Canadian tax requirements on discounts
Posted by Dino Bassanese on 28 March 2014 12:25 PM

Early Payment Discounts & GST/HST

For early-payment discounts on credit sales, you charge GST/HST on the full amount of the invoice, even if the customer takes the discount. (The same applies to late payment surcharges; if you are adding a surcharge for a late payment to a bill, GST/HST is charged only on the original invoiced amount.)

So suppose I invoiced a customer $500 for my landscaping services with credit terms offering the customer a 2% discount if she paid the bill within ten days of the invoice, and she paid the bill within that time, the amounts on the invoice would read (in a province such as Alberta where only GST applies to the sale):

Landscaping services = $500

GST @5% = $25

TOTAL $525

Minus 2% discount of $10 = $515

(See How to Invoice in Canada for information on what information has to be on your invoice, tax rates, and examples of complete invoices for GST, HST and/or PST.)

Volume Discounts & GST/HST

For volume discounts, how you apply GST/HST to the sale depends on whether you offer the discount at the time you make the sale or after you make the sale.

For a discount offered at the time of sale, you charge GST/HST on the net amount (the sale price minus the discount). So for instance, if a customer bought ten dancing hula lamps that normally cost $100 each and I was offering a 10 percent discount on that item, I would charge the customer GST/HST on the net amount of $900 ($1000 minus the $100 discount).

Volume discounts offered after the sale, such as discounts that customers earn over time, are a bit more complicated because you need to choose whether or not to credit the GST/HST related to the amount of the discount.

If you refund or credit the GST/HST for the volume discount to the customer and he is a GST registrant, (also charges and collects GST/HST), then you have to issue the customer a credit note explaining the adjustment, telling him what the discount is and the related amount of GST/HST.

This can also be worked the other way around, with the customer issuing you a debt note to explain the adjustment. As long as the amount credited or debited was previously included in your net tax, you can deduct the amount of GST/HST adjusted when you are determining your net tax for the period in which you issued the credit note or received the debit note.

See the attached CRA excerpt for further details.