Not every invoice ends with a payment in full. A client changes the scope halfway through, you agree to a discount after the fact, something gets returned, or, occasionally, a client simply never pays. Each of these needs to be recorded properly, and the good news is that the fix is straightforward once you know how.
Don’t edit an invoice you’ve already sent
It’s tempting to open the original invoice and change the numbers. Please don’t! Once an invoice has gone to a client, and especially once you’ve reported it on a GST/HST return, it’s part of your records. Changing it afterwards breaks the paper trail that CRA expects to see.
Instead, leave the original exactly as it was and issue a separate document that corrects it. That document is a credit note.
What a credit note is
A credit note reduces the amount owing on an earlier invoice, or records a refund. It has its own number and refers back to the invoice it corrects, so anyone reading your records can follow exactly what happened.
If you’re registered for GST/HST, CRA sets out what a credit note must include:
- a statement that it’s a credit note
- your business name and GST/HST registration number
- your client’s name
- the date you issued it
- the amount of the GST/HST being adjusted, refunded or credited
It should also show the date of the original invoice, and if that invoice listed the price and tax separately, the credit note should too. CRA asks that you issue it within a reasonable time. The full details are in CRA’s guide to refunds, adjustments and credits under section 232.
Getting the tax back
Once you’ve issued a credit note, you can deduct the GST/HST you credited on your return for the period you issued it, as long as you’d already included that tax when you first reported the sale. If your client is registered, they reduce the input tax credits they claimed by the same amount.
There’s a time limit to keep in mind: when you reduce a price, you have up to four years after the end of the reporting period in which you reduced it. Without a credit note, though, there’s no adjustment at all, which is one more reason to issue one every time.
Refunds and credit on account
When money needs to go back to a client, you have two choices. You can refund it, by issuing a credit note and recording the refund payment. Or, if you’ll be working together again, you can leave it as a credit on their account and apply it to their next invoice. Clients on a monthly arrangement often prefer the second option, and there’s more on setting those up in our post on retainers and recurring billing.
Whichever you choose, write it down, so there’s no confusion months later about whether that money was returned or carried forward.
When a client never pays
Sometimes, despite your best efforts, an invoice just isn’t going to be paid. Before calling it a loss, make a genuine attempt to collect: reminders, a phone call, a firm final notice. We’ve written about what to do when a client won’t pay if you’re at that stage. Keep notes of every attempt, because they show your write-off was reasonable.
Once a debt is truly uncollectible, two things can soften the blow:
- Income tax. If you already included the invoice in your income, you can generally deduct it as a bad debt once it’s reasonably clear you won’t be paid.
- GST/HST. If you already reported and remitted the tax on that sale, you can recover it. Write the debt off as a bad debt in your records, then claim the tax portion on line 107 of a later return. The client must be someone you deal with at arm’s length, and you have four years from the period you wrote it off to make the claim. Don’t go back and change the return where you reported the original sale. CRA explains the calculation in its instructions for preparing a GST/HST return.
If the client surprises you and pays later, you add the recovered tax back on the return for the period you receive the money, and the payment counts as income again.
As always, this is general information rather than tax advice, so check anything significant with your accountant.
Keep the whole story together
For every correction, keep the original invoice, the credit note, any proof of refund and your collection notes in one place. CRA expects business records to be kept for six years, and having everything together makes a review far less stressful.
How Ledger helps
Ledger handles returns and credits with negative line items, so the original invoice stays exactly as it was sent. You can refund a client or hold the amount as credit on their account for their next invoice, and every payment, refund and credit appears together on the client’s history. If correcting invoices has ever felt messy, Ledger keeps the whole trail tidy for you.