How to Write Off Bad Debt in Canada: A Practical Guide

You sent an invoice to a client in March. They said the cheque was in the mail. By June, the cheque still hasn't arrived and the client stopped returning calls. Now it's October, and you need to close your books. You have two choices: keep chasing a debt that likely won't be paid, or write it off.

Writing off bad debt in Canada is not just about removing a receivable from your records. It involves specific CRA rules for income tax and GST/HST, different rules for different business structures, and accounting methods that affect when you can claim the deduction. If you handle this wrong, you could miss a deduction or trigger a CRA reassessment.

This article explains exactly how to write off bad debt in Canada for small businesses, bookkeepers, and accounting firms. We cover the criteria, the journal entries, the GST/HST adjustment, and common mistakes. You will also see how a contractor firm in Ontario handled a real write-off scenario.

What Is Bad Debt in Canada? Definition and CRA Guidelines

Bad debt is an amount owed to you that you have made reasonable efforts to collect but still cannot recover. The Canada Revenue Agency (CRA) allows you to deduct bad debts from your business income, but only if certain conditions are met.

Criteria for a Bad Debt Write-Off

To write off a bad debt for tax purposes, you must show:

• The debt was included in your income previously. You cannot write off a debt that you never recorded as revenue.
• You have taken reasonable steps to collect it. This means sending reminders, making phone calls, or engaging a collection agency. The CRA does not require you to sue, but you must demonstrate genuine effort.
• There is a reasonable expectation that the debt will not be paid. For example, the customer declares bankruptcy, disappears, or dies without assets.

If you use the accrual method of accounting, you report revenue when you send the invoice, not when you receive payment. That makes you eligible to write off the debt later. If you use the cash method, you never included the unpaid invoice as income, so there is nothing to write off.

Canadian Context: GST/HST on Bad Debts

One of the most overlooked aspects of writing off bad debt in Canada is the GST/HST adjustment. When you issued the invoice, you remitted the GST/HST on the full amount to CRA. If the customer does not pay, you have effectively paid GST/HST out of your own pocket. You are entitled to recover that amount through a bad debt adjustment.

For GST/HST purposes, you can claim a deduction on your next GST/HST return equal to the tax portion of the unpaid amount. The rules differ slightly between GST and QST in Quebec, but the principle is the same. You need to file Form GST20 for GST/HST adjustment requests, or use line 106 on your return for a streamlined claim.

How to Write Off Bad Debt for Income Tax Purposes

Writing off a bad debt for income tax involves two steps: removing the receivable from your books and claiming the deduction on your tax return.

Journal Entry for Bad Debt Write-Off

Under the direct write-off method, you debit a bad debt expense account and credit accounts receivable. For example:

• Debit Bad Debt Expense $1,000
• Credit Accounts Receivable $1,000

This reduces your net income by $1,000, which becomes your tax deduction.

When to Claim the Deduction

You claim the bad debt deduction in the tax year you reasonably determine the debt is uncollectible. You do not have to wait until the debt is legally extinguished. For example, if a client goes bankrupt in December but the bankruptcy trustee sends a report in January, you can still claim the deduction in the earlier year if you had enough information to conclude the debt was worthless.

Allowance for Doubtful Accounts (Reserve Method)

Some businesses prefer to estimate bad debts at year-end using an allowance for doubtful accounts. This is a contra-asset account that reduces net receivables. The CRA does not allow a deduction for a general reserve. You can only deduct specific debts that are written off. However, for accounting purposes, the allowance method is common. For tax, you must adjust back to the direct write-off method if you use the allowance.

How to Write Off Bad Debt for GST/HST Purposes

If you collected GST/HST on a sale and the customer never paid, you can recover the tax portion. Here is how the CRA rules work.

Eligibility for GST/HST Bad Debt Adjustment

You can claim a bad debt adjustment on your GST/HST return for the reporting period in which the debt is written off. The adjustment is the tax component of the unpaid amount. For example, if you sold $1,000 plus $50 GST and only collected $0, your adjustment is $50.

How to Claim

For GST/HST registrants, you can claim the adjustment by subtracting the bad debt amount from your net tax calculation. If you used a quick method of accounting, the adjustment is based on the tax fraction of the payment you did not receive. You must keep records showing the debt was written off and that you made reasonable collection efforts.

