You completed the work.
You sent the invoice.
The customer promised to pay within 30 days.
Thirty days became 60.
Then 90.
Then six months.
Your staff called. You sent emails. Statements went out. The customer stopped responding.
Your accounting system still shows a $25,000 receivable, but the money may never arrive.
Now the business owner asks:
Can we just write this invoice off and deduct it from our taxes?
Sometimes, yes.
But an invoice does not become a deductible bad debt simply because it is late.
CRA generally allows a deduction for a business bad debt when the receivable was previously included in income and the business has determined that it became a bad debt during the year. CRA’s more detailed guidance also looks at whether the debt was still owing at year-end and whether there is sufficient evidence that it had actually become uncollectible.
That means a customer being 60 days late is not automatically enough.
A business should be able to show why collection is no longer reasonably expected.
The difference matters because accounts receivable affect taxable income, financial statements, cash flow and GST/HST reporting.
This guide explains when an unpaid customer invoice can become a deductible bad debt in Canada, how a bad debt differs from a doubtful account, what evidence businesses should keep, and how GST/HST can potentially be recovered when a customer never pays.
Important: This article provides general information only. The appropriate treatment depends on your accounting method, facts surrounding the receivable, tax year, GST/HST status and collection history. Obtain professional advice before making material tax adjustments.
The Problem: Your Business Already Reported Revenue It Never Collected
This is why bad debts can be so frustrating.
Suppose your Canadian business invoices a customer:
Invoice amount before tax: $20,000
The company uses accrual accounting.
Revenue is recognized.
The $20,000 becomes part of business income even though the customer has not yet paid.
Months later, the customer becomes insolvent and the business concludes the money will not be collected.
Without an adjustment, the company could appear to have earned revenue that it will never actually receive.
CRA’s current business guidance addresses this problem by allowing a bad debt deduction where the receivable has been determined to be bad and the amount was previously included in income.
This creates an important principle:
You generally cannot deduct an unpaid sales invoice as a bad debt if the amount was never included in your income in the first place.
When Can an Unpaid Invoice Become a Bad Debt?
A business needs more than an old invoice.
The debt needs to have genuinely become bad.
CRA’s longstanding interpretation of subsection 20(1)(p) identifies three important conditions for a typical business bad debt:
The debt must still be owing to the taxpayer at the end of the taxation year.
The debt must have become bad during that taxation year.
The amount must have been included, or be deemed to have been included, in income for that year or an earlier year.
The most difficult part is usually proving:
When did the debt actually become bad?
That is a question of fact.
A Late Invoice Is Not Automatically a Bad Debt
Consider two customers.
Customer A
Invoice is 120 days overdue.
The customer is financially healthy.
They have paid late before.
They acknowledge the debt.
They have agreed to pay within another 30 days.
This invoice may be overdue, but it is difficult to say it is definitely uncollectible.
Customer B
Invoice is also 120 days overdue.
But this customer has closed its office.
Phone numbers are disconnected.
Legal correspondence has gone unanswered.
The company has entered insolvency proceedings.
Your collection agency has advised that recovery is unlikely.
That looks very different.
CRA has historically considered factors such as the debtor’s financial condition, collection efforts, payment history, security available and other facts showing whether the debt can reasonably be collected.
The age of the invoice matters, but age by itself is not enough.
Solution: Build Evidence Before Writing the Debt Off
The best bad debt file tells a clear story.
It should show that the invoice was legitimate, that your business attempted to collect it, and that circumstances eventually made recovery unlikely.
Useful evidence can include correspondence with the customer, aging reports, payment promises, returned mail, collection-agency reports, bankruptcy or insolvency notices, legal correspondence and notes showing attempts to contact the debtor.
You do not necessarily need to sue every customer before a debt can become bad.
The appropriate collection effort should make commercial sense relative to the amount owed and the facts.
For example, spending $15,000 in legal costs to pursue a $3,000 invoice may not be commercially reasonable.
What matters is being able to support why management concluded the receivable had become uncollectible.
Bad Debt vs Doubtful Debt: They Are Not the Same Thing
This distinction is extremely important.
A bad debt is an amount you have concluded is uncollectible.
A doubtful debt is an amount where collection is uncertain, but you have not concluded that recovery is impossible or sufficiently unlikely to write the debt off completely.
CRA’s current audit guidance confirms that whether a debt is doubtful is a factual question. Aging, previous collection experience and current business conditions can be considered. CRA also notes that a reserve should not simply be calculated as a general percentage of all receivables without identifying which accounts are genuinely doubtful.
For tax purposes, paragraph 20(1)(l) can permit a reasonable reserve for doubtful debts in qualifying situations.
