The tax consequences of loyalty programs

Donating frequent flyer miles can have unintended tax consequences.

Frequent-flyer plans often allow members to donate points to charities. One charity that benefits is Hope Air, a provider of free flights to individuals who are in need of travel to obtain medical treatment but cannot afford travelling costs.

The recipients’ average household income is below the national poverty line, and many patients require cancer treatment or organ transplants. In August, the charity celebrated its 25th anniversary and has reached the milestone of 66,000 flights in total. Each year, the charity provides about 2,400 free flights.

Air travellers’ security charges

In 2007, Hope Air became at odds with the Minister of National Revenue over its claim for a refund of charges it paid under the Air Travellers Security Charge Act (the Act) between 2002 and 2007. It based its refund claim on an exception in the Act that says,

No charge is payable in respect of an air transportation service that is acquired … by a registered charity from an air carrier for no consideration, if the service is donated by the charity to an individual for no consideration and in pursuit of its charitable purposes.

Hope Air faced a tax bill of over $40,000 despite its charitable status, so it appealed the assessments to the Tax Court of Canada.

Form and routing of the donation

In general, Aeroplan members can donate or relinquish their points to approved registered charities or programs, including Air Canada’s charitable program Kids’ Horizons. Aeroplan began in 1984 as Air Canada’s points program, but by 2002 it had become a separate legal entity.

At the beginning of each year, Hope Air would meet with a Kids’ Horizons representative to request support based on the coming year’s expected needs. Air Canada then donated Aeroplan points and return-flight passes based on those discussions. On average, that amounted to about 3 million points and 100 passes annually.

As a given travel need arose, Hope Air determined whether it was more cost-efficient to use the flight passes or the points. The passes are redeemed with Air Canada directly, whereas Hope Air uses its account on the Aeroplan website to redeem points and purchase flights. The CRA’s assessments exempted the flight passes, but not the points.

Consideration paid?

The decision hinged on whether both transactions — the donation of points to Hope Air and the acquisition of air travel by Hope Air — were completed for no consideration. While the former transaction fulfilled the requirement, the judge determined that the acquisition of the flight via the Aeroplan website constituted an exchange for consideration.

Ironically, one of the cases relied upon to come to this decision was a claim by a taxpayer for a medical expense tax credit. The taxpayer had used Aeroplan points to fund a flight from Thunder Bay to Chicago for medical treatment. The annual assessment asserted that the points had no value, and could not be claimed against income, but the taxpayer successfully appealed on the basis that there was exchangeable value in that circumstance.

In the present case, the judge expressed that while Hope Air provides a valuable and essential service, it does not fall within the exclusion here.

But he did suggest that the Crown could return the charges or remit the charges to Hope Air pursuant to provisions of the Financial Administration Act.

So it seems that “Hope” is not lost after all.

Doug Carroll, JD, LLM(Tax), CFP, TEP, is vice president of tax and estate planning at Invesco Trimark Ltd.