When a customer buys a $100 gift card, pays a 30% deposit on a custom order, or prepays a year of service, you have their money but you haven't earned it yet. Booking it straight to sales overstates revenue, and charging GST/HST at the wrong moment can mean remitting tax too early or twice. Both problems are common in retail, restaurants, salons, contractors, event businesses and anyone selling prepaid packages.
This guide explains how to record gift cards, deposits and prepayments as unearned revenue, when GST/HST applies under the Excise Tax Act (ETA), how income tax treats amounts received in advance, and what to do with gift cards that are never redeemed. It's based on the ETA, including section 181.2 (gift certificates) and subsection 168(9) (deposits), CRA's GST/HST guidance, and the Income Tax Act. It includes worked examples, journal entries and common mistakes.
Money received before you deliver goods or services is a liability until you deliver. In accounting, it's often called unearned revenue, deferred revenue or customer deposits.
| Event | Accounting treatment |
|---|---|
| Customer pays in advance | Bank up, unearned revenue (liability) up |
| You deliver the goods or service | Unearned revenue down, sales up |
| Customer cancels and is refunded | Unearned revenue down, bank down |
Under cash-basis bookkeeping, some businesses record prepayments as sales when received. That's simpler, but it can distort monthly results and the GST/HST timing below still applies. Accrual books show the liability properly.
Under section 181.2 of the ETA, selling a gift certificate (including a gift card) for money is generally not treated as a supply. That means:
GST/HST applies at redemption only if the item bought is taxable. CRA's policy statement P-202, Gift Certificates, says a gift card qualifies if it has a monetary value that's stated or easily determined, is sold for consideration for use at a particular supplier, is accepted as payment, requires nothing beyond presenting it to redeem it (no minimum purchase), and has no intrinsic value. A card for a specific product or service can still qualify. If a card has conditions, such as a minimum purchase, it may not be a gift certificate, so check P-202 or ask your accountant.
Example numbers for illustration only. A Nova Scotia retailer (HST 14%).
Sale of a $100 gift card:
| Account | Debit | Credit |
|---|---|---|
| Bank | $100.00 | |
| Gift card liability | $100.00 |
No HST is charged on the gift card sale.
Customer later buys a $100 item (plus $14 HST), paying $100 with the gift card and $14 by debit card:
| Account | Debit | Credit |
|---|---|---|
| Gift card liability | $100.00 | |
| Bank | $14.00 | |
| Sales | $100.00 | |
| HST payable | $14.00 |
HST is collected and reported in the reporting period when the gift card is redeemed.
Under subsection 168(9) of the ETA, as explained in CRA's GST/HST memorandum 300-6-8, Deposits, a deposit (other than a deposit for a returnable container) is not considered consideration for a supply until the supplier applies it as consideration for that supply. In plain terms, a true deposit that secures an order generally isn't taxable when received; GST/HST applies when the deposit is applied to the sale.
Be careful: a payment called a "deposit" may really be a partial payment. Under the ETA's general timing rules, GST/HST generally becomes payable on the earlier of when the consideration is paid or becomes due. If an amount is a down payment or progress payment, GST/HST is generally payable on that amount when it's paid. The wording of your contract and how you apply the money matter. If in doubt, ask your accountant or check CRA's GST/HST memoranda on timing of liability.
| Payment | GST/HST when received? |
|---|---|
| True security deposit, refundable, not yet applied | Generally no |
| Down payment or partial payment for an order | Generally yes |
| Deposit applied to the final invoice | Yes, when applied |
| Damage deposit returned in full | No |
Example numbers for illustration only. An Ontario business (HST 13%).
A customer orders a $5,000 table. The contract treats the $1,500 deposit as a refundable security deposit, applied to the final invoice on delivery.
Deposit received:
| Account | Debit | Credit |
|---|---|---|
| Bank | $1,500 | |
| Customer deposits | $1,500 |
Delivery and final invoice ($5,000 + $650 HST = $5,650):
| Account | Debit | Credit |
|---|---|---|
| Customer deposits | $1,500 | |
| Bank (balance paid) | $4,150 | |
| Sales | $5,000 | |
| HST payable | $650 |
The customer pays $5,650 in total: $1,500 + $4,150. If the contract had described the $1,500 as a partial payment, HST would generally be payable on it when received.
