable supplies under its brand to a network of independent dealers managed by Company B, and also to Company B for sale by it or for resale to such network. Company C provides loyalty points to Company A or (through Company A) Company B or (through Company A and Company B) to the dealers. Such points entitle the retail customer to a 10% discount on widgets purchased at the applicable retail outlet of Company B or a dealer upon redeeming one loyalty point for each widget purchased. Company A reimburses Company B for 85% of the discount provided and (where the retail sale occurs at a dealer) Company B pays over the reimbursement so received by it to the dealer. Instead of receiving a discount on widget purchases, the customer may be able to redeem points for a free service provided by Company B or the dealer, the cost of which would be reimbursed by Company A directly to Company B or indirectly (via Company B) to the dealer.

1. Will the redemption of loyalty points by a customer for a discount applied to a purchase of widgets cause the creation and issuance of a coupon to the customer for the widget as defined under s. 181(1) (so that the acceptance of the points by Company B or its dealer entails the issuance of a coupon to the customer, which is then exchanged for the discount applied to the customer’s widget purchase)?

2. If “yes,” what are the s. 181(2) consequences of such acceptance?

3. On such redemption, would s. 181(5) allow Company A to claim an ITC for the amount of tax embedded in the reimbursement paid to Company B?

5. Does the redemption of points by a customer for a free service entail the creation of a “coupon” (as defined in s. 181(1), which is then exchanged for the free service (so that s. 181(4) applies when the coupon is accepted by Company B or the dealer)?

6. Would Company A be eligible to claim an ITC on redemption of the points?

CRA responded:

1. The acceptance of the loyalty points by Company B or its independent dealers is considered to be the acceptance of a “coupon” as defined in s. 181(1), that is redeemed by a customer for a discount that is applied to the purchase of widgets.

2. Under s. 181(2), in accepting points (i.e. the coupon) as partial consideration for a taxable supply that is not a zero-rated supply, Customer B or its independent dealer is deemed to have collected the tax that would have been collected had the points not been accepted. Pursuant to s. 181(2), this includes an amount equal to the tax fraction of the value of the points redeemed (the coupon value) that is embedded in the discount allowed to the customer.

3. Where Company A pays an amount to Company B in respect of the coupons (points) redeemed by Company B, s. 181(5) would allow Company A to claim an input tax credit (ITC) for the amount of tax embedded in the coupon value. However, without additional information, CRA was unable to determine whether Company A was similarly entitled when it made the corresponding payments to Company B.

4. When the supplier of widgets redeems customer loyalty points and receives payments from another person in respect of such redemptions, s. 181(2) applies as the scenario is that of a reimbursable coupon.

5. The redemption of loyalty points by a customer in exchange for a free service provided by Company B or an independent dealer would be considered the acceptance of a coupon, and s. 181(4) would apply where Company B or its dealer accepted the loyalty points.

6. As s. 181(4) applies, the reimbursement of the coupon is deemed under s. 181(5) not to be consideration for a supply and the payment and receipt of the amount is deemed not to be a financial service. However, there would be no ITC available as s. 181(5)(c) is not met, i.e., the coupon does not entitle the recipient to a reduction of the price of the taxable supply by a fixed dollar amount specified in the coupon, and instead the recipient of the service, on redeeming the points, opts in lieu of a fixed dollar amount off the price of widgets for a free service, the value of which varies depending on the location where the service is performed..

Aco sells taxable goods under its brand to a network of independent dealers managed by Bco, and also to Bco for sale by it or for resale to such network. Cco provides loyalty points to Aco or (through Aco) Bco or (through Aco and Bco) to the dealers. Such points entitle the retail customer to a 10% discount on widgets purchased at the applicable retail outlet of Bco or a dealer upon redeeming one loyalty point for each widget purchased. Aco reimburses Bco for 85% of the discount provided and (where the retail sale occurs at a dealer) Bco pays over the reimbursement so received by it to the dealer.

Instead of receiving a discount on widget purchases, the customer may be able to choose to redeem points for a free service provided by Bco or the dealer, the cost of which would be reimbursed by Aco directly to Bco or indirectly (via Bco) to the dealer.

CRA indicated that the ETA s. 181 coupon rules would to some extent apply, so that:

• On the acceptance of the points (viewed as “coupons”) by Bco or the dealer as part consideration for the taxable supply of the widgets, they are deemed to have collected tax equal to the GST/HST that would have been collected had the points not been collected (i.e., equal to the tax fraction of the points’ value).
• When Aco pays an amount to Bco respecting the points redeemed by Bco, s. 181(5) would allow Aco an input tax credit (ITC) for the amount of tax embedded in such redeemed “coupons.”
• However, additional information would be required to determine whether Aco would also be entitled to ITCs when making payments to Bco for points redeemed in turn by a dealer.
• Similar consequences would attend the redemption of loyalty points by a customer in exchange for a free service provided by Bco or the dealer – except that, regarding Aco’s payment to Bco respecting the points redeemed by Bco, no ITC would be generated to Aco because s. 181(5)(c) would not be met.