GST/HST: Deposits, Unpaid Invoices, Gift Certificates, Bad Debts

Is GST/HST owed on an unpaid invoice?

Yes, if you are a GST/HST registrant. GST/HST is owed on the earlier of the day you receive payment and the day payment is due, so tax on an unpaid invoice is normally reported and remitted before the client pays (Excise Tax Act s. 168). Reporting the tax only when the client pays does not follow this rule. Tax reported late carries interest from its original due date (s. 280). A sole proprietor owes it personally, general partners are jointly liable for a partnership's (s. 272.1(5)), and a corporation's directors can be assessed too once the Act's collection conditions are met, with due diligence a defence, up to two years after they last cease to be directors (s. 323).

Payment is due on the earliest of the day you first issue the invoice or the date on it, the day you should have issued the invoice but for undue delay, and a date the client must pay under a written agreement (s. 152(1)). For a lease or licence under a written agreement, payment is due only on the day the agreement requires it (s. 152(2)). CRA adds that tax on paid and unpaid invoices is reported for the period in which you issue the invoice (RC4022).

A case is not simple when money arrived before the work and may be a deposit or a payment, when goods are sold on instalment terms, when a contract holds back part of the price, when a customer never pays, or when you already remitted tax on a sale that was later refunded or never paid, because the fix depends on which return the tax was on. Gather invoices with dates and terms, written agreements, deposit agreements, the customer ledger, write-off records and the filed returns for the periods involved.

Which GST/HST return does an invoice belong to?

Normally the period that contains the invoice date, even if payment comes later, unless you were paid or an agreement required payment earlier (s. 225: the period in which the tax became collectible). Monthly and quarterly filers file and pay 1 month after the period ends. Most annual filers file and pay 3 months after the fiscal year-end; a sole proprietor with business income and a December 31 year-end pays by April 30 and files by June 15 (CRA deadlines). Either way, a business can remit tax before it collects.

The reporting period and the income-tax year are separate questions. See GST/HST reporting period and fiscal year when they do not match, and December sales paid in January for the income year.

Do you charge GST/HST when a customer pays a deposit?

Not on a true deposit, which is money held as security for the customer's own performance. A registrant does not collect GST/HST on a deposit and collects it when the deposit is applied to the price (RC4022). Money that is really part of the price is taxed when paid or due; the test is in the next section. The Act treats a deposit, refundable or not, as not yet paid towards the price until the supplier applies it (s. 168(9)).

The price itself still becomes due under the usual rules, such as the invoice date. A refundable deposit that is simply returned has no tax consequences, according to a CRA memorandum that has not been updated for later legislative changes (memorandum). Deposits on returnable containers follow separate rules in RC4022. How to book a deposit and when it becomes income: see customer prepayments and unearned revenue.

How is a deposit different from a partial payment, an instalment or a prepayment?

CRA's deposits memorandum defines a deposit as an amount given as security for the customer's own performance (300-6-8). Any part of the price, whether called a partial payment, instalment or prepayment, is taxed when paid or due (s. 168(2); 300-6-7). Both memoranda say they have not been updated for later legislative changes. The Act does not define "deposit," and RC4022 does not separate the two, so this is a judgment point: the contract wording, whether the money is refundable and what it secures or pays for are the facts that decide it.

Treating every advance as a deposit can leave tax unreported for the period the money arrived; if that happened, see correcting a filed GST/HST return.

What happens to the GST/HST if the customer loses the deposit?

A forfeited deposit is taxable. When a customer forfeits an amount because an agreement for a taxable supply is breached, changed or ended, the Act treats it as payment for the supply, with the tax included (s. 182). The supplier does not bill extra: it multiplies the forfeited amount by a tax fraction (RC4022) and reports the result for the period of the forfeiture, since the tax is deemed collected at that time (s. 182(1)(b)).

The rule covers a supply that would have been taxable and not zero-rated (taxable at a zero rate, such as many exports; see exempt, zero-rated and out-of-scope). It can also reach other amounts paid or forfeited because the agreement ends, such as a cancellation fee. A customer that is a registrant may be able to claim an input tax credit for the tax in the forfeited amount (RC4022); see filing GST/HST and input tax credits.