Quebec and PST Provinces

In Quebec, Revenu Quebec handles QST. The rules are similar, but you must file a separate adjustment. In provinces with provincial sales tax (PST) like Saskatchewan and Manitoba, the PST rules differ and may require a separate process. Always check provincial tax regulations.

Real-World Scenario: A 12-Person Contractor Firm in Ontario

Let's walk through a realistic example. ABC Contracting Inc. in Ontario has 12 employees. In 2023, they completed a renovation for a developer who later went bankrupt. The invoice was $50,000 plus $6,500 HST. The developer paid only $10,000 before defaulting. ABC Contracting tried collection letters and calls for six months before deciding to write off the remaining $40,000 plus $5,200 HST in early 2024.

Steps Taken

1. Documentation: ABC's bookkeeper saved copies of all invoices, proof of partial payment, and records of collection attempts.
2. Write-off journal entry: Debit Bad Debt Expense $40,000, Credit Accounts Receivable $40,000.
3. GST/HST adjustment: On the next HST return, they reduced their net tax by $5,200 (the HST on the unpaid portion).
4. Income tax deduction: Claimed $40,000 as a business expense on the 2024 corporate tax return (T2).

Lessons Learned

• The write-off was in 2024, not 2023, because the debt only became uncollectible in 2024.
• They kept a separate schedule tracking the bad debts for future CRA review.
• They updated their credit policy to require deposits on large contracts.

Table: Direct Write-Off Method vs. Allowance Method

Common Mistakes When Writing Off Bad Debt in Canada

Avoid these pitfalls:

• Claiming before reasonable efforts: If you write off a debt after one email, the CRA may deny the deduction. Document at least three attempts.
• Forgetting GST/HST: Failing to claim the bad debt adjustment on your GST/HST return means you lose that money permanently. You have two years from the write-off to amend.
• Double-dipping: Do not claim the same debt as an expense and also reduce revenue. The write-off should only be the expense.
• Confusing cash and accrual: Cash-basis businesses cannot write off bad debts because they never included the sale as income. Ensure you are on accrual.
• Misallocating for partnerships: Partners in a partnership must each claim their share of bad debts personally, not the partnership entity.

FAQ

Can I write off bad debt on my personal tax return in Canada?

Only if you are a sole proprietor or have self-employment income that was reported in a previous year. If the debt relates to employment income (wages you earned but were not paid by an employer), you cannot write it off. The CRA requires the debt to be included in your income first, which typically means it is business or property income.

How do I write off bad debt for GST/HST if I am a small supplier?

Small suppliers are not required to register for GST/HST, so they do not collect tax. If you are not registered, you have no GST/HST to recover. The write-off only applies to the income portion claimed on your tax return. If you become a registrant later, you can only claim adjustments for debts arising after registration.

What is the CRA's deadline to claim a bad debt deduction?

For income tax, you claim it in the year the debt becomes uncollectible, but the deadline to file that year's return is usually six months after your fiscal year-end (e.g., June 15 for individuals, six months after year-end for corporations). For GST/HST, you can claim the adjustment up to two years after the write-off, but it is best to do it in the next return.

Can I write off a loan to a friend or relative as bad debt?

Yes, if the loan was made with a genuine expectation of repayment and you made efforts to collect. However, the CRA may deny the deduction if the loan is deemed a gift or if there is no formal agreement. Document the loan with a promissory note and evidence of collection attempts.

Which software should I use to track bad debts and automate write-offs?

For Canadian businesses, Awditify's small business platform offers a complete solution. It tracks accounts receivable, integrates with bank feeds to flag overdue payments, and provides 70+ financial reports that include bad debt summaries. The AI transaction categorization can help classify write-offs correctly, and the audit trail ensures you have the documentation CRA requires for a deduction.

What to Do Next

Writing off bad debt in Canada is a routine task, but the details matter. The CRA expects you to document your efforts, time your deduction correctly, and handle GST/HST adjustments separately. A missed step can cost you a deduction or trigger a review.

If you manage multiple clients or your own business, consider using a platform like Awditify to centralize your receivables, automate reminders, and record write-offs with proper audit trails. The automated bank feeds and AI bookkeeping features reduce manual errors in bad debt accounting. For accounting firms, the practice management tools help track client collection efforts across multiple files.

Start by reviewing your outstanding receivables today. Identify accounts over 90 days past due and assess whether they meet the CRA criteria. Then write them off properly, claim your deductions, and move on.