If a client cancels a booked project, appointment, or event, keeping the fee does not automatically put it outside the sales tax system. GST/HST on cancellation fees in Canada usually follows the tax status of the work that was cancelled. For registered freelancers and sole proprietors, the amount kept may already include tax that must be reported to the CRA.
GST/HST on cancellation fees in Canada: the basic rule
Section 182 of the Excise Tax Act can apply when a customer pays or forfeits an amount because an agreement to make a supply was breached, changed, or ended. If the planned supply was taxable and not zero-rated, the CRA generally treats the retained amount as tax-included.
This can cover situations such as:
- a photographer keeping a non-refundable booking deposit after a cancellation;
- a consultant charging a late cancellation fee under the service agreement;
- a designer retaining part of an advance after the client terminates the project; or
- an event business keeping a deposit when the customer cancels.
The label is not decisive. Calling an amount a “deposit,” “retainer,” “kill fee,” or “cancellation fee” does not determine the result by itself. The agreement, why the amount became payable, and the tax status of the original supply all matter. For the difference between money held in advance and money that has become payable, see our guide to GST/HST on deposits and retainers in Canada.
The cancellation amount is generally tax-included
A common mistake is to keep a $200 cancellation fee and then calculate another 13% on top for the GST/HST return. Under the forfeiture rule, the amount retained is generally treated as already including the applicable tax.
Suppose an Ontario photographer registered for GST/HST keeps a $200 cancellation fee for a taxable photo session. The HST portion is:
- $200 × 13/113 = $23.01 HST
- $200 − $23.01 = $176.99 before tax
The photographer reports $23.01 as tax collected or collectible, not $26. The same tax-fraction approach applies elsewhere: 5/105 for 5% GST and 15/115 where 15% HST applies. Use the rate that applied to the intended supply under the normal place-of-supply rules. If clients are in different provinces, read what GST/HST rate freelancers should charge.
What if the original service was exempt or zero-rated?
The underlying supply is the key. If the cancelled service would have been exempt, the related cancellation fee is generally not subject to GST/HST. The CRA gives this treatment, for example, where an exempt psychotherapy or counselling service is cancelled.
If the intended supply would have been zero-rated, section 182 does not turn the forfeited amount into a positive-rate supply. A Canadian freelancer’s service to a non-resident client may be zero-rated, but only if the export rules and their exceptions are satisfied. Do not assume that every foreign address produces a zero-rated sale; review GST/HST on US clients in Canada if that is your situation.
A payment that is truly compensation for unrelated damage can also fall outside section 182. The CRA distinguishes those payments from amounts tied to an earlier agreement for a taxable supply. Unusual settlements, damage claims, and negotiated termination payments deserve professional review because their wording and purpose can change the result.
Does the fee count toward the $30,000 threshold?
If the retained amount is treated as payment for a taxable supply, track its pre-tax portion with your other taxable revenue for the small supplier calculation. Do not use the full tax-included amount as revenue, and do not leave it out just because the booked work was never performed.
For the $200 Ontario example, the taxable revenue amount is $176.99 and the HST is $23.01. Record both when the fee is forfeited or becomes payable under the cancellation terms. This keeps your threshold total and GST/HST return aligned.
Use HST Hero to track taxable revenue against the $30,000 threshold, including the pre-tax portion of taxable cancellation charges. Keep a note linking each entry to the cancelled booking and the relevant contract term.
A practical record-keeping checklist
For each cancellation, save:
- the signed contract or accepted booking terms;
- the original invoice and description of the planned work;
- the cancellation notice or other evidence that ended the agreement;
- the amount refunded and the amount retained;
- the province and tax rate used for the intended supply; and
- the calculation separating tax from the retained amount.
Your cancellation policy should say when a deposit becomes non-refundable and what happens if either party ends the agreement. Clear terms help explain why you kept the money, but they do not override the GST/HST rules.
The practical takeaway is simple: start with the tax status of the cancelled work. If it was taxable and you are registered, treat the retained cancellation amount as tax-included unless the facts point to a different rule. Separate the embedded tax, record the pre-tax revenue, and keep the agreement that supports the charge.