How is GST/HST Charged on Discounts?

When the discount is given matters

How is GST/HST Charged on Discounts?
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Wondering how to charge GST/HST when you give your customer a discount on a sale?

According to the Canada Revenue Agency's General Information for GST/HST Registrants Guide, the GST/HST you charge depends on the type of discount you're giving.

The Guide distinguishes between early-payment discounts and volume discounts.

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 you invoiced a customer $500 for your landscaping services with credit terms offering the customer a 2% discount if they paid the bill within ten days of the invoice, and they 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):

ItemCost
Landscaping services$500.00
GST @5%$25.00
Total$525.00
Minus 2% discount of $10$515.00

Follow 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.

How Is GST/HST Charged on Volume Discounts?

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 you were offering a 10 percent discount on that item, you 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.

It 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.

You might want to choose not to adjust the amount of the GST/HST you charged if the customer is a GST registrant and has already claimed an Input Tax Credit on the GST/HST he was charged.

For more information on handling discounts when you are charging or remitting GST/HST, refer to the Canada Revenue Agency's General Information for GST/HST Registrants Guide or contact the Canada Revenue Agency.

What About Manufacturers' Rebates, Coupons and Gift Certificates?

Manufacturers Rebates

Manufacturers rebates are normally issued in the form of a certificate that the customer must mail in to collect the rebate. However, sometimes the vendor can issue the rebate to the customer at the point of sale - in this case, GST/HST is still charged on the full price of the item, for example:

ItemPrice
Acme Leaf Blower$500.00
HST @8%$40.00
Subtotal$540.00
Less $20 Manufacturers Rebate-$20.00
Amount Due$520.00

Coupons

Fixed discount coupons are treated the same as above, that is GST/HST is charged on the full price of the item. Variable discount coupons (such as discounts that increase with more of the same item purchased) are treated differently - in this case, GST/HST is charged on the amount after the total discount is applied.

Gift Certificates

In the case of a vendor issued coupon the GST/HST can be treated as with a fixed discount coupon (e.g., charged on the full price), or (preferably from a customer standpoint) used to reduce the price of the item before applying GST/HST, for example:

ItemPrice
Acme Leaf Blower$500.00
Less $20 Coupon-$20.00
Subtotal$480.00
HST @8%$38.40
Amount Due$518.40