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To handle returns and refunds in e-commerce accounting, record each one as its own entry that reverses the sale, and adjust the GST/HST you collected. When a supplier refunds a customer for returned goods, the CRA lets you issue a credit note for the tax and take it off your net tax for that reporting period.
How do you handle a refund in your books?
Don’t delete or edit the original sale. Leave it alone and add a new line dated the day you refund the customer, linked to the order number. Your sales total for the month then shows the real picture, and anyone who checks later can follow both entries.
Say a customer in Ontario returns an item that cost $113 with tax. The reverse HST calculator splits that into $100 before tax and $13 of HST. So the refund entry has three parts: $100 off sales, $13 off the HST you owe, and $113 out of the bank.
| Line | Original sale | Refund |
|---|---|---|
| Sales | $100 | minus $100 |
| HST collected (13%) | $13 | minus $13 |
| Cash | $113 in | $113 out |
A customer in Alberta would see 5% GST only. On a $2,100 order, the GST/HST calculator shows $100 of GST on a $2,000 price, and a full refund reverses all $2,100.
What does the CRA say about the tax on a refund?
If you refund all or part of the price for goods that were returned, you can also adjust, refund or credit the GST/HST. You issue a credit note for the tax, or the customer issues a debit note. You then deduct that amount when working out your net tax, in the reporting period in which you issue the credit note or receive the debit note.
The adjustment goes on line 107 of your GST/HST return. And there’s a time limit: you have up to four years after the end of the reporting period in which the price was reduced to adjust or refund the tax.
Two points follow. The tax comes off in the period of the credit note, not the period of the original sale. So a return in February for a December sale still lands in February’s return for a monthly filer. And you can only take off tax you actually included in net tax earlier, so a refund can’t create a deduction for tax you never collected.
What about partial refunds and price adjustments?
Partial refunds work the same way in proportion. Refund half of a $113 item, $56.50, and the tax part is half of $13, or $6.50. If a customer keeps the goods and you knock $20 off, treat the discount as a reduction of the price, and the tax falls with it.
Shipping and restocking fees are less clear. We didn’t find a CRA page that settled how each one is taxed, so check the rule for your situation before you build it into your process. A credit note should list the original invoice, the amount and the tax, so the paper trail holds.
Do refunds change your income tax?
They lower your revenue, which lowers profit. A sole proprietor’s tax is based on net business income, so a bigger return volume at the end of the year shows up there. The self-employed tax calculator gives $22,126 of income tax and CPP at $80,000 of net income in Ontario, and $20,213 at $75,000.
Watch the year boundary. A sale in December refunded in January is normally reversed in January under the cash basis, but your accounting method decides, so ask whoever files your return.
What mistakes come up most?
Two, mainly.
Recording only the cash, without splitting off the tax, is the classic. Your GST/HST return will then owe tax you already gave back. The next is letting refunds sit in a payment account and never reaching the books at all.
Also watch the tax type on the sale. Refunds from provinces with their own sales tax involve a second tax, and our page on online store taxes covers which rates apply when goods are shipped across provinces.
Where the numbers come from
The credit note, net tax adjustment, line 107 and four-year limit come from the Canada Revenue Agency’s publication on section 232 of the Excise Tax Act. Dollar figures come from this site’s calculators, which use 2026 rates.
Frequently asked questions
Do I refund the GST/HST when a customer returns goods?
You can. You issue a credit note for the tax, and you deduct it from your net tax for the period the credit note is issued.
Where does the adjustment go on the return?
On line 107 of the GST/HST return, according to the CRA.
How long do I have to adjust the tax?
Up to four years after the end of the reporting period in which the price was reduced.
Should I delete the original sale?
No. Keep it and add a separate refund entry, so both are visible in your records.
Are restocking and shipping fees taxed?
We couldn't confirm the rule on a CRA page, so check your own case before you set your process.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST
Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.