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.
DATE
March 16, 2010
FROM/DE
Larry Springstead
Industry Sector Specialist
Specialty Tax Unit
320 Queen St. Tower A 14th Floor
Ottawa, ON, K1A 0L5XXXXX
XXXXX
XXXXX
FILE/DOSSIER
120684
SUBJECT/OBJET :
GST/HST Treatment of Discounts
Thank you for your question regarding the tax treatment of discounts under a program offered by XXXXX. XXXXX.
Facts
The following is a summary of all relevant facts you have submitted as well as XXXXX. In these facts you identify the subject discounts as "rebates" or "instant rebates", terms used by XXXXX in its promotional literature and displays.
1. XXXXX is a manufacturer/distributor of various household goods and personal care products.
2. XXXXX products are sold through retailers in Canada. In the course of its past business, XXXXX had issued coupons allowing purchasers of XXXXX taxable products, which are not zero-rated, fixed dollar amount discounts on the purchase price of the products, when the coupons were accepted by GST/HST registrant vendors of the products ("retailers").
3. The coupons issued by XXXXX had historically been conventional paper coupons specifying 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 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. Effective XXXXX, XXXXX and XXXXX, a retail partner, undertook to use a marketing program known as XXXXX rather than conventional paper coupons. Under this program, XXXXX advertises that a manufacturer's "Instant Rebate" equal to a fixed dollar amount is available for a specified period of time in respect of a particular taxable XXXXX product that is not zero-rated and the sales tax will be calculated on the pre-rebate price. The advertising is generally placed alongside the product on the shelves and the discount applies to all of the products sold during the promotion period. Following is a sample of the display:
XXXXX 24.99
Mfr's Instant Rebate Exp. XXXXX -3.00
Price at Register 0 21.99
Sales Tax on the pre-rebate price
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 rebate.
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 enters the product code, product description, pre-rebate price, Instant Rebate code, XXXXX/Product Name, Rebate amount on the sales receipt and calculates the taxes, GST/HST and PST on the pre-rebate price. Following is a sample of the sales receipt.
XXXXX 9.99 XXXXX
XXXXX 2.00-
*** GST 7% .70
*** PST 8% .80
Total 9.49
6. On a XXXXX basis XXXXX submits a claim identified by the parties as a rebate billing for the fixed dollar amount of the "Instant Rebate" granted during the billing cycle for the particular product for reimbursement by XXXXX.
7. This arrangement between XXXXX and XXXXX is outlined in a contract known as the XXXXX. Under the XXXXX is entitled to deduct the amount of the "rebate" granted from the amounts due to XXXXX on the supply of products.
Question
Based on the above, you would like our opinion as to whether the arrangement between XXXXX and XXXXX related to XXXXX satisfies the rules in section 181.1 such that XXXXX can claim an ITC equal to the tax fraction of the value of the amounts reimbursed to XXXXX.
Comments
First, XXXXX, the discounts in question are not considered 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 discounts are considered price reductions offered at the point of sale and the GST/HST applies on the net price (i.e. after deducting the discount). Therefore, section 181 does not apply to the discounts in question.
Second, in order for section 181.1, manufacturers' rebates, to apply:
• a customer must purchase taxable goods or services and then claim a manufacturer's rebate for that purchase;
• the supply of those goods or services to the customer must be made either directly by the manufacturer or by another person such as a retailer; and
• the customer must receive a rebate from the manufacturer for purchasing the goods or services and be made aware in writing that the rebate includes GST/HST.
An example of a potential application of section 181.1 is when mail-in battery rebates are paid to a customer directly from a manufacturer. A second example involves a rebate received by a customer from a car manufacturer through a retailer who reduces the total amount payable by the amount of the rebate. It is assumed that for purposes of both these examples the rebate is paid under a specific arrangement between the manufacturer and the customer. However, without a clear agreement to the contrary, the latter example would normally be construed as a point-of-sale discount. In all cases, the existence of a rebate is a question of fact as supported by written agreements or other evidence of the arrangement in question. Such evidence may take the form of books and records that would enable CRA to make a determination that a price reduction given to a consumer by a retailer occurs as a result of a manufacturer's rebate.
Given these facts, as well as the lack of any other evidence that the program is a manufacturers' rebate program or that any arrangement exists between the manufacturer and the customer in relation to the price reduction we could not conclude that the discounts are manufacturers' rebates. In any case, section 181.1 requires written indication that a rebate amount includes GST/HST in order for the provision to apply. This is not the case. XXXXX section 181.1 does not apply to the transactions under this promotional program, keeping in mind of course that the documentation submitted does not apply to the period under audit.
In cases where a manufacturer enters into a temporary price discount contract with a retailer, it is more likely, barring the existence of documents or agreements clearly indicating the use of coupons or rebates, that the amount paid, directly or indirectly, by the manufacturer to the retailer is a payment to promote the manufacturer's product by temporarily reducing the retailer's selling price of the product for a designated campaign period. In this case, the amount would be considered payment in the form of a promotional allowance for the purpose of section 232.1 of the ETA as XXXXX. As such, the initial supply of the product to the customer should have GST/HST charged on the discounted amount and, if the conditions of section 232.1 are met, the amount of the promotional allowance would not be consideration for a supply made by the retailer to the manufacturer.
If you have any questions please do not hesitate to contact me at 613 952 9220.
UNCLASSIFIED
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