CRA Reassessment Journal Entry: GST/HST, Penalties, Interest

How do I record a GST/HST amount owed to the CRA after a reassessment?

Book the notice as one entry with a single credit and three kinds of debit: the extra tax, the interest and the penalty each go to their own account, and the total goes to a GST/HST payable line for the reassessment. The CRA does not publish journal entries or account names, so this layout is common bookkeeping practice built on the three amounts a notice shows. For a notice of assessment that charges interest or a late-filing penalty on a return filed or paid late, book only the charges not already recorded; the tax is usually already in your regular GST/HST payable.

Date the entry on the day of the notice. The CRA treats an assessed amount as payable once it sends the notice (Excise Tax Act, s. 315(2)), so most small-business books record it on the notice date. If you are objecting, whether a disputed amount is booked in full, in part or only disclosed depends on the accounting framework used and on whoever signs the financial statements. Reverse what the CRA later cancels or reduces, against GST/HST payable, reassessment; a refund the CRA pays goes the other way. Whether a closed earlier year is restated is also for that person; see correcting last year's financial statements.

The case is not simple if the notice covers several periods, disallows input tax credits (the GST/HST paid on business purchases, claimed back), carries more than one kind of penalty, sits next to an income tax reassessment, or lands on books with no separate trail for tax, interest and penalty. Gather the notice, the CRA account statement, the original return for each period and the support for any credit in question. Where two or more of these apply, the entries, the return and the missing proof are usually settled together; see bookkeeping help.

This page covers GST/HST administered by the CRA. A business whose physical location is in Quebec files with Revenu Québec, which generally administers the GST/HST there (CRA: RC4022); its notices are outside this page.

What does a notice of reassessment show, and how do I split it?

A GST/HST notice may show the changes the CRA made to a return, with details of any filing penalties and of interest on the amount owing. Business notices are generally posted only in the online CRA account, with exceptions such as paper mail (CRA: after you file). Split it in four steps:

1. Tax. For each period, find the change the CRA made to net tax (tax collected less input tax credits). That change is the tax part; tax you already booked from the filed return is not booked again.
2. Interest. Take the interest the notice shows. Interest on the extra tax runs from the day after the net tax was first due, not from the notice date, until it is paid (Excise Tax Act, s. 228(2); s. 280(1)). Read the start date of any interest on a penalty from the notice; the CRA pages cited here do not give it.
3. Penalty. List each penalty by name and period.
4. Check. Add the three parts and compare the total with the CRA account's transactions for the same periods. The account balance leaves out amounts under dispute, amounts not yet due and payments not yet applied (CRA: account balance FAQ), and can show interest calculated to a date you choose (CRA: remit GST/HST). Your regular GST/HST payable plus GST/HST payable, reassessment should match the CRA once those items, offsets and instalments are explained; see reconciling GST/HST payable to the CRA.

One notice can reach back over several periods; see GST/HST reviews and audits for how far back the CRA can go.

What journal entry records the extra GST/HST the CRA says I owe?

Credit the extra tax to GST/HST payable, reassessment, and debit the cost it belongs to. The plainest case is tax the business never charged: customers did not pay it, so it is not a collected balance.

GST/HST collected and GST/HST paid normally stay tied to the returns already filed; the reassessment is the difference. For how they work, see GST/HST in your books.

Whether the tax itself reduces income is a return question. The Income Tax Act rules cited below on interest and penalties do not settle it. Keep the tax in its own account so the person preparing the return can treat it as the facts require.

What is the journal entry for CRA interest and penalties on GST/HST?

Debit interest and penalties to their own accounts, credit the same payable line, and keep both out of ordinary interest expense and bank charges.

Separate accounts do three jobs:

• They keep non-deductible amounts away from deductible lines. Anything posted to ordinary interest expense flows to the return as a deduction unless someone catches it.
• They isolate what can change. The Minister of National Revenue (in practice the CRA) can cancel or waive penalties or interest in certain circumstances (CRA: remit GST/HST). With separate accounts, you reverse only the part that is cancelled.
• They give later interest one home. Interest keeps being added, so each new charge is one entry to one account.

