18 July 2001 GST/HST Interpretation 36392 - Credit Notes for Returned Goods

Thank you for your facsimile of June 14, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to returned goods.

Our understanding of the situation is as follows:

1) A GST registrant is XXXXX. The registrant is a wholesaler of periodical publications that are purchased by the registrant from another registrant who is a non-resident of Canada.

2) When some of the periodicals become dated and cannot be sold, the registrant shreds them instead of returning the goods to the non-resident supplier.

3) The registrant takes an internal credit to reduce his accounts payable account by an amount equivalent to the value of the shredded periodicals. The registrant does not adjust the GST amount charged by the non-resident supplier for the periodicals, including those that were shredded and that are considered to be returned goods.

Issue

In circumstances such as described in the above scenario, XXXXX if the non-resident supplier's computerized accounting system is programmed to calculate the GST as included in the amount of the returned goods, the non-resident supplier may reduce his GST liability for the returned goods. XXXXX[.]

Response

Pursuant to subsection 232(2) of the Excise Tax Act (the ETA), where an amount is refunded, adjusted, or credited to a purchaser after the tax has been charged or collected, and the amount of the consideration is subsequently reduced for any reason, the supplier may, in or within four years after the end of the supplier's reporting period in which the consideration was so reduced, refund or credit to the purchaser the tax calculated on the amount by which the consideration was so reduced.

Subsection 232(2) of the ETA is permissive. The supplier may, but is not required, to credit the tax paid by the recipient on the returned goods.

Subsection 232(3) of the ETA states, in part, where an amount is refunded or credited under the provisions of subsection 232(2), a credit note or debit note containing the information prescribed in the Credit Note and Debit Note Information (GST/HST) Regulations (the Regulations) shall be issued between the supplier and the recipient. One of the requirements stipulated in the Regulations is that the credit note or debit note must include a statement to the effect that the total include the adjustment, refund or credit of the tax. In addition, the supplier may, pursuant to subsection 232(3) of the ETA, make the necessary adjustments to his net tax calculations to the extent that the amount has been included in the supplier's net tax and the recipient shall reduce his input tax credits to the extent that the amount has been included in determining an input tax credit of the recipient for the reporting period in which the credit note is issued or received, as the case may be.

If the tax is adjusted, credited, or refunded, the supplier must issue a credit note, unless the recipient first issues a debit note.

If a refund, adjustment, or credit of the tax is not made, a credit note or debit note need not be issued, and there will be no requirement for the supplier or the recipient to adjust their net tax.

If a supplier, whose computerized accounting system is programmed to adjust his GST liability for the GST collected on the subsequent reduction in consideration with respect to returned goods, in circumstances such as described in this case, does not issue a credit note containing the prescribed information, he is not in compliance with the provisions of subsection 232(2) of the ETA. The issuance of a debit note containing prescribed information by the recipient with a reduced payment would permit the supplier to make an adjustment.

XXXXX[.] Should you have any questions regarding this matter, please do not hesitate to contact me at (613) 952-0419.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate.

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