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.
DATE December 15, 2011
TO [Client]
FROM Constantin Constant
Specialty [Tax] Unit
Financial Institution and Real property
320 Queen St
Ottawa ON K1A 0L5
FILE 137970
SUBJECT:
GST/HST INTERPRETATION
Entitlement to input tax credits on price reductions
This memorandum is in response to your [...] [enquiry] sent to the Specialty Tax Unit on August 9, 2011, in which you requested our opinion regarding the availability of input tax credits (ITCs) relating to price reductions awarded on the purchase of certain products. Our understanding of the facts is as follows:
In the course of its business, [...] (the "Manufacturer") issued coupons allowing purchasers fixed dollar discounts on the purchase price of its products. The coupons issued by the Manufacturer had historically been conventional paper coupons specifying a fixed dollar amount discount on the coupon. [...] (the "Retailer") accepted these coupons as partial consideration towards the purchase price of Manufacturer products. These coupons were treated in a manner consistent with subsection 181(2) of the Excise Tax Act, that is, the GST/HST was collected by the Retailer on the full value of the consideration which would be payable if the coupon had not been accepted.
In recent years, the traditional paper coupons have begun to be replaced by an electronic version. Subject to a prior agreement between the parties, the Retailer advertises and processes a price reduction at the point of sale for all purchasers. The price reduction is for a limited period of time for specific items. The discounts may be advertised via the Retailer's website, through advertising flyers or through advertising placed alongside the product on the Retailer's shelves.
The Manufacturer contends that the [customer] accesses the electronic discounts by presenting a specifically encoded membership card [the Retailer's membership card] to the checkout clerk. Therefore, it is the Manufacturer's position that the card qualifies as a device that comes within the definition of coupon under subsection 181(1) and since the device entitles the purchaser to a fixed dollar reduction of the price of Manufacturer products, an ITC is available to the Manufacturer on amounts reimbursed to the Retailer.
For both types of coupons, the Manufacturer has a contractual obligation to reimburse the Retailer for the predetermined discount amount. The Retailer invoices the Manufacturer for the value of coupons redeemed via a Billing Detail debit memo which is offset against other amounts owing to the Manufacturer for inventory purchases. The Billing Detail debit memo provides the coupon number, type of coupon (electronic or paper) the amount of the discount, the effective dates of the promotion, the amount of the billing and the billing frequency. Electronic coupons are identified as [...], whereas, paper coupons are identified as [...].
To support the above, you submitted a document described as [...] whereby the Manufacturer agrees to pay to the Retailer an amount of $2 referred to as [...] in respect to the sale of a specified product regularly priced at $10.49 at a final cost to the purchaser of $8.49 during a promotional campaign. The discount is fully paid for by the Manufacturer and is referred to as an "instant rebate coupon".
OPINION REQUESTED
You would like to know whether the Manufacturer can claim ITCs on amounts paid to the Retailer as instant rebates under a temporary price reduction of certain Manufacturer products.
OPINION GIVEN
Subsection 181(1) of the ETA defines "coupon" to include "a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit (within the meaning of section 181.3)". The Oxford dictionary defines "device" as "...a plan or scheme to effect a purpose...".
The Canada Revenue Agency has taken the position that the definition of a coupon encompasses an intangible device that has the characteristics of a traditional paper coupon, including the presentation of the device (by way of a card or other identifiable characteristic) by the purchaser and the acceptance of the device by the retailer.
An electronic coupon that is provided to a purchaser in respect of a product in replacement of a printed coupon will be treated in the same manner as the printed coupon, if the manner in which the electronic coupon is presented, accepted and treated by all parties mirrors the treatment of the previously used printed coupon.
While we agree to the existence of a plan or scheme to effect a discount of the purchase price of the Manufacturer products at the point of sale, we do not view the discount as being triggered by the presentation of the membership card. The card is presented for the purpose of ensuring that the customer's membership - conferring the right to shop at the Retailer locations - is in good standing and the card certainly is not intended to act as a replacement for Manufacturer paper coupons that used to be accepted by the Retailer. Therefore, it is our opinion that the presentation and acceptance of the Retailer card should not be construed as the presentation and acceptance of a device that comes within the definition of coupon under subsection 181(1).
As the purchasers are not in possession of any device that entitles them to a fixed-price reduction and the Retailer is not accepting any device in full or partial consideration for the supply made by the Retailer, amounts paid by the Manufacturer to the Retailer in respect of the price reductions given to customers do not give rise to an ITC under subsection 181(5).
Rather, these discounts offered to all purchasers of a particular product over a specific period of time are considered price reductions offered at the point of sale. The amount of the price reduction should be deducted from the regular selling price of the product before the Retailer calculates the GST/HST.
For purposes of section 232.1, an amount paid under a temporary price reduction program may qualify as a promotional allowance where it is paid by the supplier to the reseller to reduce the selling price of a product that had been acquired by the reseller for resale. The allowance is not consideration for a supply made by the reseller to the supplier.
The allowance may take the form of a reduction of consideration of goods previously sold. The supplier may choose to adjust, refund or credit the tax on the reduction in the consideration pursuant to subsection 232(2). If the supplier adjusts, refunds or credits the tax, pursuant to subsection 232(3) a credit or debit note must be issued permitting the supplier to reduce and the purchaser to add that amount to their net tax.
Section 181.1 generally applies where a manufacturer supplies taxable goods or service (other than zero-rated) to a particular person (e.g., a retailer or a customer), pays a rebate to the person in respect of the property or service and provides in writing that the rebate includes an amount on account of tax. In such circumstances, the manufacturer would be entitled to claim an ITC with respect to the rebate and the particular person if a registrant would be required to self assess an amount of tax.
Based on the agreements submitted, there is no indication that the amounts paid to the Retailer to temporarily reduce the selling price of certain products include an amount of tax; therefore, there are neither tax adjustments nor ITCs available respectively under subsection 232(3) and section 181.1.
UNCLASSIFIED
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