In this case, we are trying to draw a distinction between ETA section 181 and section 232.1.
The analysis focused on the Tele-Mobile-established principle that a coupon must be tendered by the customer. The analysis was supplemented by a Crown discussion of the underlying purpose for the coupon rule. See, especially text around and note 4. The distinction, apparently, was created to aid tax reporting by small grocery store operators.
The basic rule is that if a customer gets a discount through use of a coupon, the manufacturer (issuer of the coupon) gets an input tax credit for the GST-imputed portion of the coupon amount.
The TCC decided that Nestlé was not entitled to the ITC, explaining, in part: “[43] The Federal Court of Appeal, in Tele-Mobile, was concerned that a relaxation of the tendering requirement would allow any discount arrangement to be considered a coupon… Such an interpretation of the legislation would also render one provision, here section 232.1, virtually meaningless…”
Somewhat reluctantly, the Court concluded that its decision led to an equally adverse policy result:
“[45] I accordingly conclude that the IRCs were promotional allowances, not coupons. Nestlé will therefore not be able to claim ITCs on the IRCs and the customer will not recover the tax overpaid. In a promotional allowance context, GST/HST should have been collected only on the post-discount price. In that context, I realize that the Minister has received a windfall.”
But the Court’s decision does not really seem to create a windfall to the Government. Rather, the way the coupon and promotional allowance rules work, there could either be a windfall for Costco (the retailer) or for Nestlé (the manufacturer). The Government does not get a windfall. Here is why:
First, the promotional allowance rule in section 232.1 is, effectively, the base case. Under that rule, if the manufacturer gives a promotional allowance to a retailer or distributor, the manufacturer can get an input tax credit for the allowance but the credit comes from the retailer or distributor’s pocket. That result comes from 232.1(d) (for price reductions) and (e) (for actual cash payments). Effectively, the retailer is forced to reduce any ITC it previously claimed by the tax implicit in the allowance. So, what the manufacturer gets comes out of the pocket of the retailer. There is no direct cost to the Government.
There can be a windfall to a manufacturer under the coupon rule in section 181. Under that rule, when it applies, the retailer is not required to repay the Government the ITC the retailer claimed on the purchase of the product from the manufacturer. But the manufacturer still gets an ITC. If the manufacturer does not meet the conditions for the coupon rule in section 181, and also does not comply with the requirements of the promotional allowance rule in section 232.1, then the “windfall” goes to the retailer. The Government does not get a windfall.
In this light, the decision is not harsh. There was a contract negotiated between Nestlé and Costco. Nestlé had the ability to comply with the promotional allowance rules and if it had, Costco would have funded an ITC for Nestlé. So Nestlé, either by agreement with Costco or its own decision transferred the ITC it otherwise might have had to Costco. That is not necessarily a bad result for Nestlé because Costco was running a complete promotional program for Nestlé and saving Nestlé the task of running a coupon program. Had Nestlé not forfeited its right to the ITCs, Costco would have got nothing for running the program—that would be the same financial result for Costco had it left Nestlé to run its own program.