Understanding the GST/HST Obligations

In general, the Excise Tax Act (the “ETA”) requires GST/HST to be charged at the time an invoice is issued – assuming that the invoice is due to paid on issuance – under subsection 168(1).  If a supplier needs to adjust a previously issued invoice, they may issue a debit note or a credit note, as governed by section 232 of the ETA.  These adjustments are common, for example, when there is a change in the price of goods sold.

Multiple Invoices and GST/HST Complications

While the requirement to charge and remit taxes upon issuing an invoice seems straightforward, it becomes complicated due to the nature of the Oil, Gas and Petrochem industry.  For example, goods might be delivered in one reporting period, and an “initial invoice” is issued at that time.  However, the final pricing (or even quantity) may not be determined until a later reporting period, leading the supplier to issue a “rebill”, “correction” or “true-up” invoice.

This practice can create issues from a GST/HST perspective.  Taxes are generally required to be charged when an invoice is issued, meaning both the initial and final invoices technically require taxes to be charged and remitted.  Failing to handle this correctly may result in the supplier being assessed for unremitted taxes on the invoices, even if the final invoice was meant to replace the initial one from a commercial perspective.  Simply labelling the final invoice as “rebill”, “correction” or “true-up” is often insufficient to avoid tax assessments on the previously issued invoices.

This issue has been a significant focus of CRA audits since 1996, with many large corporations having been caught by this compliance pitfall.

Debit and Credit Notes: Another Potential Minefield

Alternatively, a supplier may issue a debit or credit note to adjust the initial invoice.  While this approach seems like a practical solution, it comes with its own risks.  Debit and credit notes must contain specific information and be issued and reported within a particular timeframe to comply with the ETA, creating further complications for businesses.  Failing to meet those requirements, and businesses may be left covering shortfalls in their GST/HST remittance requirements.

Takeaways

Dealing with the reporting complexities in the Oil, Gas and Petrochem industry is challenging, especially given the varying business practices across the sector.  Key questions arise, such as whether the first invoice is a deposit, and whether GST/HST should be charged on the first or second invoice.  Addressing these issues often requires professional guidance to ensure compliance and avoid costly CRA assessments.

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