CRA finds that cardholder points did not represent an expense incurred by the taxpayer until the cardholder redeemed them

The taxpayer encouraged the use of its credit card by agreeing that cardholders would earn points based on the dollar amount of eligible purchases charged to their credit cards. Those points could then be redeemed for rewards. The taxpayer, in turn, had agreements with a related party and with various third parties (the “participants”) that, consequent upon a cardholder redemption, the taxpayer would pay an agreed amount to the applicable participant to acquire the applicable reward for delivery to the cardholder. Points expired only in very limited circumstances.

Before finding that the taxpayer could not recognize an expense as the rewards were earned (as an expense had not yet been “incurred”), and that the applicable deductions were deferred until the points were redeemed, CRA stated:

[T]he courts have held that an expense will not be considered to have been incurred unless the taxpayer has an obligation to pay money to someone … [and] that a legal obligation to pay under contract does not exist until all contractual preconditions to which the payment relates are fulfilled.

Here, it was only on redemption of the points that a cardholder selected the particular reward - and it was only then that both the amount of the reward and the participant who would supply it (and, therefore, the party whom the taxpayer would ultimately be required to pay an amount to) became known. Thus, when the points were earned, there was no identifiable debt owing to an identifiable creditor who could make a legally enforceable claim against the taxpayer in respect of the points. CRA stated:

Concluding otherwise would lead to inappropriate results in many situations, given that it is common commercial practice for parties to contract for the provision of goods or services, the fulfillment of which necessitates expenses to be incurred in the future.

Neal Armstrong. Summary of 25 October 2023 External T.I. 2022-0927891E5 under s. 18(1)(a) – incurring of expense.