25 February 2005 GST/HST Interpretation 56925 - Treatment of Instant Rebates

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of section 181 of the Excise Tax Act ("ETA") to a manufacturer's electronic discount.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is a manufacturer XXXXX.

2. XXXXX products are sold through retailers in Canada. In the course of its business, XXXXX issues coupons that allow purchasers of XXXXX taxable products, that are not zero-rated, fixed dollar amount discounts on the purchase price of the products, when the coupons are accepted by Goods and Services Tax (GST)/Harmonized Sales Tax (HST) registrant vendors of the products ("retailers").

3. The coupons issued by XXXXX have historically been conventional paper coupons that specify a fixed dollar amount discount on the coupon. Retailers accepted these coupons as partial consideration towards the purchase price of XXXXX products. These coupons were treated by XXXXX and the retailers in a manner consistent with the application of subsection 181(2) of the ETA. The GST/HST was collected by the retailers on the value of the consideration which would be payable if the coupons had not been accepted. The paper coupons stated on their face that GST/HST was included in the coupon value. The retailers were paid amounts by XXXXX, for the redemption of the coupons. Pursuant to subsection 181(5) of the ETA, XXXXX claimed input tax credits (ITCs) equal to the tax fraction of the value of the coupons.

4. Recently XXXXX and selected retail partners have begun to undertake a marketing program using electronic media rather than conventional paper coupons. Under the program, the retailer advertises that a manufacturer's discount (equal to a fixed dollar amount) is available for a specific period of time in respect of a particular taxable XXXXX product that is not zero-rated. The advertising is generally placed alongside the product on the retailer's shelves and the discount applies to all of the products sold during the promotion period. The purchaser is not required to present evidence (physical or otherwise) of any coupon for acceptance by the retailer in order to obtain the applicable discount.

5. When the purchaser reaches the cash register and pays for the particular XXXXX product, the bar code that contains the electronic pricing for the product automatically discounts an amount equal to the advertised fixed dollar discount amount. The discount is reflected on the purchaser's cash receipt, obtained from the retailer. XXXXX subsequently reimburses the retailer for the fixed dollar discount amount.

6. There is no evidence of any coupon accepted and retained by the retailer. The electronic discount is available to all purchasers of the particular product. The retailer retains electronic records, which record the XXXXX discount amounts deducted against the purchases of the particular XXXXX product. The retailer issues a debit note to XXXXX as documentation for the value of the discounts given by the retailer at the point of sale. The retailer, being XXXXX customer, takes a deduction for the amount of the debit note from a payment owing to XXXXX.

Ruling Requested

You request confirmation that the electronic discount is a coupon as defined in subsection 181(1) of the ETA, and that XXXXX is entitled to claim ITCs equal to the tax fraction of the value of the coupons in respect of the subsequent redemption of the coupons in accordance with subsection 181(5) of the ETA.

Ruling Given

Based on the facts set out above, we rule that the provisions of section 181 of the ETA do not apply to the electronic discount, therefore XXXXX is not entitled to claim ITCs equal to the tax fraction of the value of any electronic discount offered at the point of sale under the above marketing program.

This ruling is subject to the general limitations and qualifications outlined in Chapter 1.4 of the GST/HST Memoranda Series. We are bound by this ruling provided that the above issue is not 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 transactions for which you requested a ruling.

Explanation

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 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.

Electronic discounts offered to all purchasers of a particular product over a specific period of time are not considered electronic coupons to which section 181 of the ETA applies. The purchasers are not in possession of any device that entitles the purchasers to a price reduction and the retailer is not accepting any device in full or partial consideration for the supply made by the retailer. The electronic discounts are considered price reductions offered at the point of sale. The amount of the price reduction is deducted from the regular selling price of the product before the retailer calculates the GST/HST.

Generally, if an amount is paid by a supplier to a retailer to promote (i.e., efforts, activities or actions that directly or indirectly inform, persuade and influence the acceptance, distribution and sale/purchase of a product) the supplier's product by temporarily reducing the retailer's selling price of that product for a designated campaign period, the amount is considered a promotional allowance for the purposes of section 232.1 of the ETA. As such, the amount of the promotional allowance is not consideration for a supply made by the retailer to the supplier.

If the amount of the promotional allowance is paid as a discount or credit against the price of any product or service supplied by the supplier and the other requirements of paragraphs 232.1(a) and (b) are met, paragraph 232.1(d) of the ETA will apply. Where tax has been charged or collected in respect of the supply of the discounted product or service, the allowance is deemed to be a reduction of the consideration for that supply for the purposes of subsection 232(2) of the ETA. The supplier may choose not to adjust the tax, in which case, there are no tax implications to the supplier or the retailer. Alternatively, the supplier may choose to adjust the tax, in which case, the supplier must issue a credit note, or the retailer may issue a debit note. The supplier may, in turn, be entitled to claim a deduction from its net tax for the amount of tax credited, and the recipient of the allowance may be required to add the amount of the tax credited to its net tax.

If the amount of the promotional allowance is paid otherwise than as a discount or credit against the price of any discounted product or service provided by the supplier, the promotional allowance is deemed, under paragraph 232.1(e) of the ETA, to be a rebate for purposes of section 181.1 of the ETA. Therefore, the supplier has the option of indicating in writing to the retailer when the promotional allowance is paid, that a portion of the promotional allowance includes an amount on account of GST/HST. If the supplier provides a written indication that the allowance includes GST/HST, the supplier may be entitled to claim an ITC under paragraph 181.1(e). In addition, the retailer may be required to account for GST/HST in respect of the promotional allowance.

Pursuant to subsection 286(1) of the ETA, both the retailer and the supplier must maintain books and records to enable the determination of each person's liabilities and obligations under the ETA, as well as, any refund or rebate entitlements. Given the tax implications, it is imperative that the parties maintain adequate documentation of the transactions involved and are consistent in their handling of the transactions to ensure that their obligations and entitlements are determined in accordance with the facts.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-954-7945.

Yours truly,

Susan Mills
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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