Lines
104 / 204 and 107 / 207: tax and price adjustments to net tax due to reduction
in consideration.
In
general, no adjustment to tax previously remitted with respect to a supply may
be made without exchanging documentation between the supplier and the recipient
about the adjustment. The documentation must satisfy the documentary
requirements outlined in GST/HST memorandum 12.2 “Refund,
Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act”.
This rule applies to adjustments made to price, volume, or other factors, of a
consideration. The obligatory issuance and exchange of proper documentation is because
it is possible for one party to claim an adjustment to net tax without the
other party realizing that its net tax must also be adjusted for the amount
paid, debited, credited, or received. Supporting documentation, satisfying
documentary requirements, must, therefore, be exchanged and kept on records to
demonstrate that the reporting period GST/HST has been adjusted.
The
legislation, moreover, permits suppliers to reimburse customers for GST/HST collected
in cases where:
1.
The collected, or
collectable, GST/HST was applied to an invoice’s subtotal mistakenly (e.g. zero-rated
or exempt).
2.
The collected, or
collectable, GST/HST was applied to an invoice’s subtotal inaccurately (e.g. wrong
tax rate).
3.
An after-sale reduction in
the consideration of a supply resulting in an eligible GST/HST collected, or
collectable, adjustment.
The reported
GST/HST may not be adjusted unless the supplier issues a credit note, or the
recipient of the supply issues a debit note, containing prescribed information.
Under any of the three scenarios mentioned above, the supplier is not required
by the Canadian legislation to reimburse, credit, or modify the GST/HST that
was collected or charged to the recipient. In cases where the recipient of the
supply is not a registrant, however, a refund, adjustment, or credit of the
collected, or collectable, GST/HST should be granted. This is because where the
recipient is a registrant, they may claim either an input tax credit (ITC), or
refund (ITR), on their paid GST/HST, or QST, when calculating the net tax
payable for the period.
This
optional refund, credit, or modification of charged GST/HST, or QST, to the
recipient, moreover, is with regard to the excess GST/HST, or QST, collected
due to price adjustment. Once the refund is issued, however, reporting the
adjustment in the respective period return becomes obligatory for the supplier
as per GST/HST memorandum 12.2 (paragraph 24), and for the recipient
as per GST/HST memorandum 12.2 (paragraph 25) and paragraph
232(3)(c) of the Excise Tax Act (ETA). The equivalent QST requirements are
found in section 449R1 in the Act respecting the Québec sales tax. The
supplier has also an incentive to report the refund (discusses in 1.2. below).
Table 1. GST/HST refund, adjustment, or credit under Section 232: what is optional and what is mandatory
|
|
Registrant
Seller |
|
Registrant
Recipient |
|
|
Issues
invoice with GST/HST,
QST collected |
|
Pays
invoice subtotal plus GST/HST,
QST paid |
|
Subsequent action: |
Reduction
in price |
|
Reduction
in price |
|
Required document: |
Credit
note Usually
issued when the seller is stronger than the recipient. |
|
Debit
note Usually
issued when the recipient is stronger than the seller. |
|
Required adjustment: |
Refund
part or all of GST/HST QST collected. |
|
Reduce
previously reported ITC / ITR. |
|
GST/HST return reporting: |
Line 107 |
|
Line 104 |
|
QST return reporting: |
Line 207 |
|
Line 204 |
Table 2. Scenario of GST/HST, QST refund, adjustment, or credit under Section 232.
1.
Credit or debit note
prescribed information
A
credit or debit note must contain the following prescribed information pursuant
to the Credit Note and Debit Note Information (GST/HST) Regulations to
support an adjustment to net tax under section 232 of the Excise
Tax Act (ETA) and pursuant to section 449R1 of the Regulation
Respecting the Québec Sales Tax:
1.
An indication that the
document is a credit or debit note.
2.
The name of the supplier or
the name under which the supplier does business.
3.
The supplier’s GST/HST or
QST registration number.
4.
The recipient’s name or the
name under which the recipient does business.
5.
The note issuance date.
6.
Either:
a. The amount of the adjustment, refund, or credit of tax for which
the note is issued, or
b.
The tax rates at which
GST/HST was charged in respect of each of the taxable items for which there was
a reduction in supply.
The
legislation states that the recipient of the refund is required to report the
addition to net tax, to the extent that the refunded amount was previously
claimed as an input tax credit, or refund. On the other hand, if the seller
makes the reduction to net tax, the reduction should be recorded by the seller
in the period in which the note was issued (see para 24 of GST/HST
memorandum 12.2 “Refund,
Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act”).
1.1.
Adjustments to be added
when determining the net tax
To
the extent that the amount has been used to calculate an input tax credit, or
refund, claimed by the recipient in a return filed for the reporting period, or
a prior reporting period, the recipient, if registrant, must include the amount
of the tax adjusted when calculating its net tax for the reporting period in
which the credit note was received, or the debit note was issued, by the
recipient.
They
should enter that amount as an adjustment on line 104 of their GST/HST return,
or on line 204 of their QST return, within the relevant time frame. For the reduction
in consideration scenario, the supplier has up to four years after the end of
the reporting period in which the consideration was reduced to adjust the
amount of tax charged, or to refund or credit the tax collected, to the
recipient.
1.2.
Adjustments to be deducted
when determining the net tax
When
the supplier has issued a credit note to the recipient, or has received a debit
note from the recipient, the supplier should subtract the amount of the tax
refund when calculating its net tax for the reporting period in which the
credit note was issued, or the debit note was received, provided that the
amount has already been included in determining the net tax for a preceding
reporting period of the supplier.
When
the supplier deducts an amount under section 232 to determine its net
tax, that amount must be recorded as an adjustment on line 107 of the person's
GST/HST return, or on line 207 of the person’s QST return, for the relevant
period.