rehoult

I just did a quick read through of IRC § 4261 and I completely agree with Air Canada / Aeroplan, though the base fare is not relavent. However, it a reasonably complex area of tax, so I can see why people get confused by it.

There are 3 main US travel taxes:
1) 7.5% tax on 'taxable travel'
2) US Segment Fees (Not relavent here)
3) International Travel Facilities Tax (What you are talking about)

International Travel Facilities Tax is added "on any amount paid (whether within or without the United States) for any transportation of any person by air, if such transportation begins or ends in the United States". Payment, as is typical in tax law, refers to any method whether miles, cash or barter, and therefore, it effectively applies to all international tickets. However, the International Travel Facilities Tax is not charged on a ticket if the 7.5% tax applies to the entire ticket.

The 7.5% tax applies to tickets purchased in the US. It also applies to miles that are purchased in the US (i.e. the bank pays it when they buy miles from the airline), and therefore reward tickets issued by US airlines are deemed to have been subject to the 7.5% tax as it was paid when the miles were bought/issued. In both cases, the International Travel Facilities Tax doesn't apply.

However, AP miles clearly aren't subject to the 7.5% tax at time of purchase/issuance as it's a purely Canadian transaction. Further, most (99%+) tickets they are used to book wouldn't be subject to the 7.5% tax either, as travel paid for outside of the US is only subject to it if the flights both start and end in the US.

Therefore, the International Travel Facilities Tax applies to the AP issued tickets.

A complete analysis would be pages long, but tl;dl: AP is right to charge you the tax and to remit it to the US