A client in service industry recently launched a reward program in certain demographic areas in order to attract new customers and penetrate in the target market. What the client provided is a special one-time offer, which allows new customers to enjoy a discount of $20 on the first service. He phoned us and wondered how the GST is taken into account.
What a wonderful question!
Customer rewards program adds value to the business’s brand and are quite often by a lot of businesses. Rewards program can be in different forms like a points system, discount cards, special one-time offers, coupon, etc. How does GST/HST apply to those rewards then?
Depends.
According to the CRA, Businesses may issue coupons, rebates, or gift certificates to reduce the price of a good or service. GST/HST applies differently depending of the type of coupon or certificate issued.
How to account for GST
From the client’s case, the special one-time coupons are issued and accepted by the client(vendor) and will not be reimbursed by any one. This is called: Non-reimbursable coupons .The one-time special coupon entitles the customer to receive a reduction in regular service price. Under such circumstance, the client has an option:
- either choose to include a reduction of the GST/HST in the face value of the coupons
- or reduce the purchase price of the service
In #1, the client can charge and remit the GST/HST on the full price of the service. Since these coupons are non-reimbursable, you can claim an input tax credit (ITC) for the tax fraction of the coupon value as follows:5/105 for the GST; or 13/113 in Ontario,
In #2, If the client chooses not to include GST/HST in the value of the coupons, deduct the
coupon value from the selling price before calculating GST/HST.
A simple illustration is as follows:
Price of the service
$100.00
Less coupon value
$20.00
Subtotal
$100.00
GST ($100 × 5%)- for illustration purpose
$5.00
Customer pays
$105.00
In this case, when the client files the GST/HST return, report the GST/HST charged on the sale after
the coupon deducted from the purchase price ($5.00 GST in the above example).But no ITCs can be claimed for coupons issued as they do not include the GST/HST.
As compared, if the coupon offered is Reimbursable, this means vendors can expect to be reimbursed by the manufacturers for accepting these coupons from customers. then generally the coupon can be treated the same as cash.
It is interesting how the rules vary based on the type of rewards offered to customer. While businesses are preparing GST submission, please pay attention to the details. And one more reminder, remember to make sure all the documentation are complete and meet all requirements to avoid a denial of the ITC by the CRA.
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