One combined account for interest and penalties works only if every entry names the notice and the two amounts can be split again. For relief, see penalties, interest and relief.

Are CRA interest and penalties on GST/HST deductible?

Interest and penalties: no. The tax part is different: it is not an expense in itself. A disallowed credit becomes part of the cost of the purchase, and for tax never charged on sales the person preparing the return decides the treatment (see the extra-tax and input tax credit sections). Interest under Part IX of the Excise Tax Act is denied by Income Tax Act, s. 18(1)(t)(ii). For penalties, the CRA says you cannot claim an income tax deduction for any penalty paid or payable for failing to correctly file a GST/HST return (CRA: GST/HST filing penalties). The Act also denies a deduction for a fine or penalty imposed under a law of a country or province, other than a prescribed fine or penalty (s. 67.6).

How to keep them out of deductible accounts:

• Sole proprietor. Do not put either amount on a business expense line, including interest and bank charges (line 8710 of T2125). The CRA lists most fines and penalties among amounts that are not business expenses (CRA: T2125 expenses).
• Corporation. The T2 starts from the financial statements, and Schedule 1 adds back expenses booked there that the tax rules do not allow (CRA: T2 guide). One account per item makes each add-back a single lookup.
• Already posted to interest expense. Move the amounts to the dedicated accounts before the return is prepared. If the return was already filed with them deducted, the return needs correcting too.

The CRA disallowed my input tax credits: what changes in the books?

The credit comes off, the tax becomes owing, and the debit generally goes back to the purchase the credit came from, so the expense or asset shows its full cost. The notice shows the net change, so check it against any credits the CRA allowed in the same assessment. Debit the disallowed credit to the account the purchase was posted to, debit interest and penalty to their own accounts, and credit the total to GST/HST payable, reassessment, as in the first table.

If the credit was denied because the cost was personal, not business, do not debit an expense; the cost may belong to the owner. See shareholder benefit found in an audit and business costs paid personally.

The CRA tells sole proprietors to reduce business expenses by the credits claimed (CRA: T2125 expenses), so a credit that does not stand leaves the expense unreduced. For income tax, the Act treats a claimed credit as government assistance and a credit added back to net tax as assistance repaid (Income Tax Act, s. 248(16) and (18)). How the repayment lands in the cost depends on the item, so give the preparer the disallowed credits item by item.

What proof was missing. A registrant may not claim a credit unless, before filing the return that claims it, it has sufficient evidence showing the prescribed information (Excise Tax Act, s. 169(4)). Which details a receipt must show is in GST/HST receipt details for input tax credits; how long to keep it is in how long to keep business records. If you left out credits you were entitled to, the CRA must count them when it reassesses, provided you hold the required proof (s. 296(2)); gather those invoices too. Whether evidence found after filing can save a credit depends on the facts; see GST/HST reviews and audits.

The reassessment is for income tax (T1 or T2), not GST/HST: is the entry the same?

The three-part split is the same, but the tax part is booked differently, and all three parts are non-deductible. The Income Tax Act denies a deduction for any amount paid or payable under that Act, apart from tax under Parts XII.2 and XII.6 (s. 18(1)(t)(i)), which covers tax, interest and penalties alike.

Use a separate payable for income tax, so each payable ties to its own CRA statement. A payroll reassessment (CPP, EI and income tax withheld from pay) is outside this page; see payroll journal entry. If the CRA reassessed income tax because it called an expense personal, see shareholder benefit found in an audit.

How do I record payments on the balance, and what happens to interest while it is unpaid?

Debit each payment to GST/HST payable, reassessment, and credit the bank. Book each new interest charge from the CRA statement, debit CRA interest, not deductible, and credit the same payable line.

