GST/HST Technical Information Bulletin B-042R

January 18, 1991
Revised December 6, 1996

REFUND, ADJUSTMENT OR CREDIT OF GST

This publication is not a legal document. It contains general information and is provided for convenience and guidance in applying the Excise Tax Act and Regulations. If interpretation problems occur, please refer to the legislation or contact the nearest Revenue Canada Excise office.

INTRODUCTION

This document outlines circumstances where an adjustment, refund or credit of the Goods and Services Tax (GST) may occur pursuant to section 232 of the Excise Tax Act.

SECTION 232 OF THE EXCISE TAX ACT

Section 232 of the Act permits an adjustment, refund or credit of the GST in two situations: where an excess amount of tax has been charged or collected; or where consideration for a supply is reduced at some time after the tax has been charged or collected, and the supplier adjusts, refunds or credits the tax charged on the original consideration.

A credit note containing prescribed information must be issued by the person providing an adjustment, refund or credit of tax. The supplier should subtract the amount of tax adjusted, refunded or credited from net tax to the extent it was previously added to net tax. Similarly, the recipient, where a registrant, must add this amount to the net tax calculation to the extent that it was previously deducted. This must occur in the respective reporting periods of supplier and recipient in which the adjustment, refund or credit of tax is made.

. If a refund, credit or adjustment of tax is not made, a credit note need not be issued, and there will be no corresponding adjustment to the net tax of either supplier or recipient.

EXCESS OF TAX COLLECTIBLE

In order that a credit note be issued, the GST charged or collected must be "in excess" of tax that is properly collectible under Division II of the Act. This means that the GST has been charged or collected in error at some point in time prior to the realization that this amount of tax is more than is required. Any adjustment, refund or credit of tax charged or collected by a supplier must be paid to the recipient no later than four years after the end of the supplier's reporting period in which the amount was initially charged or collected.

Circumstances where the GST paid or payable would exceed the tax properly paid or payable include:

• -when some or all of the consideration paid is returned;
• -if there is an error in calculating the tax payable due to a numeric miscalculation; or
• -if an error occurs as a result of using the incorrect tax status of the supply (e.g. if a supply was taxed at seven per cent and should have been zero-rated or exempt).

A "deferred price adjustment" refers to a reduction in consideration which occurs at some point in time after the GST has been charged or collected. To qualify as a "reduction in consideration", the adjustment, refund or credit of tax must be given to the original purchaser of the supply, or that person's authorized agent, and must relate to an amount that has already been paid or charged. The reduction in consideration must also relate to the original supply and may be made for any reason, but must not depend upon any action undertaken, or supply made, by the recipient.

A reduction in the consideration previously used to calculate GST payable might occur as a result of surpassing a certain volume of purchases, which is a volume rebate. A reduction may similarly occur where goods previously delivered are found to be substandard. However, if the refund or credit does not specifically relate to purchases where consideration is payable or has been paid, or if the discount is tied to other performance criteria, the amount refunded will not qualify as a deferred price adjustment for tax adjustment purposes.

. ADJUSTMENT, REFUND OR CREDIT IS OPTIONAL

Where too much GST has been charged or collected, the supplier may refund, credit or adjust the overpayment of tax. It is expected that a refund, credit or adjustment of tax will be given in all instances where the customer is a non-registrant.

Where the customer is a registrant, the person making the adjustment, refund or credit may choose not to refund or adjust the GST previously charged or collected. This may be desirable where the person making the adjustment, refund or credit has already accounted for the tax and the customer has already claimed or is entitled to claim a corresponding input tax credit.