Salons, gyms, tutors, software and service businesses often sell prepaid packages: 10 sessions, an annual plan, a membership. These are usually payments for a specific supply, not gift cards, so GST/HST generally applies when the payment is received or becomes due, even though the revenue is earned over time.
Example numbers for illustration only. An Alberta business (GST 5%).
A client prepays $1,200 + $60 GST on January 1 for 12 months of service.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1 | Bank | $1,260 | |
| Unearned revenue | $1,200 | ||
| GST payable | $60 | ||
| Each month-end | Unearned revenue | $100 | |
| Service revenue | $100 |
At the end of March, $300 has been earned and $900 remains in unearned revenue.
For income tax, paragraph 12(1)(a) of the Income Tax Act generally includes in income amounts received in the year for goods or services to be delivered later. Paragraph 20(1)(m) then generally allows a reserve for goods and services you reasonably expect to deliver after year-end. The practical effect is that unearned revenue at year-end is often not taxed until earned, but the reserve must be claimed and supported. Your accountant handles this at year-end; your bookkeeping just needs an accurate unearned revenue balance with a breakdown by customer or gift card.
Some gift cards are never used. Accounting standards generally allow businesses to recognize expected breakage as revenue over time based on redemption patterns, or when redemption becomes unlikely. For tax, the treatment depends on the facts, so discuss it with your accountant.
Also check provincial consumer protection rules. In Ontario, the Consumer Protection Act, 2002 and O. Reg. 17/05 ban expiry dates on most retail gift cards; a card with an expiry date is treated as if it had none. Exceptions include cards for one specific good or service, cards issued for charitable purposes, and cards issued by financial institutions. Several other provinces have similar rules. Expired-card policies may not be enforceable, and the liability may stay on your books. Check your province's consumer protection office.
Example numbers for illustration only.
| Item | Amount |
|---|---|
| Opening gift card liability | $8,400 |
| Gift cards sold | $3,200 |
| Gift cards redeemed | −$4,100 |
| Breakage recognized (per accountant) | −$300 |
| Closing liability | $7,200 |
| Outstanding cards per POS report | $7,200 ✓ |
A gift card you give away for free, such as a "spend $100, get a $20 card" promotion, is different from one a customer buys. No money comes in, so there's no liability funded by cash. When the promotional card is redeemed, the business generally treats it as a discount on that sale, and GST/HST is generally calculated on the reduced amount the customer actually pays. Track promotional cards in a separate POS tender type so they don't get mixed into the purchased gift card liability.
When an order is cancelled, record a refund as a reduction of the customer deposits account, not as a negative sale. If your contract lets you keep a deposit when a customer cancels, the forfeited amount becomes income. Under section 182 of the ETA, as CRA's memorandum 300-6-8 explains, a deposit forfeited on a cancelled taxable (non-zero-rated) supply is generally treated as including GST/HST, which you must remit, for example 13/113 of the amount in Ontario; ask your accountant if forfeitures are common in your business.
| Balance | Reconcile to | Frequency |
|---|---|---|
| Gift card liability | POS or gift card system report of outstanding cards | Monthly |
| Customer deposits | List of open orders and deposits | Monthly |
| Unearned revenue (subscriptions) | Customer contracts and service schedule | Monthly |
| GST/HST payable | Tax reports from POS and invoices | Each filing period |
If the gift card liability keeps growing, your redemptions may be recorded as new sales instead of reducing the liability.
Many POS systems treat gift card sales and redemptions as separate tender types. Map them correctly:
Test the setup with a single sale before going live.
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Generally no. Under ETA section 181.2, GST/HST applies when the gift card is redeemed for taxable goods or services.
A true deposit generally isn't taxable until applied to the sale (ETA 168(9)). A partial or down payment generally is taxable when paid.
To a gift card liability account, not sales.
Prepayments are generally included in income when received, but a reserve may be available for goods or services delivered after year-end.
Accounting may recognize breakage over time, but provincial rules on expiry dates and the tax treatment need checking.
Money in advance isn't revenue yet. Keep gift cards and deposits on the balance sheet, apply GST/HST at the right moment, reconcile each liability monthly, and let your accountant handle reserves and breakage. For monthly books that get this right, start with Accelo Bookkeeping.