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: 95868
July 29, 2011
Dear [Client]:
Subject:
GST/HST RULING
[...] loyalty program [for credit card holders]
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 the [...] (" [...] [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 [...]. Also included [...].
It is our understanding that [Organization A] has [...] As such, we asked that [XYZ] to provide the relevant agreements to allow CRA to issue binding rulings on the transactions at issue. On [mm/dd/yyyy], we received three agreements:
1. A [...] Agreement dated [mm/dd/yyyy], in which [...] ("[...] [Finance Co]") agrees with [...] ("[...] [Organization B]") to provide a loyalty program to its Members.
2. An agreement dated [mm/dd/yyyy], between [...] ("[...] [the Company]") and [...] to provide a loyalty program to [Organization B] Members.
3. An agreement dated [mm/dd/yyyy] between [the Company] and [...] 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 [...]; 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 [...] Agreement dated [mm/dd/yyyy], in which [Finance Co] agrees with [Organization B] to provide a loyalty program to its Members. A ruling pertaining to [the Company's] loyalty program as described in the agreements mentioned in points 2 and 3 above will be provided under separate cover.
All legal references are to the Excise Tax Act ("ETA") unless otherwise indicated.
1. On [mm/dd/yyyy] [FinanceCo] entered into the [...] Agreement
(the "Agreement") with [Organization B] together with [...] including [Organization A] (collectively, "[...] [Organizations C]").
2. The Agreement essentially describes a marketing strategy whereby [FinanceCo] acquires [...] holding a [Organization B] membership (the "Members") for the purpose of soliciting and distributing credit cards thereto.
3. By making purchases with a credit card, a Member may benefit from a related rewards program (the "Loyalty Program") that allows a Member to earn rewards, referred to in Section [...] of Schedule [...] as "credits", that may be redeemed against the Member's [Organization B] membership dues and other [Organization B] products and services.
4. The [...] Agreement describe[s] the purpose of the Loyalty Program as, among other things [...] and assisting [FinanceCo] in widening its base of credit card holders.
5. [Organizations C] are not involved in credit approval but agree to participate in a marketing plan for the Loyalty Program with [FinanceCo].
6. Under the Agreement, [Organizations C] supply [...] to [FinanceCo] for consideration described as [...].
7. The [...] are described in Schedule [...] to the Agreement [...].
8. Pursuant to paragraph [...] of the Agreement, [FinanceCo] shall pay [...] to each [Organizations C] as may be generated from credit card accounts. Except as otherwise provided in Schedules [...] and [...], payment of [...].
9. Under paragraph [...], [FinanceCo] has the right and license to use the current and future respective names, trade-marks, service-marks, copyrights [...] of [Organization B] set out in Schedule [...] solely in connection with the marketing of the credit cards to Members pursuant to the Loyalty Program.
10. Conversely, section [...] of the Agreement states that [Organizations C] have the right and license to use the names, trade-marks, copyrights, service-marks [...] of [FinanceCo] as set out in Schedule [...] in connection with their marketing of the credit cards pursuant to the Program. In this regard, [Organizations C] are not required to pay any amounts to [FinanceCo] in connection with the use of [...] in conjunction with the Loyalty Program.
11. Under paragraph [...] of the Agreement, [FinanceCo] will issue the credit cards to interested Members in accordance with [FinanceCo's] standard consumer credit card issuing policies and credit practices, which shall be the same as for the issuance of any other [FinanceCo] credit card. All decisions concerning the creditworthiness of any potential Members shall be made at the sole discretion of [FinanceCo].
12. Paragraph [...] of the Agreement confirms that credit cards issued to Members by [FinanceCo] shall be governed by the agreements between the Member and [FinanceCo].
13. Under paragraph [...], [Organizations C] and [FinanceCo] agree to jointly design and develop marketing, promotion and solicitation materials to promote the Loyalty Program to Members, and [Organizations C] shall endorse and reasonably assist [FinanceCo] with the administration of such promotional and solicitation activities. Nevertheless, the parties agree that [FinanceCo] shall make all credit decisions and shall bear the risks with respect to each Member cardholder's account independently of [Organization B] and any [Organizations C].
14. As compensation to [Organizations C] for delivering the benefits of the Loyalty Program to the Members, [FinanceCo] is required under paragraph [...] of the Agreement to pay, in addition [...] described in points 6, 7 and 8 above, [...] to [Organizations C].
15. The [...] are calculated as a percentage of credit card purchases [...] made by Members over a specified period.
16. Pursuant to section [...] of the Agreement, [Organizations C] are required to participate in and fund certain Member rewards set forth in Schedule [...] in respect of the Loyalty Program. To this end, section [...] of Schedule [...] specifies that all amounts paid by [FinanceCo] as [...] shall be used by the relevant [Organizations C] to fund the Loyalty Program.
17. A [Organizations C] in receipt of a [...] payment is required to allocate the amount to the relevant Members' accounts. In a telephone conversation with [XYZ] on [mm/dd/yyyy], [XYZ] confirmed that [Organizations C] would generally record such transactions as a liability in favour of the Member by debiting cash and crediting the Member's Loyalty Program account.
