Charged the Wrong GST/HST Rate: Fix Invoices and Returns

My out-of-province client rejected Ontario HST. What do I check first?

Check what you sold, where GST/HST law treats the sale as made, and whether the supply is taxable, zero-rated, or exempt. An Ontario supplier does not always charge Ontario HST, and a client's mailing or billing province does not decide every case (CRA: place-of-supply rules).

These distinctions come from the CRA's place-of-supply rules. For an ordinary taxable sale made in Ontario, the HST rate is 13%; in a non-participating province, the GST rate is 5%. Nova Scotia uses 14%, and New Brunswick, Newfoundland and Labrador, and Prince Edward Island each use 15% (CRA: rates). Check the rate that applied when the tax became payable if the invoice is old. Provincial sales tax and QST are separate questions. For the rate on a new transaction, see GST/HST registration and charging.

For some taxable real property sales, including a sale to a registered business buyer, the seller does not collect GST/HST and the buyer must self-assess it; check this before billing a shortfall (Excise Tax Act, sections 221(2) and 228(4)).

If an agent or billing agent issued the invoice, check whether you and the agent jointly elected on Form GST506 for that supply. With the election, the agent makes the section 232 correction and reports the tax, while both parties can owe related GST/HST (Excise Tax Act, section 177(1.1)). Both keep the form; it is not sent to the CRA. Without the election, a registered principal generally reports the sale (CRA: agents).

How do I correct an unpaid invoice with too much or too little tax?

Issue a corrected invoice that identifies the original and clearly shows the right tax and amount payable. Keep both versions, the reason for the change, and the communication sent to the client; do not silently replace the original record. The CRA's invoice guidance requires the rate and either separate price and tax amounts or a clear tax-included total.

If the period is still open, file its original return using the corrected tax and your reporting method; keep the original invoice and note. Do not deduct excess tax never included in net tax (CRA: calculate net tax; Excise Tax Act, section 232). For a filed period, the invoice and return corrections are separate. Tax is generally reported for the period that includes the invoice date even when the customer has not paid, but payment or a written agreement can make it payable earlier (CRA: when to report and remit; Excise Tax Act, section 152 and section 168).

I collected too much GST/HST. Do I refund or credit the client?

You may refund the excess in cash or credit it against what the same client owes. For excess tax collected, section 232 gives the supplier 2 years from collection to make that refund or credit; a later reduction in the sale price can be corrected within 4 years after the end of the period in which the price fell (Excise Tax Act, section 232). Do not relabel a wrong rate as a price reduction to use the longer period.

When you adjust, refund, or credit tax under section 232, issue a credit note within a reasonable time unless the client first issues a compliant debit note. The CRA's section 232 memorandum lists the required details:

• Identify the document as a credit or debit note.
• Give the supplier's name and GST/HST registration number, the recipient's name, and the date issued.
• State the GST/HST adjusted, refunded, or credited. A tax-included breakdown can replace that amount only when both the price and tax were reduced and the other prescribed details are shown (Credit Note and Debit Note Information Regulations, section 3).
• Link it to the original invoice or invoices and show the corrected price and tax separately when the original did. These references help reconcile the correction, even where they are supplementary rather than prescribed details.

A client who paid tax in error and cannot get a supplier refund or credit may qualify for a rebate. They apply with Form GST189, reason code 1C, or Revenu Québec's FP-2189-V if claiming there, within 2 years after paying it. A rebate is unavailable to the extent they claimed or could claim an input tax credit, or received a credit note for that amount. If they already received a rebate before your credit note, they must repay the overlap by the due date of the return for the note period if registered, or by the end of the next month if not (Excise Tax Act, sections 232, 261, and 263).

I collected too little. Can I bill the difference if the client refuses?

You can ask the client to pay the missing GST/HST, but collection from the client depends on the agreement and the invoice's tax disclosure. The supplier still has to account for tax that became collectible even if the client refuses to pay it (CRA: collection where invoice is silent; CRA: charge and collect).

If an arm's-length debt is later written off, section 231 may allow a proportional bad-debt deduction after the collectible tax was reported and the return's net tax remitted. Claim it on a return filed within 4 years after the due date for the write-off period; add back the tax share of any later recovery. The Quick Method generally excludes bad-debt adjustments for eligible supplies.

Review whether the agreed price was tax-included or tax-extra, what the contract says, and what tax the original invoice disclosed. An amended invoice alone does not settle a dispute over the agreed price (CRA: collection where invoice is silent). If you disclosed the tax as required and accounted for or remitted it, section 224 may let you sue to recover tax you had to collect but did not collect.

