A monthly feature focusing on current issues in commodity taxation, edited by Michael Firth of PricewaterhouseCoopers LLP, Brent F. Murray of Wilson & Partners LLP, and Sheila Wisner of CCH Canadian Limited.

Gift Certificates versus Coupons—The CRA's Distinction

As evidenced by a string of recent ruling requests, suppliers are having a difficult time determining the GST/HST implications associated with devices being used by customers to obtain supplies free of charge or at a discount. On one hand, such an intangible device may be a "coupon", which triggers the coupon rules in section 181. Conversely, the intangible device could be a "gift certificate", which is essentially treated as money, and would not reduce the value of consideration for the supply.

There are instances where there is uncertainty in determining whether the coupon rules apply and, if so, which of three variations of the rules will apply. The misapplication of the rules can significantly impact the "net tax" calculation; therefore, suppliers need to be aware of the assessment risks that are associated with coupon-type devices. This article provides a high level overview of the GST implications associated with a supplier's acceptance of coupons and gift certificates, and the importance of the distinction between the two.

Overview of Coupon and Gift Certificate Rules

(i) Non-Reimbursable Coupons

Subsection 181(3) of the Excise Tax Act (the "Act") addresses non-reimbursable coupons used as full or partial consideration for a taxable supply, entitling the recipient of the supply to a price reduction equal to "a fixed dollar amount specified in the coupon, or a fixed percentage". Subsection 181(3) applies, in relation to the redemption of a coupon, where the following conditions are satisfied:

1. The supplier accepts a coupon as full or partial consideration for the making of a taxable supply (other than a zero-rated supply);
2. The coupon entitles the recipient of the supply to a reduction in the price of the taxable supply, equal to a fixed dollar amount (or fixed percentage) which is specified in the coupon; and
3. The supplier will not be paid an amount for redeeming the coupon with another party.
   

Where this subsection applies, the supplier charges tax without factoring in the coupon, and may claim an input tax credit ("ITC") equal to the tax fraction of the coupon. The claiming of an ITC in relation to a supplier's acceptance of a coupon may give rise to a challenge by the CRA upon audit.

(ii) Reimbursable Coupons

Subsections 181(2) and 181(5) of the Act address reimbursable coupons for "a reduction of the price … equal to a fixed dollar amount specified in the coupon", where the supplier will be paid an amount from another person for accepting the coupon. With such a coupon, the amount of tax collectible by the supplier is determined without reference to the coupon, and the amount of the coupon is deemed to include tax equal to the tax fraction. The recipient is deemed to have paid a reduced amount of tax, calculated as the GST otherwise payable less the tax fraction of the coupon. Upon reimbursement, pursuant to subsection 181(5), the amount paid to the supplier for accepting the coupon is not subject to GST, and the person paying the reimbursement is entitled to claim an ITC for the tax fraction of the coupon.

(iii) Other Coupons

If a coupon does not meet the requirements of subsections 181(2) or 181(3), the supplier is required to treat the coupon as a partial cash payment that reduces the value of the consideration for the supply (i.e., the supplier charges tax on the reduced selling price). To the extent a supplier erroneously treats an intangible device as this type of coupon, then the supplier may under-report the tax collectible.

(iv) Gift Certificate Rules

Section 181.2 of the Act provides that a gift certificate is considered money, such that no GST/HST is collectible on the consideration paid for a gift certificate. When a gift certificate is used to purchase a taxable supply, GST/HST is collectible on the stated price of the supply.

(v) Devices that are Neither a Coupon nor a Gift Certificate

The CRA recently determined that an intangible device could constitute something that is neither a gift certificate nor a coupon, meaning that: (i) the supplier would be required to charge GST on the full price of the supply; and (ii) the supplier could not claim an ITC for the tax fraction of the device. In a ruling, note 1 the CRA stated the following:

A gift card issued for no consideration as described in the above facts is considered money supplied on account for which no supply has yet been made and, accordingly, is not subject to GST/HST at the time of supply.

