Credit Notes and Refunds
Guide • Canada • last updated October 2026
What a credit note is, how it differs from a refund, how tax is handled, and how to issue one, with a free generator.
When you need to reduce or reverse an invoice, a credit note is the clean way to do it. This guide explains what a credit note is, how it differs from a refund, how tax is handled, and how to issue one. Use the credit note generator.
What a credit note is
A credit note is a document that reduces the amount a client owes, issued against a specific invoice. It is used for returns, overcharges, corrections or agreed discounts after the invoice has gone out.
Credit note vs refund
A credit note reduces or cancels what is owed on paper; a refund returns money the client already paid. Often you issue a credit note first, and a refund follows if the client had already paid.
How tax is handled
A credit note reverses the tax on the original invoice proportionally. If you charged GST/HST on the amount being credited, the credit note reduces that tax too, which matters for your return.
How to issue one
Reference the original invoice number, show the amount being credited and the tax reversed, and date it. Keep it with the original invoice in your records.
A worked example
You invoiced $1,000 plus 13% HST in Ontario. The client returns $200 of the work, so you issue a credit note for $200 plus $26 HST, reducing the balance by $226.
Common mistakes to avoid
- Editing the original invoice instead of issuing a credit note.
- Forgetting to reverse the tax.
- Not referencing the original invoice number.
When to issue a credit note
Reach for a credit note whenever you need to reduce an amount after the invoice has gone out: a return, an overcharge, a billing error, or a goodwill discount. It keeps your records clean because the original invoice stays intact and the credit note documents the change, rather than quietly editing history.
Getting the tax right
A credit note reverses the GST/HST, and QST where it applies, in proportion to the amount being credited. That adjustment flows into your next tax return, so the credited tax is not one you end up remitting. Show the reversed tax on its own line, just as you did on the original invoice.
Credit note first, refund if needed
If the client has not paid, a credit note simply lowers the balance due. If they have already paid, issue the credit note and then refund the money through the same method where possible, so the paper trail and the money movement match. Reference the original invoice on both.
Credit note essentials
- Reference the original invoice number.
- Show the amount credited and the tax reversed.
- Date it and keep it with the original.
- Follow with a refund only if the client already paid.
Keeping your books and tax returns clean
The reason to use a credit note instead of editing or deleting an invoice is integrity: your records stay complete and your tax returns stay accurate. The credit note reverses the right portion of GST/HST, and QST where it applies, which flows into your next return so you are not over-remitting. Delete an invoice instead and you create a gap that is hard to explain later.
Always reference the original invoice on the credit note, and if the client already paid, follow with a refund through the same method so the money and the paperwork agree.
Credit note checklist
- Reference the original invoice number.
- Reverse the correct tax amount.
- Keep both documents together.
- Refund only if already paid.
Frequently asked questions
What is a credit note and when do I use one?
A credit note reduces the amount a client owes on a specific invoice, used for returns, overcharges, corrections or agreed discounts after the invoice was sent. It keeps your records clean because the original invoice stays intact and the credit note documents the change.
What is the difference between a credit note and a refund?
A credit note reduces or cancels what is owed on paper, while a refund returns money the client already paid. You often issue a credit note first, then a refund follows if the invoice had already been paid.
How does tax work on a credit note in Canada?
A credit note reverses the GST/HST, and QST where it applies, in proportion to the amount credited, and that adjustment flows into your next tax return. Show the reversed tax on its own line and reference the original invoice number.