Navigating Early and Late Payments in GST/HST Consideration

When dealing with taxable supplies in Canada, it's crucial to grasp the concepts of consideration and payment terms, as they directly impact the calculation of the Goods and Services Tax (GST) or Harmonized Sales Tax (HST).

Here’s a comprehensive look at these aspects:

Early Payment Discounts

• Definition: An early payment discount is a reduction offered by a supplier on the amount payable for a supply if payment is made within a specified timeframe.
• Tax Calculation: Despite the discount, tax is payable on the full invoiced amount. This means that even if the customer takes advantage of the discount, they are still liable for the GST/HST on the original invoiced amount.

Late Payment Charges

• Definition: A late payment charge is an additional amount imposed by a supplier if the consideration for a supply is not paid within a specified timeframe.
• Tax Treatment: Similar to early payment discounts, tax is payable on the full invoiced amount, including any late payment charges. This applies whether or not the late payment charge is ultimately imposed and paid.

Consideration Calculation (Section 161)

• Guideline: Section 161 of the GST/HST regulation clarifies that the consideration for a supply with early or late payment terms is the amount shown on the invoice, regardless of any discounts or additional charges. This ensures consistency in tax calculations.

Practical Examples

• Example 1 (Early Payment Discount): A supplier invoices a customer for $100 plus HST, offering a 5% discount if payment is made within 15 days. Even if the customer pays early and only remits $95 plus HST, tax is still payable on the full $100 invoiced amount.
• Example 2 (Late Payment Charge): If an invoice specifies a late payment charge of 2% per month for overdue amounts, the tax is calculated on the original invoiced amount, regardless of whether the late payment charge is applied.

Understanding early and late payment terms is pivotal for accurate GST/HST calculations. For more detailed information on early and late payments in GST/HST consideration, refer to GST/HST Memorandum 3-9. If you need tax assistance, we at PKF Antares can be of help. Send us an email at info@pkfantares.com for expert advice and support.