The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

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Yesterday, I was asked a question about gift certificates.  A vendor is selling gift certificates in June for use in June 2010 or on or after July 1, 2010.  The question is what happens for GST/HST/ORST purposes when one sells the gift certificate and when one redeems the gift certificate for goods/services.

Before I go too far, it is important to pin-point what I mean when I say "gift certificates" (or rather what the Canada Revenue Agency (CRA) thinks is a gift certificate).  In CRA Policy Statement P-202 "Gift Certificates", the CRA states:

A gift certificate is a "device" (e.g. voucher, receipt, ticket) which,

1) has a stated monetary value,

2) can be redeemed on the purchase of property or a service from a particular supplier; that is, the supplier agrees to accept the device as consideration, or a part hereof, in respect of the purchase of property or a service,

3) for which consideration is given in the amount of the stated value, and

4) which has no intrinsic value.

The determination of whether property, which otherwise would qualify as a gift certificate, has an intrinsic value will require a certain degree of judgment on the part of departmental officials applying this policy. Generally, the value inherent in the property will be evident from the circumstances surrounding its sale. If the purchase of the property is promoted as something more than a device which may be used as a partial payment towards a future purchase, the possibility that the property has value in itself, should be examined.

Pursuant to section 181.2 of the Excise Tax Act (Canada) (the "GST/HST Legislation), the issuance or sale of a gift certificate for consideration (e.g., money) shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money. 

This means that when a vendor sells or issues a gift certificate, no GST or HST is payable because the GST/HST Legislation says no supply has occurred.  If there is no supply, there is no event that results in the application of GST/HST. 

HOWEVER, when a person uses that gift certificate to purchase goods and/or services, the gift certificate is money. The redemption of the gift card for goods or services is a supply for GST/HST purposes.  If the supply (e.g., a DVD) is a taxable supply and, therefore GST/HST is collectible, then the gift certificate should be used to pay the purchase price plus GST/HST.  In other words, a the time of the supply that is a purchase of goods and/or services is the moment when the vendor needs to ask about GST/HST consequences and charge the correct amount of GST/HST/

This is important because I also saw a flyer yesterday for the sale of gift cards in June 2010 to save HST.  This flyer was wrong in the context of what was being sold and when. A vendor would collect (let's say $100 in cash) for a $100 gift certificate in June 2010.  When the consumer redeems the gift card for services (or property), the vendor will determine whether to charge GST and/or HST on what is purchased.  If the gift card is redeemed in June 2010, then the vendor would collect GST (and possibly ORST) in respect of the purchase if the supply is in Ontario.  If the gift card is redeemed on or after July 1, 2010, then the vendor would collect GST and HST if the supply in in an HST province.

For example, if the gift card is for a spa treatment (e.g., a manicure), if the services take place in June 2010, the vendor would charge for the manicure ($20) and charge GST ($1).  If the gift card was for $25, the vendor would apply $21 against the gift card and the person could keep the $4 credit for the next visit or could take the cash.

If the manicure takes place in July 2010, then the vendor would charge $20 for the manicure, $1 GST and $1.60 HST (assuming the manicure services were provided to an individual in Ontario).  In July 2010, the vendor would apply the $22.60 against the gift card and the individual would have $2.40 remaining.

Even though there isn't a similar explicit rule for Ontario retail sales tax purposes, Ontario has the following statement on an official web-site:

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

Retailers must not charge consumers provincial Retail Sales Tax (RST) and/or federal Goods and Services Tax (GST) when buying gift cards.

The Ministry of Consumer Services advises consumers to check their gift card receipts to ensure they are not charged sales taxes when buying gift cards.

Sales taxes should only be applied on goods or services when purchased using the gift card as the payment option.

Based on this official statement, it appears that the position of the province of Ontario is that Ontario retail sales tax is not collectible at the time of a sale or issuance of a gift certificate/gift card.