Do you charge GST/HST on a gift certificate or store credit?

A gift certificate that meets CRA's conditions (below) carries no GST/HST when sold; the tax comes when it is used. The Act deems the sale of a gift certificate for consideration not to be a supply, and deems a gift certificate given as payment to be money (s. 181.2). On redemption, calculate the tax on the item's full price, then deduct the certificate as if it were cash (RC4022).

CRA's policy statement sets five conditions for a gift certificate: a monetary value, sale for consideration, acceptance as payment for the issuer's supplies, no condition beyond presenting it, and no intrinsic value. A voucher that needs a minimum purchase fails, so tax is collected on its sale and it is treated as a coupon on redemption (P-202). The statement says it may not reflect later legislative changes.

Neither RC4022 nor P-202 addresses store credit, so this is a reading of the Act, not a stated CRA position. A credit given in place of a refund for a returned sale may fall under the price-reduction rule in s. 232(2) (next section); a credit sold for cash may meet the gift certificate conditions. Which applies depends on how the credit arose.

How do I adjust GST/HST on a refund or return, and what is a credit note?

When you reduce the price of a sale for any reason, you may adjust, refund or credit the tax on the reduced amount (s. 232(2)). That includes an invoice not yet paid: if you and the customer agree to cut or cancel the price, you reduce the tax charged with a credit note, without the bad debt conditions below. A customer who simply does not pay is a bad debt. Where you and the customer do not deal at arm's length, s. 155 can tax a below-market price at fair market value. The credit note rule does not apply where the invoice itself offers a discount for paying early or adds a charge for paying late: the consideration due is then deemed to be the invoice amount (s. 161; s. 232(4)). A credit note records the adjustment. You issue one, or the customer issues a debit note, and you deduct the tax in the reporting period in which the credit note is issued or the debit note received, to the extent the tax was in a return. You do not go back into the period of the original sale.

A credit note or debit note must show (Regulations):

• A statement that it is a credit note or a debit note.
• The supplier's name and GST/HST registration number.
• The customer's name, or its agent's name.
• The date it is issued.
• The tax adjustment, or a statement that the total includes it with the tax rate and total for each rate or supply.

The adjustment must be made within 4 years after the end of the reporting period in which the price was reduced. A customer that claimed an input tax credit adds it back. If you refund part of the price and keep the rest as a restocking charge, you adjust only the same share of the tax (RC4022). If you use the Quick Method, you instead reduce your revenue from eligible supplies by the credit, for the period in which you credit or pay the customer (RC4058).

Tax charged in error, not a price reduction, is a separate rule with a shorter 2 years limit (s. 232(1)); see charged the wrong GST/HST rate.

The client never pays: when can I deduct the GST/HST as a bad debt?

A supplier may deduct the tax on an unpaid sale once it writes the debt off, but only when every condition in s. 231 is met:

1. The sale was taxable and not zero-rated, to a customer you deal with at arm's length. Related persons are not at arm's length, including a corporation and the person who controls it, and a partner and the partnership (s. 126); for others it is a question of fact. A price you and the customer agree to cut is a credit note (above), not a bad debt.
2. It is established that all or part of the price and tax has become a bad debt, and you write it off in your books of account. The Act sets no number of days.
3. The tax was reported on the return for the period in which it became collectible, and any amount owing on that return was paid.
4. The deduction is claimed on a return filed within 4 years after the due date of the return for the period in which you wrote the debt off.

The deduction is A × B ÷ C. A is the tax on the sale. B is the unpaid price, tax and applicable provincial tax that you wrote off. C is the total price, tax and provincial tax. Applicable provincial tax is a provincial sales tax charged on the same sale, such as the Manitoba PST in RC4022's example; HST has no separate provincial part (s. 231(5)). Take the deduction in the net tax for the period that includes the write-off or a later period, on line 107 of the CRA return (RC4022; return working copy).

If you use the Quick Method, you generally cannot adjust net tax for bad debts on sales included in the Quick Method calculation; lines 107 and 104 apply only to supplies outside it (RC4058). For the income-tax write-off, the doubtful-debt reserve and the journal entries, see writing off unpaid customer invoices.

I collect a bad debt later: what do I add back?

