The use of customer pre-payments may let vendors avoid paying HST, but there is a fine line between pre-payments and deposits.

Now that May 1^st has arrived, vendors are required to charge the Ontario portion of HST for goods or services to be delivered after June 30, 2010.  In an attempt to avoid paying the HST under the May 1^st transitional rules, some vendors were asking customers to prepay before May 1^st for goods or service to be delivered after July 1^st and charged only the 5% GST at that time. 

The general rule for when GST/HST is payable is the earlier of the day the amount is paid and the day the amount is due (typically the invoice date).  However a deposit, whether refundable or not, is not considered to be an amount paid until the supplier applies the deposit against the amount for the good or service.  Where a good or service is delivered after June 30^th and a deposit is applied against the amount, the entire amount would be subject to HST. 

This may create a problem identifying the character of the payment as a pre-payment or deposit since outwardly, there may appear to be little difference between the two.  Ultimately, the character may be determined by reference to the supplier’s financial statements and records.  To strengthen the argument that a pre-payment is a pre-payment, identify the amounts as such on financial statements, avoid terms like “less deposit” in favour of “less pre-payment” and apply HST only on the additional amounts on subsequent invoices and ensure that the GST on the prepayment is reported and remitted in the proper period.