Subsequently, when the free gift card is used by the bearer as full or partial payment towards the consideration for a supply to the bearer, the payment or receipt of the value of the gift card towards that consideration is treated in the same manner as the payment of money as consideration for the supply.

Thus, a gift card provided by a retailer to its customer for no consideration would be considered "money" when it is redeemed.

What is the Difference between a "Gift Certificate" and a "Coupon"?

(i) What is a Gift Certificate?

A gift certificate is expressly excluded from the definition of "coupon" in subsection 181(1):

"coupon" includes 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).

What constitutes a "gift certificate" is not defined in the Act, and as discussed by the Tax Court in Royal Bank, note 2 distinguishing a gift certificate from a coupon can be difficult. The CRA's administrative policy provided in Policy Statement P-202, as recently applied in a GST/HST Interpretation, note 3 is that a gift certificate is a device:

1. that usually has a stated value,
2. that can be redeemed on the purchase of property or a service from a particular supplier (the supplier agrees to accept the device as consideration, or a part thereof, towards the purchase of property or a service),for which consideration was given, and
3. which has no intrinsic value.

The Tax Court's decisions in Canasia Industries note 4 and Royal Bank note 5 also provide meaningful guidance on whether a device is a gift certificate or a coupon. The issue in Canasia Industries was whether GST was collectible on the sale of travel certificates—which depended on whether a travel certificate was a gift certificate. There were certain conditions which a bearer needed to satisfy in order to redeem the certificates for free air travel, including requirements to pay a registration fee, stay at a particular hotel, and book travel for a minimum period of seven days. The Tax Court, in concluding that GST was collectible on the sale of the travel certificates, decided that the certificates were not "gift certificates" because a travel certificate, on its own, did not entitle the bearer to free air travel—a number of additional conditions also needed to be satisfied. In reaching this conclusion, the Court noted that a gift certificate is a "very broad term for a voucher which entitles the bearer to redeem it according to its governing terms, for goods or services, or for a value towards the purchase price of goods or services", and that it is not important whether the bearer of the certificate has paid any consideration for it.

The Royal Bank decision addressed whether GST was payable by Royal Bank on its purchase of points (the "Points") that could be used by VISA credit card holders for free air travel. In relying on Canasia, the Court rejected the CRA's administrative view that a gift certificate requires there to be a stated monetary value referenced, and concluded that a "gift certificate could include an instrument entitling the bearer to an identifiable supply at no charge". This case also noted a key characteristic of gift certificates, i.e., entitling a bearer to an unconditional right to receive free or discounted goods and services. Accordingly, in Royal Bank, where the redemption of the Points was contingent on a variety of factors, the Points did not provide unconditional rights to anything, so the Court concluded that the Points were not a gift certificate.

(ii) What is a Coupon?

In the event that an intangible device is not a "gift certificate", then the device may qualify as a coupon, which is defined rather broadly in subsection 181(1) to include a "voucher, receipt, ticket or other device". In various ruling letters, the CRA has made the following determinations with respect to whether an intangible device is a coupon:

1. Both electronic discounts and a points-based reward system can constitute a coupon.
2. Price-reduction programs which are implemented at a retail store, and which allow customers who have signed up for an incentive program to purchase certain products at a special price, qualify as a coupon, even though the discount is paperless, and offered to the customer at the time of purchase as a pure price reduction. note 6
3. A voucher provided to employees, which can be exchanged for free products, is a "coupon" to which subsection 181(4) applies when a retailer accepts the coupon. note 7
4. A points-based card that resembles a credit card, issued pursuant to an employee incentive program, that can be used to purchase goods and services at participating merchants, is a coupon to which subsection 181(4) applies when a retailer accepts the coupon. note 8
5. The sale of a gift card with a book listing the specific supplies (and their value), which may be acquired with the gift card, is a gift certificate and not a coupon. note 9
6. The provision of loyalty program miles constitutes the sale of intangible personal property, which reduces the value of consideration paid for air travel. note 10
7. Music cards which are sold in various denominations, and which can be used to purchase music from a Web site, are gift certificates and not coupons. note 11

