Rajesh asked:

We have bankrupt vendor, we owe them $1 million. We are going to settle with their Receiver for $300,000.

Will this transaction will trigger GST liability and if yes do we have any solution to avoid the huge cash flow impact.

Hari S. Nesathurai answered:

This is actually a more complicated question than first meets the eye. Assuming that the purchaser already claimed the ITC on the invoices at the applicable GST rate at the time, the purchaser will have to make an adjustment on the input tax credits on his next reporting period. i.e. Purchaser claimed $60,000.00 input tax credit on 1 million dollar invoice. Invoice reduced to $300,000.00 with GST of $18,000.00. Purchaser would file an adjustment of $42,000.00 on its next GST return and will also have to reduce its expenses for the relevant period. There are time limits on the filing of adjustments which must not be missed.

The link below may be of some assistance. http://www.cra-arc.gc.ca/E/pub/gp/rc4022/rc4022-05-e.html#P984_80382.

The person here should probably contact a tax lawyer or accountant who has a solid understanding of the GST.

About the author

Hari S. Nesathurai is the senior tax counsel at the Toronto law firm of Heydary Hamilton PC where his practice includes domestic and international tax planning and tax litigation for privately held corporations and wealthy individuals. Click here to view Hari's C.V

 
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