You add back a share of the tax for the period in which you recover the money. The addition is A × B ÷ C, where A is the amount recovered, B is the tax on the original sale and C is the total price, tax and provincial tax (s. 231(3)). CRA tells registrants to enter it on line 104 of the CRA return (RC4022). Recovering the whole debt adds back the whole tax that was deducted.

How do conditional and instalment sales change the timing?

For a sale of goods, tax on any part of the price that is neither paid nor due by the last day of the month after the month possession or ownership first passes is payable on that last day (s. 168(3)(a)). For goods delivered on approval, consignment or sale-or-return terms, the month that counts is the one in which the customer takes ownership or resells them (s. 168(3)(b)). In a conditional sale, the seller hands over the goods but keeps ownership until conditions such as full payment are met. In an instalment sale, ownership passes at the start and the buyer pays over time (RC4022).

The same month-after rule applies to a written agreement for construction, renovation, alteration or repair of real property or a ship that is expected to take more than three months, counted from when the work is substantially completed. A part of the price the customer holds back, under a statute or a written construction, renovation, alteration or repair agreement, until the work is satisfactorily done is taxed when it is paid or becomes payable (s. 168(7)). When a holdback becomes payable, and the bookkeeping for it, are in construction holdbacks and subcontractors.

Example

These examples are illustrative; the figures are in Canadian dollars.

An invoice paid after the quarter ends

An Ontario contractor invoices C$10,000 plus HST of C$1,300 on December 20. The client pays on February 10. No contract date or earlier payment applies, so the HST was due on the invoice date and goes on the return for the period that includes December 20. For a quarterly filer whose quarter ends December 31, that return is due January 31. Nothing is added on the return that covers February.

A deposit that is forfeited

An Alberta photographer takes a C$500 deposit on a C$5,000 job. While the deposit is held as security, no GST is charged on it. If the job goes ahead, GST on the full price is C$250, reported as each part of the price is paid or becomes due, whichever is earlier; a deposit counts as paid only when applied. If the photographer invoices the full C$5,000 at booking, the GST is due on that invoice date. If the client instead cancels and loses the deposit before any invoice for the price, the photographer reports GST of 5/105 of C$500, or about C$23.81, for the period of the forfeiture. The tax comes out of the C$500; the client is not billed more.

If the contract instead calls the C$500 the first part of the C$5,000 price, it is not a deposit. GST of C$25 on that part is due when it is paid.

A bad debt, then a partial recovery

An Ontario client never pays an invoice of C$5,650 (C$5,000 plus C$650 HST). The business reported and remitted the HST, deals at arm's length with the client and writes off the whole amount in its books. The deduction is 650 × 5,650 ÷ 5,650, or C$650, in the net tax for the period of the write-off or a later one, on a return filed within the time limit. If the client later pays C$1,130, the business adds back 650 × 1,130 ÷ 5,650, or C$130, for the period of that payment.

Different for you?

• Money arrived before the work and you cannot tell whether it was a deposit: the contract and what the money secures decide it. Have the agreements and customer ledger reviewed with bookkeeping help, and see customer prepayments and unearned revenue for the income side.
• You have been reporting GST/HST when clients pay, not when you invoice: earlier returns may be short and owe interest from their original due dates. See correcting a filed GST/HST return, and use bookkeeping help to rebuild the invoice-date records.
• An invoice is long unpaid, or a debt was written off in the books but the tax was never reported: the bad debt deduction depends on the conditions and time limit above. Review the debt with bookkeeping help and the write-off guide.
• You remitted tax on sales that were refunded or never collected, or past returns look wrong: see correcting a filed GST/HST return, and get bookkeeping help to rebuild the customer records behind them.
• Your books are behind and there is no clean list of unpaid invoices: see catching up on overdue books.
• You use the Quick Method: bad debt and credit adjustments work differently there. See the Quick Method guide.
• You are registered but never charged the tax: see registered but did not charge GST/HST.
• Your prices already include the tax: see tax-included prices and GST/HST.
• You are in Quebec or a province with its own sales tax: a business located in Quebec files its GST/HST with Revenu Québec on its forms, not the CRA lines named above (RC4058). QST and PST have their own timing, credit and bad debt rules, which this page does not cover. Start with provincial sales tax.