CRA finds that payments made for loyalty points that had been applied to receive free services without a fixed dollar amount, did not generate ITCs

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: s. 181(5)(c) would not be met, i.e., the coupon does not entitle the recipient of the supply by Bco or the dealer 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.

Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.19 under ETA s. 181(5).