An overdue invoice is not a bad debt, and writing one off in December just because the year is ending is the version of this claim that fails. The Canada Revenue Agency's guidance is specific: a debt is deductible only after determined efforts to collect have been unsuccessful, or there is clear evidence it has in fact become uncollectible — and a debt that is merely doubtful should not be claimed as a bad debt at all, but considered for a reserve for doubtful debts instead (s1). If that description does not fit an invoice on your list, stop here for that invoice. Keep chasing it, or carry it as doubtful. Do not write it off.
There is a second stop line, and it is about timing. A bad debt may be claimed only in the year it became bad, regardless of how long it has been outstanding, and a deduction for a debt that became bad in one year cannot be deferred and claimed in a later year (s1). That rule is what makes a December review worth doing at all: a debt that genuinely went bad this year has a claim window that closes with the year, while a debt that goes bad next year belongs to next year however impatient December makes you feel.
The three gates an invoice must pass
The deduction rests on three requirements stated in the CRA bulletin (s1). First, the debt was owing to you at the end of the taxation year. Second, the debt became bad during the taxation year. Third, the debt was included, or is deemed to have been included, in your income for that year or a previous year. The third gate is the one cash-thinking businesses trip over: work that was never invoiced, or an amount that never entered income, has nothing to reverse.
When the gates pass for a sole proprietor, the mechanics are concrete. Under accrual accounting an invoice counts as income when it is issued, not when it is paid, and the unpaid amount is deducted on Form T2125, Part 4, line 8590 — Bad debts (s2). A worked example from the same source sizes both halves of the claim: on a $2,260 Ontario invoice made up of a $2,000 fee plus $260 HST that goes bad after the $260 was remitted, the result is a $2,000 deduction on line 8590 plus $260 recovered on the GST/HST return (s2).
| December verdict | Test | Action |
|---|---|---|
| Still collectible | Client is trading, responding, or on a payment plan | Keep chasing; no deduction |
| Doubtful | Collection uncertain, but not established as uncollectible (s1) | Consider a reserve for doubtful debts; document why |
| Bad | Determined collection efforts failed, or clear evidence of uncollectibility, and the three gates pass (s1) | Write off in the books this year; claim in this year |
| Partly bad | Part collectible, part not | Only the uncollectible portion is treated as bad (s1) |
Build the evidence file before you write anything off
- Pull the December aging list. List every unpaid invoice with its issue date, amount, and whether the amount — fee and tax separately — was included in income and remitted.
- Sort each invoice into the table above. Collectible, doubtful, or bad. Write one sentence per invoice giving the reason. A part of a debt can be bad while the rest is not, so split invoices where the evidence splits (s1).
- Assemble the collection trail for every bad verdict. The standard in the CRA guidance is determined efforts that were unsuccessful, or clear evidence of uncollectibility (s1). In practice that file holds the original invoice, dated reminders, any demand letter, and evidence about the debtor — a closure, an insolvency filing, or a documented decision that further pursuit costs more than the debt.
- Write it off in the books, in December. A mental decision to stop chasing is not a write-off. The GST/HST relief described below requires the debt to actually be written off in the books of account (s3), and the income-tax claim belongs to the year the debt became bad (s1).
- Claim both halves. Take the income-tax deduction for the fee, and the GST/HST adjustment for the tax portion, in the correct periods for each. Keep the evidence file with the return it supports.
What success looks like: every December write-off has a dated verdict, a collection trail, and a books entry, and every invoice left in receivables has a named next step — chase, reserve, or wait — rather than no decision at all.
The GST/HST half: separate claim, separate clock
Income tax and GST/HST are two claims under two Acts, and the second is easy to forget in December. Where tax was reported and remitted on a supply and the receivable is then written off as a bad debt in the books, an adjustment on a GST/HST return can recover the tax that was remitted but never collected (s2). The relief is conditional: the supply must be taxable, the customer must be dealing at arm's length, and the debt must actually be written off in the books (s3). The deduction is calculated with the formula A × B/C — tax on the supply, multiplied by the unpaid amount written off, divided by the total consideration plus tax (s3).
Two limits belong on the December checklist. The GST/HST deduction must be claimed in a return filed within four years after the due date for the period in which the debt was written off (s3) — generous, but not infinite, and old write-offs discovered late should be checked against it first. And the system is symmetrical: if the customer later pays any part of a written-off debt, the corresponding tax is added back in the period of recovery (s3), just as the recovered fee returns to income. On the income-tax side the same symmetry holds — a recovery of a bad debt is included in income in the year it is received (s1).
— Sterling Cole, Money Writer — Earning Desk