Published: October 13, 2021
Last Updated: October 13, 2021
Pumpkins, spiders and taxation?
The ghouls and ghosts of Halloween do not stop the haunting of taxation issues. Our experienced Canadian tax lawyers have chosen a few Halloween related facts and stories to delight or scare this Halloween season.
Sales Tax on Halloween Candy
Treat buying taxpayers in four Canadian provinces – British Columbia, Saskatchewan, Manitoba and Quebec – have two different types of sales tax to pay on their Halloween candy. The first sales tax is the federal Goods and Services Tax or GST which will apply to all Halloween candy purchases. The five provinces which use Harmonized Sales Tax or HST also have sales tax applied to their Halloween candy purchases. The second sales tax is provincial level sales tax known as provincial sales tax (“PST”) in British Columbia and Saskatchewan, Retail Sales Tax (“RST”) in Manitoba and Quebec Sales Tax (“QST”) in Quebec. Taxation rules, including what to what products sales tax applies, vary both between these four provinces and between the provincial and federal rules. PST, RST and QST are payable on Halloween candy purchased in Saskatchewan, Manitoba and Quebec. Those purchasing their Halloween goodies in British Columbia are in for a double treat though as no PST applies to candy, chocolate and chips in British Columbia.
Coupon or Promotional Allowance for GST/HST
In 2016, Nestlé and the Canada Revenue Agency went knocking on the Tax Court of Canada’s door to ask “Coupon or Promotional Allowance?”. Nestlé had partnered with Costco to offer promotions, which included a Halloween promotion, they called “instant rebate coupons” or IRC. The IRC provided customers with a fixed amount discount on Nestlé products. Signs were posted on the Costco shelves advertising this discount. Customers who purchased applicable products would have the discount automatically applied without having to show any type of document to claim the discount. The GST/HST on the purchase of each Nestlé product was calculated based on the full price of the product, without the discount. For example, if a box of chocolate bars was purchased for 12 dollars in Alberta with a 2 dollar discount, the customer would pay 10 dollars plus an additional $0.60 cents in sales tax ($12 * 5% GST).
Nestlé was obligated to reimburse Costco for the amount customers saved using the IRCs. Nestlé collected GST/HST on the full price of the product without reducing the price for the GST/HST discount. Further, Nestlé did not credit or refund Costco for the extra GST/HST which was charged because the GST/HST was charged on the full price of the product instead of the discounted price. Nestlé believed the IRCs were coupons pursuant to section 181 of the Excise Tax Act. Citing subsection 181(5) of the Excise Tax Act, Nestlé claimed the tax fraction of the amounts it reimbursed to Costco as input tax credits or ITCs. These ITCs allowed Nestlé to decrease the amount of GST/HST it was required to remit.
The Canada Revenue Agency (“CRA”) denied the $109,970.17 of ITCs claimed by Nestlé. The CRA did not believe the IRCs were coupons pursuant to section 181.
Justice Lamarre agreed with the Canadian tax litigation lawyer for CRA. Specifically, Justice Lamarre found the definition of “coupon” in section 181 required something to be submitted by the purchaser in exchange for the discount on the good or service. The IRC promotion did not require purchasers to tender any document or other instrument, electronic or physical, specifically related to the discount in order to receive the discount. Costco membership cards were not sufficient because even though shoppers required these cards to shop at Costco where the discount was being offered, the cards contained no information about receiving the discount on Nestlé products. Instead, Justice Lamarre found the IRC promotion was a promotional allowances under section 232.1 of the Excise Tax Act. The IRC promotion was therefore not a coupon and no ITCs could be claimed by Nestlé.
The CRA potentially received an unexpected treat from this decision. Customers who had purchased the Nestlé products during the IRC promotions had paid GST/HST on the full product price, not the discounted product price. If the IRC promotion had been a coupon, the additional GST/HST would have been lessened by Nestlé claiming the ITC. But with no ITCs claimed, the additional GST/HST was a treat for the CRA.
Halloween Trust Taxation Massacre
On October 31st, 2006, then Minister Of Finance Jim Flaherty announced a scary surprise for Canadians. The taxation of income trusts would be brought in line with corporations, including the tax rate on distributions from income trusts shooting up to over 30 percent. An income trust describes a trust where at least 90% of the trust’s net cash flows are distributed to its unitholders. The announcement caused an immediate drop in value for these trusts and the value of unit holders’ interests in these trusts. Because of the date of this announcement, it is commonly known as the “Halloween Massacre”.
Pro Tax Tips: Using the Voluntary Disclosure Program to Avoid A Nightmare Tax Situation
Discovering an error in previous tax filings, or lack of thereof, can be a situation worthy of a Halloween horror movie for many taxpayers. The voluntary disclosure program allows taxpayers to pre-emptively come forth to correct taxation issues in exchange for penalty and interest relief, and avoid being haunted by the CRA. Our experienced Canadian tax lawyers advise on and assist with voluntary disclosure applications, leaving vampires and werewolves to be the subject of scary stories.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
The Halloween Massacre refers to an announcement made on October 31st 2006 that income trusts would be taxed at a much higher tax rate consistent with the taxation of corporations. The announcement caused an immediate drop in value for these trusts and the value of unit holders’ interests in these trusts.
A coupon is defined in section 180 of the Excise Tax Act as a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit. There must be something tendered in order to receive the discount on the taxable supply.