Selling gift cards at a small business in Ontario, the rules, the tax and the tracking

Stop 01Rule 1: most gift cards in Ontario cannot expire

Ontario’s consumer page is clear. The Consumer Protection Act “bans most retail business gift cards from having an expiry date.” The province’s business guide says the same thing from the seller’s side: “most retail businesses cannot have an expiry date on these products.”

There are two exceptions the province names:

• A card for one specific service. Ontario’s own example is a certificate for a massage at a spa, which can carry an expiry date.
• A card “issued for a charitable purpose.”

A card with a dollar value for a café, a bookshop, a salon or a hardware store is not in either group. Do not print an expiry date on it. If your point-of-sale system adds one automatically, turn that off before you sell a single card.

One more detail from the business guide that catches loyalty programs: when a program “issues a voucher as a reward,” for example a discount on a future purchase, it is “considered a gift card and cannot expire.”

Stop 02Rule 2: no fees that eat the balance

The province lists the fees a business cannot add:

• “activation fees or added service fees to purchase the card or to use the card”;
• “fees that reduce the value of the gift card over time, sometimes called dormancy fees.”

And the two it can:

• “customizing a gift card”;
• “replacing a lost or stolen card.”

In plain terms: a customer who pays $50 must get a card worth $50, and it must still be worth $50 in three years. If you offer a personalized card with a printed message or a photo, you may ask a fee for that design work.

Shopping mall cards that work across many stores have their own separate rules in Ontario, with a capped activation fee and a 15-month window before limited dormancy fees. Those are for mall operators, not for an independent business selling its own cards.

Stop 03Rule 3: put the conditions in writing

Ontario’s consumer page says any limits or terms “must be stated in clear and visible writing for the customer.” Keep the conditions short and print them on the card or its sleeve:

• where the card can be used (one location, or all of them);
• that it does not expire;
• how to check the balance;
• what happens if it is lost, and whether there is a replacement fee.

If you have more than one location, decide now whether cards work at all of them. The province notes that if a business closes, customers should check the card’s terms, since they may allow use at another location.

Stop 04The tax: HST at redemption, not at sale

This part surprises people. Under the CRA’s policy statement on gift certificates, the sale of a gift certificate is “deemed not to be a supply and therefore does not attract GST/HST.” The CRA says the term “includes a gift card provided the gift card meets all the conditions” of a gift certificate.

So you do not collect HST when you sell the card. The CRA’s business income page says it directly: “Do not collect GST/HST when a gift card or certificate is sold.” Tax applies later, when the card is used as payment. The CRA’s policy says that at redemption the card is treated as payment, and “GST/HST may apply at that time depending on the tax status of the supply.”

In practice: when a customer buys a $40 taxable item with a gift card, you ring up the item and the HST as usual, and the card pays for the total, like cash.

The exception is a discount certificate. If you sell, say, a $10 voucher worth $100 off a purchase of at least $500, the CRA’s example says “the retailer is required to collect GST/HST in respect of the issuance or sale of the certificates,” and they are treated as coupons at redemption. Keep promotions and gift cards separate in your system.

Stop 05The income: reported when sold

For income tax, the CRA treats the sale differently. Its business income page says you “must report the amounts received from the sale on the date they are sold as business income.”

There is an optional relief. A business “may choose to calculate a reserve as a deduction against this income,” defined as “the amount of gift cards or certificates that you anticipate will be redeemed after the end of your fiscal year.” Any reserve you deduct “must be added back to business income the following year.” Whether a reserve is worth it depends on your numbers; this is a good question for your accountant before your first holiday season of gift card sales.

Stop 06A simple tracking ledger

Because cards do not expire, you need a record that lasts as long as they do. If your point-of-sale system tracks gift cards, use it. If you sell paper cards or certificates, a spreadsheet works:

Three habits make it dispute-proof:

1. 01Number every card before you sell it, and never reuse a number.
2. 02Record the sale at the till, not at the end of the day.
3. 03Write each redemption with the date and the new balance, and tell the customer the balance left.

Look at the total of outstanding balances once a month. That number is money customers have paid you for things you still owe them. It is not spare cash.

Stop 07A fictional example

To illustrate, here is an invented business. A fictional bakery sells 60 gift cards of $25 in December, $1,500 in total. It collects no HST on those sales and records $1,500 of business income in December. In February, a customer uses one card on a taxable cake, with HST rung up as usual, and the remaining balance is written in the ledger. Two years later, another customer arrives with a card that was never used. It is worth $25, as it was on the day it was sold, and the ledger confirms it in seconds.

Stop 08Before the holiday rush

1. 01Remove any expiry date from cards and from your till settings.
2. 02Remove activation or dormancy fees.
3. 03Print short, clear conditions on the card.
4. 04Set up gift cards so the till collects HST at redemption, not at sale.
5. 05Start a ledger with numbered cards.
6. 06Ask your accountant whether a year-end reserve makes sense for you.

I write more practical pieces on running a small business on ZELR, and keep simple templates on my own site.