Hi @luvbudgies ,
The tax treatment would entirely depend on the Place of Supply rules. You may be being "paid" by an American company, but where are the labour/services being performed and where are supplies being delivered to? If they are in Canada, then GST/HST is still applicable; if you are delivering goods outside of your own province and you are not registered to collect PST in that province, then you would not have to charge PST; rather the recipient would have to self-assess. If you are making the supply of everything directly to the US, then what @LeithG said is correct.
Because you say you are receiving credits against your "account" with that company, I'm assuming that there are also amounts you have purchased/will purchase from that company in US$ that will need to have an exchange rate applied to them as well. Because no cash is actually changing hands, there isn't a hard exchange rate to use for either the purchase transaction or the warranty credit transaction. What is suggested in these cases is that you go to the BOC (Bank of Canada) site and determine the rate on the day these transactions are dated. For example, lets say you purchased $300 (US) from this company on May 3, 2021.
You would do this by going to the Currency Converter on the BOC site, entering a conversion from $300 US to ?? CAD$, then choosing the date of May 3, 2021, the results show a value of $368.37 CAD$ at a rate of 1.2279. You would go back to your purchase document (supplier bill or CC) and enter a second line into the transaction for the difference of $68.37 (using the same expense account as your original US purchase) and identify this as US Exchange in the memo field on that line. This way you can always still search for the original amount of the invoice in US$. If you overwrite the entire line with the total of $368.37, you can no longer search for the $300.00; splitting the lines just leaves your future options open in terms of searching.
Now you can determine the CAD $ value of the warranty claim you have received in the same way. For example: You have submitted a warranty claim that consists of $100 labour, $50 for parts, and $25 for shipping and have received a credit of $175.00 US$ from the US company, dated Jun 1, 2021. Go to the BOC site Currency Converter (ensure that you are converting from US$ to CAD$) and enter the details and the date. The currency conversion shows a value of $210.70 CAD$ with an exchange rate of 1.2040. Since you need to separate the accounts these amounts are being posted to, you will have to determine each breakdown separately. So the $100.00 labour would become $120.40, $50 parts would become $60.20 and $25 shipping would become $30.10.
You would enter a Supplier Credit as @LeithG has suggested, with the lines being split as follows:
Warranty Income $120.40
Parts Expense $ 60.20
Shipping Expense $ 30.10
-----------------------------------------
Total Credit $210.70
This is assuming you have an income account set up for Warranty Income, and that you are simply reimbursing your costs for Parts and Shipping. Doing it this way will mean that you are crediting more for Parts and Shipping than you are paying, which could potentially create a credit in each of these accounts on your P & L if this scenario is happening often.
Another way you could do it is to put all the exchange into your Warranty Sales account so that your Parts and Shipping will only be in and out in CAD$, no differences. Supplier credit would then be entered like this:
Warranty Income $135.70
Parts Expense $ 50.00
Shipping Expense $ 25.00
-----------------------------------------
Total Credit $210.70
The bottom line is the same, but rather than posting with excess credits in your expense accounts, the entire exchange amount would be posted to income.
Tax on each of these lines will be according to Place of Supply rules, as mentioned previously and PST rules for your province. You will have to determine all of that before making these entries.
If, however, at any time, you actually pay an outstanding amount to this supplier or they pay you an outstanding amount in actual cash, then you would have to make adjustments between the exchange rates you have calculated from the BOC and the actual exchange rate for the financial transaction.
Let's say you ended your relationship with this supplier after the two transactions above. You owe this supplier $300 US and the supplier owes you $175 US; thus you must make a cash payment of $125.00. When you make this payment, the CC or the bank or clearing house will determine the amount of exchange on the $125.00 which we'll say becomes a value of $154.31 CAD (rate of 1.2345). You would have to edit your purchase transaction so that your BOC rate of exchange applies only to the first $175.00 US, and the remaining $125.00 is entered at 1.2345.
Hope this helps :)
