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Repaying an HST refund: Is there a tax loophole?

By Julie King |

Brent asked:

Editor's note: this question has been edited for clarity.

Here is the scenario:

  1. You enter a payable invoice in the books.
  2. You then record and claim HST.
  3. A refund is received.
  4. Months later, the situation has changed so that I am not going to pay the bill, and I claim it as forgiveness of debt on my tax return.

The question: I can't find any HST rules that says I have to return the refund. Is this correct?

Julie King answered:

To answer your question we contacted Keith, a representative with CRA. The short answer is that there is no "free lunch" — you cannot keep a refund of HST that you never actually paid.

In answering your question, Keith first noted that he made the following assumptions based on your question:

  1. That you you are registered for GST/HST purposes;
  2. That you purchased a good or service from a supplier;
  3. That you claimed an input tax credit on his GST/HST return for the HST payable; and
  4. The supply was subsequently cancelled before Brent had made any payment to the supplier.

Keith explained that when a supplier reduced the entire consideration of an invoice and also makes an adjustment for the HST charged, then either the supplier must issue a credit note or the purchaser (yourself) can choose to first issue a debit note.

To put that in simpler terms, if you assume that the company that invoiced you either did not remit the GST/HST (possibly because they did not file an input tax credit claim until after debt had been forgiven) or the company did remit the GST/HST and then filed for a reduction of that amount due to a bad debt, then the company needs to issue a credit note to your company.

Here is an excerpt from the CRA bulletin on this topic:

"When a supplier refunds, adjusts, or credits an excess amount, or tax on consideration that has subsequently been reduced, to another person (i.e., the recipient), the supplier is required to issue a credit note including prescribed information within a reasonable time to the other person, unless the other person first issues a debit note to the supplier.

This is an interesting point, because it is possible that many business, especially smaller companies, may not be aware of this obligation and simply have their accountant or bookkeeper write-off the bad debt in the following year.

You also have the option of issuing a debit note. The regulations governing GST/HST require the following information to be included on all credit and debit notes:

  • A statement indicating whether the note is a credit or debit note
  • The name of the vendor* and the vendor's* registration number
  • The name of the customer**
  • The date of issue
  • The amount of the adjustment, refund or credit of GST/HST.

* The legislation states that this can be the name of the supplier or an intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number of the supplier or the intermediary.**The legislation states that this can be the name of the recipient, the name of the recipient's business or or the name of the recipient's duly authorized agent or representative.*** The legislation states that unless the note is issued in respect of a patronage dividend or for a total amount that includes both the consideration and the tax for more than one supply, the amount of the adjustment, refund or credit of tax for which the note is issued. Further information on credit and debit notes can be found in the CRA Memorandum: Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act. 

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