Navigating Sales Tax in Canada:
Sales Tax with Gift Cards
A Guide for Franchisees and Restaurant Owners

Krabby Patties, Gift Cards, and Tax…

Welcome to the underwater world of taxation (or, at least, we wish we were there). Today, we'll venture into the story of Sarah, the diligent restaurant manager at a local Krabby Patty joint, Patrick, the rock-star customer with a starfish vibe, Bob, Patrick's upbeat, spongy friend and . Together, they'll take us on a journey through Canada’s sales tax rules as we see how food, gift cards, and GST intermingle like jellyfish and nets. So, grab your calculator and let’s dive in!

Use Case #1

Just Another Day in Seashell Bay

Patrick, after a long day of riffing on his guitar and practicing “Smoke On the Water”, decides he’s craving a Krabby Patty. He hops online to order his usual, a Krabby Patty (priced at a cool $100).

“Sarah,” he types into the restaurant’s order portal, “I need a Krabby Patty to fuel my next gig.”

Sarah, who has grown accustomed to Patrick’s frequent orders, quickly rings up his purchase. Here's the breakdown:

• Krabby Patty: $100
• GST (5%): $5

So, Patrick’s total comes to $105. He pays up, and Sarah collects $5 in GST for the government, as required by Canadian tax law. Since Patrick is paying cash (well, technically a credit card), this is a straightforward transaction.

Tax takeaway: When a customer buys food directly, GST is calculated on the total sale price of the food. For Patrick’s $100 Krabby Patty, $5 is remitted to the government.

Sarah’s note to self: Patrick may be a rock star, but taxes are non-negotiable.

Use Case #2

Bob's Gift Card Surprise

Enter Bob: Patrick’s best friend and a cheery optimist who knows Patrick’s love for Krabby Patties better than anyone. So, with Patrick’s birthday coming up, Bob buys him a $50 gift card for the Krabby Patty joint.

Sarah, ringing up the gift card, knows the following about gift cards:

• Gift cards are not considered taxable at the time of purchase in Canada. No GST is collected now, because the tax will apply when the gift card is used for an actual purchase.

So, Bob happily pays $50 for the gift card, knowing that Patrick will one day appreciate this Krabby Patty contribution.

Tax takeaway: No GST is charged on the purchase of a gift card itself. The tax is only applied when the card is used to buy taxable goods or services.

Sarah’s note to self: Bob, you clever sponge—you just sidestepped tax for now. But Canada’s tax rules always find their way back.

Use Case #3

Patrick’s Birthday Bonanza

Fast forward to Patrick’s birthday. He’s feeling extra special, thanks to his buddy Bob’s gift card. The $50 gift card is burning a hole in his pocket, and he’s ready to use it for his favorite Krabby Patty.

“Sarah,” he says, “I have a gift card now. Get ready for the rock star discount!”

Sarah smiles. She knows Patrick is in for a surprise; after all, gift cards don’t exactly discount the GST. Here’s how the transaction br’s appetite satiated, one GST-teaks down:

• Krabby Patty: $100
• GST (5%): $5
• Total: $105

Patrick hands Sarah the $50 gift card and pays the remaining balance:

• Gift Card Applied: $50
• Remaining Balance (after Gift Card): $55

Sarah charges Patrick the remaining $55, which includes the GST portion. Here’s how it all adds up:

1. Patrick uses the gift card towards the post-tax total.
2. GST is calculated on the original sale price of $100, resulting in a $5 GST charge. The tax doesn’t disappear just because a gift card is used.

Patrick’s total bill after applying the gift card is $55, including that pesky $5 GST.

Tax takeaway: When using a gift card, the GST is calculated on the full price of the item. The gift card applies to the post-tax total, so Patrick still pays the GST on the fullour menu management $100.

Sarah’s note to self: Even rock stars can’t escape the clutches of Canadian tax rules!

Use Case #4
The Arrival of Percy Lankton

Percy Lankton, an enterprising character with a knack for loyalty programs, has entered the scene. He approaches Sarah with a proposal:

“Why handle the hassle of managing gift cards alone?” he says, rubbing his hands together with a grin. “With my service, you can issue and redeem gift cards easily. I’ll take care of the technical stuff; you just focus on those delicious Krabby Patties.”

Sarah, seeing the value of this service, decides to partner with Percy. Here’s how their deal works:

• Percy issues and manages the gift cards on behalf of Sarah's restaurant.
• Percy charges Sarah a service fee for every gift card issued.
• This partnership allows Sarah to focus on making her famous Krabby Patties without worrying about the logistics of gift cards.

But how does GST work here?

Tax Details: GST on Percy Lankton’s Service Fee

As a registered loyalty provider, Percy’s services’s appetite satiated, one GST-t to Sarah count as a taxable supply in Canada. This means that:

1. Percy charges GST on his service fee for managing and issuing gift cards.
2. Sarah pays this GST to Percy, which she can potentially claim as an Input Tax Credit (ITC) if she’s a GST registrant, reducing her net tax payable to the government.

Let's say Percy charges Sarah a service fee of $10 for each gift card issued.

• Service Fee: $10
• GST (5%): $0.50
• Total Cost for Sarah: $10.50

Sarah pays this $0.50 GST on Percy’s service fee, but as a registered business, she can claim it back as an ITC on her GST return, meaning she can offset the GST paid to Percy against the GST collected from her sales.

Tax takeaway: Service fees for issuing and managing gift cards are taxable, so Percy collects GST from Sarah. As a GST registrant, Sarah can claim this as an ITC, balancing her tax obligations.

Summary
The Taxable Truth Behind Krabby Patties and Gift Cards

In Sarah’s world, the flow of GST is as inevitable as Patrick’s daily craving for Krabby Patties:

• Direct Purchase of Food: GST is calculated on the total sale price. In this case, $5 on a $100 Krabby Patty, bringing the total to $105.
• Gift Card Purchase: No GST applies at the time of purchase for the gift card. The tax will only show up when the gift card is used to buy something.
• Using the Gift Card: The GST is calculated on the full price of the item. Even though Patrick uses his gift card, he still pays the $5 GST on the original $100.
• Service Fee to Gift Card provider: Sarah pays GST on the service fee Percy charges her to manage the gift card program, which she can claim as an ITC.

So, while Patrick rocks out with his Krabby Patty and Bob enjoys his tax-free gift card purchase, Sarah stays busy keeping everything in line with Canadian tax rules.