The CRA charges arrears interest at the prescribed rate, set every 3 months and compounded daily (CRA: remit GST/HST). It runs until the amount is paid, and compounded interest is added to the amount owing (Excise Tax Act, s. 280). A part payment reduces the balance that interest runs on. Compare the ledger with the CRA account transactions for the same periods at least monthly. Book only identified new interest charges as interest; investigate any other difference first.

An objection must be filed within 90 days after the notice is sent (Excise Tax Act, s. 301(1.1)). If it is missed, an application to extend must reach the Minister within one year after that deadline and can be refused (s. 303). Objecting does not by itself stop collection. For the steps, see reviews, audits and voluntary disclosure.

For offsets, instalments and refunds that make the payable differ from the CRA account, see reconciling GST/HST payable to the CRA. If you cannot pay at once, see CRA payment arrangements for business debt.

Example

These examples are illustrative. All amounts are in Canadian dollars (C$).

A corporation with disallowed credits

A review disallows C$8,000 of input tax credits. The notice shows tax C$8,000, interest on the overdue amount C$600 and a penalty C$400.

The C$600 and C$400 stay out of ordinary interest expense. How the C$8,000 sits in the cost of each purchase for income tax is a question for the person preparing the T2.

A sole proprietor who did not charge GST

The CRA finds GST was not charged on C$30,000 of sales and assesses C$1,500 of tax (5% of C$30,000, assumed here; the notice sets the real figure) plus C$120 of interest.

The notice adds C$1,620 to what the business owes. The C$120 stays out of interest and bank charges on the T2125.

A corporation paying a C$12,000 reassessment monthly

The notice shows tax C$10,500, interest C$1,000 and a penalty C$500. The corporation debits C$10,500 to the cost the tax belongs to, C$1,000 to CRA interest, not deductible, and C$500 to CRA penalties, not deductible, and credits C$12,000 to GST/HST payable, reassessment. It then pays C$1,000 a month. The interest amounts below are made up; take the real ones from the CRA statement.

Each payment debits the payable and credits the bank. Each new interest charge debits CRA interest, not deductible, and credits the payable. The liability stays on the books until it reaches zero.

Different for you?

• The books carry no separate trail for tax, interest and penalty, the notice also disallowed credits or covers several periods, or an income tax reassessment arrived with it: how the amounts sit in the books and the return, what proof a credit lacks, and whether to object or ask for relief first are usually settled together; see bookkeeping help.
• The interest or penalties were already deducted on a filed return: the return needs correcting as well as the books; see correcting last year's financial statements and bookkeeping help.
• You are objecting and the statements will go to a lender or an accountant: how a disputed amount is shown is settled with whoever signs the statements. An objection alone does not mean the filed return needs correcting.
• The notice names a director or partner personally: a general partner can owe the partnership's GST/HST (Excise Tax Act, s. 272.1(5)), and a director can owe unremitted net tax with its interest and penalties (s. 323), subject to collection conditions and a due-diligence defence; the CRA must assess a director within two years after the person last ceased to be a director. A sole proprietor owes personally. See GST/HST reviews and audits and bookkeeping help.
• Your books are months behind: see catching up on overdue books before booking a reassessment into them.
• You want a penalty or interest cancelled: see penalties, interest and relief; for the late-filing formula, see late GST/HST filing penalty.
• You want to object, or the CRA sent a proposal first: see reviews, audits and voluntary disclosure and GST/HST reviews and audits.
• Returns were never filed and the CRA estimated the amount: see unfiled GST/HST returns and estimated assessments.
• The payable does not match the CRA account: see reconciling GST/HST payable to the CRA.
• You cannot pay the balance at once: see CRA payment arrangements for business debt.
• Your business is located in Quebec: Revenu Québec generally administers the GST/HST there, so its notices and relief rules are outside this page; check the Revenu Québec notice and contact Revenu Québec. For books that mix Quebec and other provinces, see bookkeeping help.