![]() ![]() NorthShore exemplifies this need to demonstrate that the credit has been placed at the disposal of the purchaser, along with the applicable tax. The converse is also true when a supplier issues a credit note to a purchaser and refunds all or part of the original consideration and the applicable GST/HST (or QST, PST). If so, and the purchaser has claimed an ITC for the original tax amount, the credit note from the supplier is a signal to the purchaser to increase the purchaser’s net tax (effectively reducing the previously claimed ITC) in the reporting period in which the credit note is received, and the applicable tax is credited or refunded by the supplier. When receiving a credit note from a supplier it is important to consider if a credit has actually been “issued” or a sum has been placed at the disposal of, or to the credit of, the purchaser. However, when dealing with business-to-business transactions the definition of credit can become more difficult to interpret and apply in practice. The term credit is well understood in a retail transaction where this is usually an immediate refund of cash or cash equivalent, plus applicable sales taxes. The term “credit” is generally understood in a commercial context to encompass an acknowledgment of a sum owed by one party to another. We also outline briefly, the main PST implications. Unless otherwise noted, the same principles discussed for GST/HST purposes, are synonymous with QST. This tax insight article primarily covers the implications for GST/HST registrants, but also addresses the comparable and essentially parallel impacts under the QST. This article also discusses the Canada Revenue Agency’s (CRA’s) and the Quebec Revenue Agency’s (QRA’s) audit policies relating to the issuance of credit notes. We’ll discuss these aspects of the NorthShore case, as they will likely drive the direction of businesses and their purchasers or counter-parties, in handling credits and credit notes. The Court examined amongst other matters, the terms “credit note” and “credit memorandum” and concluded the term “credit” means the acknowledgement of a sum owed or placed at the disposal by one party to another party. (hereinafter “ NorthShore”) the terms “credit” and “credit note” as used in the ETA was addressed in detail. In the 2018 Federal Court of Appeal (the Court) case of North Shore Power Group Inc. Interactions between a business and an individual consumer however, are very different given the consumer was not able to claim an ITC for the original tax charged, so they expect a credit or refund of the tax and the whole or part of the purchase price. In most business-to-business scenarios where both parties are registered for GST/HST, the purchaser is not generally “out of pocket” if the supplier chooses not to credit or refund the tax, where the purchaser was able to claim a full ITC for the original tax charged. It is important to note that the provision contains a permissive crediting or refunding of the tax and is not prescriptive. On the other hand, the purchaser is required to add the amount of GST/HST refunded or credited to the purchaser’s net tax calculation to the extent that the purchaser had claimed an input tax credit (ITC) for the GST/HST in a previous return. The supplier is entitled to deduct from the supplier’s net tax the GST/HST refunded or credited to the purchaser. ![]() The provision is intended to allow a supplier to refund or credit the applicable tax to the purchaser and then adjust the supplier’s net tax accordingly. Section 232 of the Excise Tax Act (ETA) outlines the treatment of GST/HST that has been collected or charged by a supplier and it is later determined that GST/HST was overcharged or there was a reduction in the purchase price or consideration for a taxable supply resulting in a credit to the purchaser. Consequently, it may be an appropriate time to review the indirect tax implications of your organization’s practices relating to the issuance and/or receipt of credit notes.Ĭredit note procedures can have significant compliance implications for suppliers and purchasers for purposes of various Canadian indirect taxes including the goods and services tax and harmonized sales tax (GST/HST), Quebec sales tax (QST), as well as provincial retail sales taxes (collectively PST). In addition, we have seen decisions by the courts relating to the meaning of “credit an amount” and “credit note”, as well as evolving approaches taken by the tax authorities at audit. In view of the economic downturn over the last year, businesses may have experienced various price adjustments, contract modifications or cancellations and may have issued credit notes to their purchasers. ![]()
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