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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 137201
August 3, 2011
Dear [Client]:
Subject:
GST/HST RULING
[...] loyalty program
We are writing further to correspondence and telephone conversations with [...] [(XYZ)], concerning the application of the Goods and Services Tax /Harmonized Sales Tax ("GST/HST") to rewards programs undertaken by [...] ("[...] [Organization A]"). We understand that [...].
In [XYZ's] original correspondence dated [mm/dd/yyyy], [XYZ] provided general information about [Organization A's] various loyalty programs, including those involving [...]
It is our understanding that [Organization A] has [...] On [mm/dd/yyy], we received three agreements:
1. A [...] Agreement dated [mm/dd/yyyy], in which [...] ("[...] [FinanceCo") agrees with [...] ("[...] [Organization B]") to provide a loyalty program to its Members.
2. An agreement dated [mm/dd/yyyy] (the "First Agreement") between [...] ("[...] [the Company]") and [...] to provide a loyalty program to [Organization B] Members.
3. An agreement dated [mm/dd/yyyy] (the "Second Agreement") between [the Company] and [...], namely [...], [Organization A], [...] to amend and augment the First Agreement providing for a loyalty program to [Organization B] Members.
We note that [XYZ] did not provide any documentation pertaining to transactions with [...]; as such, we cannot provide any definitive information with respect to those matters. If you require information on these transactions, please submit the necessary documentation for a written ruling.
The subject of the present ruling is the First and Second Agreements described in points 2 and 3 above. A ruling pertaining to [FinanceCo] loyalty program as described in the [...] Agreement mentioned in point 1 above was mailed to you on [mm/dd/yyyy].
All legislative references are to the Excise Tax Act ("ETA") unless otherwise indicated.
1. On [mm/dd/yyyy], [the Company] and [...], namely [...], [Organization A], [...] ("[...] [Organizations C]") entered into the First Agreement to provide a loyalty program (the "Loyalty Program") to [Organization B] Members.
2. On [mm/dd/yyyy], the parties named in the First Agreement subsequently entered into the Second Agreement to amend and expand upon the provisions of the First Agreement.
3. Both agreements describe a marketing strategy whereby [the Company] agrees to make various payments to [Organizations C] with the objective of encouraging individuals holding [Organization B] memberships (the "Members") to purchase [the Company's] products and services.
4. By purchasing [the Company's] products and services, a Member may benefit from the Loyalty Program by earning reward credits on those purchases. These credits may then be applied against the Member's [...] [Organization B] membership dues or other [Organization B] products and services.
5. Section [...] of the First Agreement states the scope and purpose of the Loyalty Program as follows: [...]
6. Subject to section [...] of the First Agreement, [the Company] agrees to pay to [Organizations C] a commission [...]
7. Under Section [...] of the First Agreement, [the Company] agrees to pay [...] to [Organizations C] calculated as [...]
8. [Organizations C] are required to use the [...] payments to fund the Loyalty Program. [...]. In a telephone conversation with [XYZ] on [mm/d/yyyy], [XYZ] confirmed that [Organizations C] records such transactions as a liability in favour of the Member by debiting cash and crediting the Member's Loyalty Program account.
9. Section [...] indicates that [the Company] will add the GST to the commission and [...] payments made to a particular [Organizations C].
10. The parties agree to continue to participate in the Loyalty Program pursuant to the terms of the Second Agreement. The Second Agreement supersedes the First Agreement but is intended to retain its character.
11. Similar to the First Agreement, the Loyalty Program has the objectives of increasing profit, customer loyalty and market share for [the Company] and increasing member loyalty and the membership base of participating [Organizations C] by rewarding Members for purchases of goods and services from [the Company]
12. [The Company] agrees to take on substantial costs related to the implementation of the Loyalty Program [...].
13. For marketing purposes, the Second Agreement uses the term [...]
14. [...] are defined in the Second Agreement as: [direct quote]
15. The function of [...] in the Second Agreement and [...] in the First Agreement is the same: [the Company] calculates a reward (expressed in money) for Member purchasers of [the Company's] goods and services based on predetermined formulae and pays this amount, referred to in section [...] of the Second Agreement as [...], to the particular [Organizations C] to which the Member belongs.
16. Pursuant to section [...] of the Second Agreement, a [Organizations C] in receipt of a [...] payment must credit the [...] by a Member to the Member's Loyalty Program account. [...]. The Member is then able to use the credits [...] toward the purchase of specified [Organization B] goods and services.
