Back Version française

“If it walks like a duck and quacks like a duck then it must be a duck”, goes the old saying.  Those of you that are Costco members know that there are coupons handed out upon entering the store, but also unadvertised instant rebate signs posted above certain products throughout the store.  While both forms of discounts are ostensibly the same, they are not to be treated similarly for GST purposes, as per the recent decision of the Tax Court of Canada in Nestlé Canada Inc. v. The Queen, 2017 TCC 33.

The key issue in this case was whether, for purposes of the Excise Tax Act (“ETA”), “instant rebate coupons” (“IRCs”) offered at Costco on different Nestlé products are coupons on which input tax credits (“ITCs”) could be claimed by Nestlé, or “promotional allowances” on which ITCs could not be claimed.  Briefly, an ITC is a mechanism by which a GST registrant can recover GST that it incurs on its purchases and expenses relating to its commercial activities.

When a customer would purchase a Nestlé product on which an IRC was offered, they had to do nothing to take advantage of the discount as it was automatically applied at the cash register.  The cash register receipt would indicate the amount of the IRC as a coupon (even though there was no physical coupon to be surrendered) and sales tax would be applied to the pre-discounted amount. 

Nestlé had a contractual obligation to reimburse Costco for the full value of the IRCs but the contract did not mention that any part of such reimbursement was to be on account of the applicable sales tax.  So, when Nestlé sold a product to Costco on which GST applied, it collected GST on the full price irrespective of any IRC, and it did not credit Costco for any inherent GST component of the IRCs.  Costco, meanwhile, treated IRCs like they did coupons for sales tax purposes, namely to calculate sales tax to be paid by its customers based on the full undiscounted selling price. 

In Nestlé’s view, the IRCs were electronic coupons that were commercially and economically equivalent to a paper coupon, the only difference being that customers did not have to hand over a piece of paper for the discount to apply.  However, the Court disagreed, deciding instead that there cannot be a coupon for purposes of the ETA unless the customer tenders something, whether physical or electronic, that entitles them to a reduction of the price.  Rather, the Court found that the IRCs were promotional allowances, which would not qualify for ITCs under the ETA. 

The Court noted an additional incentive for Nestlé to have the IRCs characterized as coupons: while the ETA requires Costco to collect sales tax on the pre-discount price of products where a coupon is offered, this results in the customer effectively overpaying the sales tax that is actually due to the government, and such excess amount is received by the provider of the coupon (such as Nestlé) when it claims ITCs.  However, as promotional allowances Nestlé could not claim ITCs on the IRCs, and the customer could not recover the excess tax paid, so this amount was a windfall for the government. 

Aside from IRCs and paper coupons, Costco also offers its members discounts in the form of coupons which are not actually given to the customer but instead kept at the cash register and scanned by the cashier at check-out.  It is of note that, while this form of discount was not at issue in this case and only received passing mention by the Court, it appears to have been implicitly accepted as a coupon even though the customer does not technically have to tender these.

Based on this decision, in order to avoid a denial of ITCs and instead ensure that the maximum ITC amount possible can be claimed, it is advisable that companies which are selling products to Costco and similar retailers on which IRC-type discounts are offered examine the following:

• the terms of their contracts with the retailers, in particular as to whether the discounts are tax-included or not;
• the nature of the discount given and whether it qualifies as a “coupon” for purposes of the ETA;
• the manner in which they are calculating and claiming ITCs where discounts are offered; and
• the manner in which the retailer processes the discount at the cash register.