A credit note is a document a seller issues to reduce or reverse a previously issued invoice, for returns, overcharges or discounts, adjusting the amount owed and any tax.
When an invoice needs to be reduced, a customer returns goods, was overcharged, or receives a discount, the seller issues a credit note rather than editing the original invoice. It documents the reduction, adjusts the customer's balance, and reverses the corresponding portion of GST/HST.
Credit notes preserve a clean audit trail: the original invoice stays intact and the adjustment is recorded separately. For sales tax, the credit note reduces the GST/HST the seller must remit and the input tax credit the buyer claimed, keeping both sides consistent.
A customer returns $500 of a $2,000 order. The seller issues a credit note for $500 plus $65 HST, reducing the receivable and the HST payable, while leaving the original invoice on record.
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