Deposits, retainers and progress invoices — how to tax them

Treat the deposit as a real invoice: its own number, the job it relates to, the amount, the tax treatment, and a line explaining that it will be applied against the final invoice. That single document answers most disputes before they start.

A common structure on renovation and installation work is a deposit to cover materials, a progress payment at a defined milestone, and the balance on completion. Put that schedule on the estimate so the customer agrees to it before you order anything.

Where the deposit is applied to the price of a taxable supply, GST/HST generally applies at the time it is applied to the consideration. A genuinely refundable security deposit, held and returned, is treated differently until it is forfeited or applied.

The practical approach for most small businesses: charge tax on the deposit at the same rate as the job, show it clearly, and then deduct the tax-inclusive deposit on the final invoice so the customer is not taxed twice.

Progress billing keeps cash flowing on jobs that run for weeks. Each invoice covers work actually completed and carries its own due date, so an unpaid milestone is visible before you have sunk another month into the project.

Keep the description specific — "framing complete, 40% of contract value" reads better than "progress payment 2" when someone questions it months later.

Estimates can carry a required deposit. When the customer accepts the estimate, the deposit invoice is created and linked to it, and converting the estimate to a final invoice carries the deposit forward as a deduction with the linkage preserved.

Every payment is recorded against the invoice, so the running balance and the receipt always agree with each other.

Do I charge GST/HST on a deposit?

If the deposit is applied to the price of a taxable supply, tax generally applies when the deposit is applied to the consideration. A refundable security deposit is treated differently. When in doubt, charge tax on the deposit invoice and apply it consistently.

What is the difference between a deposit and a retainer?

A deposit is a down payment against a specific job. A retainer secures your availability and may be drawn down over time. Both should be invoiced, not accepted informally.

How do progress invoices work?

You invoice for a portion of the work as it is completed — by percentage, milestone or actual hours. Each progress invoice is a real invoice with its own number, tax lines and due date.

How do I apply a deposit to the final invoice?

Show the full value of the work, the tax on it, and then the deposit already paid as a separate deduction. The customer can see exactly what they have paid and what remains.