17. Each [...] applied against a particular purchase of a product or service from a [Organizations C] reduces its price by [...].
18. [XYZ] stated [...]. This statement is in keeping with the terms of the First and Second Agreements which indicate that [Organizations C] receive [...] for the service of administering the Loyalty Program.
19. Section [...] of the Second Agreement confirms that [the Company] is not an agent of [Organization B] or any of [Organizations C], and that nothing contained in the Second Agreement shall be construed as creating between [the Company] and [Organizations C] a partnership, joint venture, principal-agent relationship, or employer-employee relationship. Moreover, it is our understanding that [...].
20. Section [...] of the Second Agreement states [...]
21. Under section [...] of the Second Agreement, [the Company] and [Organizations C] agree that a marketing plan for launching and maintaining the Loyalty Program structure will be developed, agreed upon by all parties and implemented.
22. Pursuant to section [...] of the Second Agreement, [the Company] agrees to pay amounts [...] to [Organizations C] for their participation in the Loyalty Program.
23. [...]
24. Under Appendix [...], [the Company] may [...]
25. While the purpose of the [...]
26. Part [...] of the Second Agreement makes reference to the use of logos and trademarks, however, neither the First nor Second Agreement confers any license to such rights. We understand that commissions are paid for these rights pursuant to separate agreements not included in your submissions.
RULINGS REQUESTED
[XYZ] asked us to rule on whether the payment to [Organizations C] of commissions and [...] under the First Agreement and [...] under the Second Agreement constitute consideration for a taxable supply by [Organizations C].
In addition [XYZ] asked us to confirm [...], as indicated in paragraph 1(d) of [XYZ's] submission, that [...] constitute a credit against the price of a taxable supply after GST/HST is charged on the supply.
[...]
Rulings Given
Based on the facts set out above, we rule that
1. The payment to [Organizations C] of commissions and [...] under the First Agreement and [...] under the Second Agreement are consideration for taxable supplies by [Organizations C] of marketing and administering the Loyalty Program.
2. When a Member uses credits [...] toward the purchase price of a supply made by a [Organizations C], the supply is made for consideration equal to the price charged for the supply before the credit is taken into account.
These rulings are 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 these rulings 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 ETA, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.
ANALYSIS
Generally, section 165 provides that every recipient of a taxable supply in Canada shall pay the GST/HST at the applicable rate calculated on the value of the consideration for the supply. Further, every person who makes a taxable supply in Canada is required to collect and remit the tax payable by the recipient in respect of the supply.
Payments by [the Company]
Both the First and Second Agreements describe the objectives of the Loyalty Program as increasing [the Company's] profit, customer loyalty and market share. Whether these objectives are met requires that [Organizations C] observe the terms of the subject agreements and, in particular, that [Organizations C] market the Loyalty Program as required in Part [...] of the Second Agreement. The importance of [Organizations C] marketing services to the success of the Loyalty Program are reflected in the payment [...] under Appendix [...] by linking [Organizations C] marketing initiatives and consumer growth targets with the size of those payments.
No less important is the function of [Organizations C] as administrators of the Loyalty Program. In this capacity, [Organizations C] fulfill a central role in maintaining the Loyalty Program accounts of the [...] by allocating credits [...] to the appropriate Member accounts and honouring them as they are used.
Based on this information, we view [Organizations C] as supplying services relating the promotion, marketing and administration of the Loyalty Program. These constitute taxable supplies for which [the Company] pays consideration in the form of commissions and [...] under the First Agreement and [...] under the Second Agreement. Pursuant to section 165 above, [the Company] is required to pay GST/HST calculated on those amounts, and [Organizations C] are required to collect and remit that tax.
[...]
For GST/HST purposes, the term "consideration" is defined in subsection 123(1) to include any amount that is payable for a supply by operation of law. Member credits [...] have value; i.e., they can be used to pay in full or in part for supplies of property and services provided by [Organizations C], and they must be surrendered by the Member to pay for the supply. Consequently, they are, or form part of, the consideration for the supply. Accordingly, [Organizations C] would be required to charge and collect GST/HST based on the purchase price of the supply before deducting an amount in respect of [...].
We trust that these rulings will be of some assistance. If you require clarification with respect to any of the issues discussed in this letter, please call me at 613-952-8816.
Yours truly,
Paul Hawtin
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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