A sole proprietor owes the business's net tax personally. Under section 272.1(5), general partners and former general partners are liable for partnership tax payable during membership; liability for earlier amounts is limited to partnership property and money, and a member at dissolution can owe later amounts. Limited partners who are not general partners are excluded. A corporate director may be assessed for unremitted net tax under section 323, subject to collection and diligence rules. The CRA must assess within two years after the person last leaves office. Under section 325, a spouse, minor, or other non-arm's-length recipient of property, including money, transferred for less than fair value can be assessed at any time for the transferor's tax from the transfer period or earlier, within statutory caps. An exception can apply to a transfer under a court order or written separation agreement to a spouse who is separated and living apart.

I already filed and remitted. Which return do I change?

Use the period of a valid credit note for a section 232 deduction, but request an adjustment to an earlier return if that return omitted tax that was collectible. Do not file a second return for the same period or put every old error on the next return (Excise Tax Act, section 232; CRA: after you file).

The CRA can refuse an amendment. Generally, request it before the usual 4 years reassessment limit, measured from the later of the return's due date and filing date; statutory exceptions can change that limit. Interest may apply to overdue amounts (CRA: adjustment policy; Excise Tax Act, section 298). Reconcile each affected period before submitting changes.

If the registrant had already elected the Quick Method, a refund or credit on an eligible supply reduces the tax-inclusive supplies used for its remittance calculation, rather than automatically creating a full line 107 deduction (Streamlined Accounting Regulations, sections 15 and 17). The registrant elects online or with Form GST74 by the first day of the second fiscal quarter for annual filers, or by the return due date for monthly or quarterly filers; a new registrant's first short period uses that return's due date (CRA: Quick Method election).

What if the client already claimed an input tax credit?

Tell the client what tax was corrected and provide the credit note. If the client is a GST/HST registrant and claimed the credited amount as an input tax credit on a return for a preceding period, section 232 requires the client to add it to net tax for the period when the client receives your credit note or issues its debit note (Excise Tax Act, section 232). The CRA's memorandum identifies line 104 for that adjustment. If the original purchase and correction are in an unfiled period, the client should claim only the corrected tax as an input tax credit (Excise Tax Act, section 169).

Ask the client to check its own claim if the original invoice was wrong, especially if the sale was not taxable at all. An amount merely labelled GST/HST on an invoice is not proof that it was properly payable. The client's input tax credit filing rules are a separate question.

What if I charged tax on a zero-rated or exempt sale?

Tax collected on a zero-rated or exempt sale is an excess-tax problem. The CRA's section 232 memorandum expressly includes both cases and says supplier refunds or credits under that section are optional. Confirm the sale's classification, then follow the unpaid-invoice or collected-tax correction above.

If you collected the amount, the CRA's rebate guide says to include it in net tax; the seller does not claim a tax-paid-in-error rebate for tax collected from a customer. If you refund or credit the customer, issue the note and use the eligible section 232 deduction. If you do not, the customer may be able to seek a rebate from the CRA. Do not claim an input tax credit to reverse tax you charged your customer.

What records reconcile the invoices, credits, payments, and returns?

Keep a trail from each original invoice to the corrected invoice, credit or debit note, payment, and affected return. The CRA's record guidance requires records that support tax collected and amounts deducted from net tax; records are usually kept for six years from the end of the last year to which they relate.

For each affected sale, record the supply and client, invoice date and number, original tax, correct tax, reason and evidence for the place of supply, payment date and amount, refund or credit date, note number, and the reporting period where each amount was included or deducted. Keep the contract, delivery or address evidence, customer correspondence, copies of filed returns, adjustment requests, and CRA responses. This lets you check that a credit was given only once and a return deduction was not taken before its conditions were met.

Example

Illustrative amounts in Canadian dollars, using regular GST/HST accounting. An Ontario consultant invoices a client for C$1,000 of ordinary taxable services and C$130 of Ontario HST. The client rejects the invoice before paying. The consultant checks the agreement and the client's Alberta business address obtained in the normal course of business. No special place-of-supply rule applies, so the correct GST is C$50. The consultant sends a corrected invoice for C$1,050 and a credit note for the C$80 excess.

If the consultant already included C$130 in net tax on a filed return, the C$80 section 232 deduction belongs to the period in which the credit note is issued, subject to the statutory conditions. If the original return included only C$50, there is no C$80 to deduct. If the consultant had instead charged too little tax and the original return omitted collectible tax, the consultant would request an adjustment to that original period (Excise Tax Act, section 232; CRA: after you file).

Different for you?

• You are deciding the rate on a new sale or whether to register: see when to register for GST/HST.
• Your client is in Quebec and QST may apply: see doing business in Quebec from another province.
• You need to file the return or review input tax credits: see filing GST/HST and input tax credits.
• The CRA has opened a review or audit: see GST/HST reviews and audits.
• A reassessment brings interest or penalties: see penalties, interest, and relief.
• Many periods, a disputed contract, or a large unrecovered tax amount are involved: gather the invoice-to-return reconciliation and seek bookkeeping help before changing the returns.