In Royal Bank, the Tax Court issued some concluding comments respecting the non-reimbursable coupon rules in subsection 181(4) of the Act, noting that the distinction between a coupon and a gift certificate is fairly uncertain:

Accordingly, I agree with the Respondent that it is not inconsistent with terms of the Act to treat the Points as coupons. However, that said, it is important that I add that I have reservations about appearing to give a general endorsement of CRA's administrative practises relating to the application of section 181 and the distinctions it seeks to make between coupons and gift certificates. In my view, the provisions are not easily applied as the CRA seeks to apply them. This leaves the state of the law uncertain—a situation that begs for legislative clarification. Without such clarification, the Act will impose collection and remittance obligations on suppliers who will have little guidance as to the outcome of a dispute relating to such obligations should one arise. [emphasis added]

In situations where the intangible device is a coupon, suppliers who do not treat the coupon as a partial cash payment that reduces the consideration paid for the supply, may be entitled to claim an ITC for the tax fraction of the coupon. The supplier's entitlement to claim an ITC will generally depend on whether the coupon entitles the recipient of the supply "to a reduction of the price … equal to a fixed dollar amount specified in the coupon or a fixed percentage". The Tax Court's decision in President's Choice Bank note 12 provides guidance respecting this requirement; there, the Court concluded that loyalty reward points were for a "fixed dollar amount" since, at the time of redemption, the supplier knew the cash value of the points being redeemed, as follows:

It can be inferred from these Technical Notes that the fixed dollar value has to be established at the time the issuer (PC Bank) redeems the coupon from the vendor (Loblaw). Even though the respondent is right in saying that the coupon does not have any cash value when it is issued, this is not what is required by subsection 181(5). What we need to determine is whether a fixed dollar value exists at the time of redemption. There is a cash value at that time: there is a paper coupon or an electronic device showing a fixed dollar amount for the points redeemed; that amount is applied as a discount on the price of groceries purchased and is recorded on the customer's invoice. [emphasis added]

The CRA, however, interprets the "fixed dollar" requirement in a more restrictive manner, and in various announcements has reasoned that subsection 181(2) would not apply to allow a retailer to claim an ITC respecting its acceptance of a particular coupon. With these considerations in mind, retailers are strongly encouraged to play close attention to the manner in which they are applying GST upon the acceptance of intangible payment devices.

Notes:

1. GST/HST Ruling CCH-5597, "Gift cards supplied at no charge", dated June 29, 2010, summarized in Window on GST #1647.

2. Royal Bank of Canada v. The Queen, 2007 GTC 999-108 (TCC).

3. GST/HST Ruling, CCH-5588, "Gift Certificates", dated June 22, 2010.

4. Canasia Industries Ltd. v. The Queen, 2003 GTC 647 (TCC).

5. Supra, note 2.

6. GST Ruling CCH-5641, "Frequent Shopper—Sales Promotion Program", dated August 1996.

7. GST/HST Ruling CCH-5585, "Employee Voucher Coupon", dated June 7, 2010, summarized in Window on GST #1639.

8. GST/HST Ruling, CCH-4731, "Application of GST/HST to an Incentive Card Program", dated March 24, 2005.

9. GST Ruling, CCH-5586, "Tax status of the supply of gift packages", dated June 7, 2010.

10. GST Ruling, CCH-5590, "Purchase of Loyalty Program Miles", dated June 22, 2010, summarized in Window on GST #1642.

11. GST Ruling, CCH-5596, "Tax status of music cards", dated July 2, 2010, summarized in Window on GST #1646.

12. President's Choice Bank v. The Queen, 2009 GTC 956 (TCC).