Anonymised, illustrative composite. An Ontario retailer's balance sheet netted its outstanding gift-card liability down by an assumed breakage rate. Ontario law does not let a gift card expire, which meant the assumption behind that number was never available — though the retailer's separate loyalty-points liability turned out to be a different question entirely.
At a glance
The target was an Ontario specialty retailer with a loyalty program and a conventional gift-card offering, sold by asset purchase. Its closing balance sheet carried two related but separate liabilities: $850,000 of outstanding gift cards, presented net of an assumed 8% breakage credit of $68,000, and a $310,000 loyalty-points liability, presented net of an assumed 15% breakage credit of $46,500. Both breakage assumptions were built the same way, from the retailer's own multi-year redemption-pattern data, and the seller's advisors treated them as a single, consistent methodology applied to two similar-looking liabilities.
Breakage accounting assumes a portion of an outstanding obligation will never be claimed, and reduces the recognised liability accordingly. That assumption needs a real basis for expecting non-redemption — a card genuinely lost, a point genuinely allowed to lapse. For the gift cards, no such basis exists in Ontario law: O. Reg. 17/05, made under the Consumer Protection Act, 2002, provides at s.25.3(1) that “no supplier shall enter into a gift card agreement that has an expiry date on the future performance of the agreement,” and at s.25.3(2) that “a gift card agreement with an expiry date on its future performance shall be effective as if it had no expiry date if the agreement is otherwise valid.” A card that legally cannot expire remains a live claim indefinitely, whatever the historical redemption curve suggests about how likely a given holder is to use it.
The buyer's diligence team initially treated the loyalty-points liability the same way, on the assumption that “a store credit is a store credit.” That assumption did not survive reading the regulation's own definitions. Section 23 defines “gift card” as “a voucher in any form, including an electronic credit or written certificate, that is issued by a supplier under a gift card agreement and that the holder is entitled to apply towards purchasing goods or services covered by the voucher,” and defines “gift card agreement” as a future performance agreement under which, on the non-reloadable branch of the definition, “the consumer makes payment in full when entering into the agreement,” and, on the reloadable branch, the consumer's payment must equal the value added to the card. A loyalty point, earned as a percentage of an ordinary purchase rather than purchased directly for its own face value, does not meet that definition — there is no separate payment for the point itself. The no-expiry rule does not reach it.
Gift cards: $850,000 gross outstanding, an assumed 8% breakage credit of $68,000, carried net at $782,000. With the breakage assumption unavailable as a matter of law, the buyer assumed the full $850,000 as the real liability — a $68,000 increase in assumed liabilities, reducing the equity price dollar for dollar.
Loyalty points: $310,000 gross outstanding, an assumed 15% breakage credit of $46,500, carried net at $263,500. Because the points program's own terms — a separate contract from any gift card agreement, and outside O. Reg. 17/05's reach — provided for point expiry after 24 months of account inactivity, and nothing in Ontario consumer protection law prohibited that for points, the seller's breakage assumption here was left unchanged. Total price impact of the correction: $68,000, not the $114,500 the buyer's first-pass diligence memo had flagged before the definitions were checked.
The enabling authority sits in the Consumer Protection Act, 2002 s.123(5)(f), which empowers the Lieutenant Governor in Council to make regulations “imposing restrictions, including prohibiting expiry dates, on future performance agreements, including gift card agreements.” The operative rule is in the regulation made under it, O. Reg. 17/05 ss.25.1–25.3: gift card agreements cannot carry an expiry date, and if one is written into the agreement anyway, it is void and the agreement is treated as having none.
The regulation's own definitions in s.23 do the rest of the work: a “gift card” and a “gift card agreement” both require the consumer to have made a direct payment for the voucher's value. A loyalty point earned through ordinary spending, with no separate payment made for the point itself, is outside both definitions, and outside the no-expiry rule that depends on them. The two liabilities look alike on a balance sheet and are governed by entirely different rules.
The purchase agreement's assumed-liabilities schedule was revised to carry the gift-card liability at its full $850,000 face value, with the $68,000 breakage credit reversed. The loyalty-points liability was left at its seller-presented net figure of $263,500, since nothing in the regulation disturbed the basis for that estimate.
The seller's counsel initially resisted on the ground that the retailer's own historical data showed real, measurable non-redemption for both programs. The buyer's position held because the question was never whether non-redemption happens in practice — it plainly does, for both cards and points — but whether the law permits a supplier to treat a claim as extinguished by the mere passage of time. For gift cards, it does not.
Accepting the net $782,000 gift-card figure would have left the buyer carrying a full $850,000 legal obligation on a balance sheet that recorded only $782,000 of it — an understatement that does not shrink with time, because the underlying cards cannot lapse. Every future redemption above the recorded $782,000 would have come as a direct, unbudgeted cash cost with no corresponding liability ever having been priced into the deal.
The tell was that the seller's breakage methodology used the identical percentage-of-outstanding-balance technique for both the gift cards and the loyalty points, without asking whether either program was actually free to lapse under Ontario law. The methodology was internally consistent and individually reasonable for a business that could set its own expiry terms. It was simply being applied to one liability the retailer was never legally free to set an expiry term for.
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