18. Subject to subsection [...] of Schedule [...], amounts received by a particular [Organizations C] as a [...] must be credited to the relevant Member's Loyalty Program account. [...]
19. [Organization A's] website states [...]
20. Section [...] of Schedule [...] further confirms that [...]
21. Section [...] of the Agreement states that nothing in the Agreement is intended to or shall be construed to constitute or establish an agency, joint venture, partnership or fiduciary relationship between [FinanceCo] and [Organizations C]. Moreover, it is our understanding that [...]
22. Under paragraph [...], [FinanceCo] agrees that [...]
RULINGS REQUESTED
[XYZ] asked us to rule on whether payments by [FinanceCo] of [...] constitute consideration for a taxable supply by [Organizations C]. In addition, [XYZ] asked us to confirm [XYZ's] understanding, 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.
We also acknowledge [XYZ's] request for a ruling concerning the tax treatment of potential transfers of [...] amounts from one [Organizations C] to another; however, since the Agreement does not address the nature of such transfers, we are unable to provide a ruling in that matter.
Rulings Given
Based on the facts set out above, we rule that:
1. The payment of [...] constitute consideration for a taxable supply of the property and services rendered by [Organizations C] under the Agreement.
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
[...]
Subsection 165(1) provides that every recipient of a taxable supply made in Canada shall pay tax in respect of the supply, unless the supply is specifically exempt. Since this case involves the issuance of credit cards by [...] ([FinanceCo]), there is a question as to whether [Organizations C] may be considered as arranging for a single supply of exempt "financial services" to be provided by [FinanceCo].
Where an agreement provides for the supply of a variety of property and services, it must first be determined whether a single supply or multiple supplies are being provided. This distinction is important in cases where a combination of property or services is supplied under an agreement, some of which, if supplied separately, would be taxable and others exempt.
Based on the Agreement, [Organizations C] are supplying property (e.g., [...]) and services (e.g., administration in respect of the Rewards Program) to [FinanceCo]. GST/HST Policy Statement P-077R2, Single and Multiple Supplies, provides guidance in determining whether a single supply or multiple supplies are being made. The Policy Statement sets out the following principles:
• every supply should be regarded as distinct and independent;
• a supply that is a single supply from an economic point of view should not be artificially split; and
• there is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
It is clear that none of the services described in the Agreement can be acquired separately; all elements of the Agreement are inextricably linked. Accordingly, it is our view that [Organizations C] provide a single supply to [FinanceCo] under the Agreement for which remuneration is received [...].
Section 1 of Part VII of Schedule V provides an exemption for the supplies of "financial services" as defined in subsection 123(1). These are delineated in paragraphs (a) to (m) of the definition, subject to the exclusions described in paragraphs (n) to (t). A "financial service" is defined, in part, as:
(l) the agreeing to provide, or the arranging for, a service that is
(i) referred to in any of paragraphs (a) to (i); and
(ii) not referred to in any of paragraphs (n) to (t)
Examples of the services to which paragraph (l) would apply include the granting of credit as described in paragraph (g) of the definition. For purposes of paragraph (l), the term "arranging for" is generally intended to include intermediation activities that are normally performed by financial intermediaries described in subparagraph 149(1)(a)(iii), such as agents, brokers and dealers in financial instruments or money. In determining if an intermediary's service is included in paragraph (l), all the facts surrounding the transaction, including the following factors, must be considered, such as:
• the degree of direct involvement and effort of the person in the provision of a financial service referred to in any of paragraphs (a) to (i);
• the time expended by the intermediary in the provision of a financial service referred to in any of paragraphs (a) to (i);
• the degree of reliance of either or both the supplier and the recipient on the intermediary in the course of providing a financial service referred to in any of paragraphs (a) to (i);
• the intention of the intermediary to effect a supply of a financial service referred to in any of paragraphs (a) to (i); and
• the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in business of providing financial services).
Where an intermediary provides a number of services including services described by any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of a financial service, the single supply of the bundled services may be, depending on the facts surrounding the transaction, a supply of a financial service of arranging for the above listed factors, and the predominant element of the supply.
In general, services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services. Based on the information provided, [Organizations C] activities when considered as a whole are predominantly in respect of the promotion and marketing of the Loyalty Program. Moreover, the services performed by [Organizations C] do not meet the factors that are used to determine whether a supply is arranging for a financial service under paragraph (l), such as the degree of direct involvement with the consumers or the time expended in the provision of a financial service referred to in any of paragraphs (a) to (i). Also, [Organizations C] are not in the business of providing supplies of financial services or considered a financial intermediary as described under subparagraph 149(1)(a)(iii).
As there are no other exemptions that would apply in this case, section 165 above will apply to the supply made by [Organizations C] under the Agreement. GST/HST must therefore be calculated on [...] when they are paid to [Organizations C], and [Organizations C] are required to remit that tax.
[...]
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.
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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