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When charging interest on an invoice is it on the base or total amount?

By Julia Germain |

Jennifer asked:

When charging interest on Accounts Receivable do I base the interest amount on the total amount of the invoice or on the amount prior to GST [or HST]?

Julia Germain answered:

The Company is charging interest on amounts in arrears.  Amounts in arrears includes HST/GST or whatever federal or provincial tax apply.  Therefore  the interest is on the whole amount.

So yes, you would include the GST when calculating the interested owed. However, since the Interest charge is zero-rated/tax exempt, the receivable increases by interest only - not interest plus tax.

To keep things simple and not include provincial taxes, here is a sample interest calculation where the original invoice was $1000 plus $130 HST for a total of $1130.00.

$ 1130.00   original invoice amount including HST
$ 22.60
  new interest charge
$ 1152.60
  new invoice sub-total
$ 0.00   HST (zero rated)
$ 1152.60   new invoice total

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