However, the reserve does not permanently remove the income.
A reserve claimed in one taxation year is generally brought back into income in the following year, after which a new reserve may be calculated based on the facts at that time.
Example
Your accounts receivable include a $40,000 customer balance.
The customer has severe cash flow problems but is still operating.
Management believes approximately $15,000 may ultimately be uncollectible.
It may be premature to classify the entire $40,000 as a bad debt.
Depending on the facts, a doubtful-debt reserve may instead be considered.
Later, if the customer enters bankruptcy and the remaining debt clearly becomes uncollectible, bad debt treatment may become appropriate.
Problem: Businesses Often Write Off Debts Too Early
Imagine an invoice becomes 90 days overdue on December 15.
The owner wants lower taxable income and tells the bookkeeper:
“Write it off before year-end.”
But the customer is still operating normally.
They have promised payment.
There is no evidence of insolvency.
They even made a partial payment in January.
A tax deduction should not be driven simply by the desire to reduce year-end income.
CRA looks at whether there was evidence that the debt had actually become bad during that particular taxation year.
The solution is to document why the write-off occurred when it did.
Problem: Businesses Also Leave Clearly Bad Debts on the Books for Years
The opposite mistake is common.
A company’s balance sheet may contain:
Accounts Receivable: $700,000
But when someone examines the aging report, $120,000 relates to customers who disappeared two years ago.
Those receivables may be making the business look financially stronger than it actually is.
This can distort:
Revenue quality.
Working capital.
Current ratios.
Cash flow planning.
Business valuation.
Bank financing discussions.
Management decisions.
Aterna discusses the broader problem of growing receivables in Signs Your Business Has Outgrown Basic Bookkeeping. As businesses grow, accounts receivable need active monitoring rather than simply being recorded and forgotten.
A Practical Example: The $30,000 Invoice That Never Gets Paid
Assume Northern Manufacturing Inc. sells products to a customer for:
$30,000 plus GST/HST
The sale is recorded as revenue.
The invoice remains unpaid for several months.
Northern Manufacturing sends multiple statements and emails.
The customer’s bank account is frozen.
The business enters insolvency proceedings.
Northern Manufacturing receives confirmation that unsecured creditors are unlikely to recover anything meaningful.
At that point, management may have strong evidence supporting the conclusion that the receivable has become bad.
The accounting entry might remove the receivable and recognize a bad debt expense.
For tax purposes, the business should then confirm that the amount meets the applicable bad-debt deduction requirements.
What Happens to GST/HST When the Customer Never Pays?
This is one of the most valuable parts of bad-debt planning.
Many Canadian businesses remit GST/HST before collecting the related customer invoice.
CRA states that if you issue an invoice and GST/HST becomes collectible, the tax generally has to be reported even if the customer has not yet paid you.
So imagine you issued a taxable invoice.
You reported the sale.
You remitted the GST/HST.
Then the customer never pays.
You may have sent tax to CRA that you never actually collected from the customer.
Fortunately, there is a bad debt adjustment mechanism.
CRA currently says that if you already reported and remitted GST/HST on a credit sale and all or part of the amount later becomes a bad debt, you may be able to recover the relevant portion as an adjustment on your GST/HST return, provided the conditions are met. The customer must generally be someone with whom you dealt at arm’s length, and the debt must be written off in your records.
How the GST/HST Bad Debt Adjustment Works
CRA uses a proportional formula based on:
The GST/HST payable on the original sale.
The unpaid amount written off.
The total amount of the original sale including applicable taxes.
Consider a simplified example.
Your business made a taxable sale totaling:
$11,300
including:
$1,300 HST
The customer later pays:
$5,650
The remaining:
$5,650
is eventually determined to be bad and written off.
You may be able to recover the HST proportion relating to the unpaid amount through the applicable GST/HST bad debt adjustment.
The exact amount should be calculated using CRA’s prescribed formula.
Importantly, CRA currently says the GST/HST bad debt adjustment must generally be claimed on a return filed within four years of the due date of the return for the reporting period in which the debt was written off.
That is another reason not to leave bad receivables unresolved indefinitely.
Businesses dealing with GST/HST compliance should also review Aterna’s GST/HST Registration Mistakes: What Happens When Your Canadian Business Passes the Small-Supplier Threshold and Registers Late?.
What If You Recover the Money After Writing It Off?
This happens.
You may write off a customer balance after concluding it is uncollectible.
A year later, the customer receives financing and unexpectedly sends payment.
You cannot simply keep the old tax deduction while treating the recovered money as something unrelated.
CRA states that if you recover an amount that was previously written off as a bad debt, the recovered amount generally has to be included in income in the year it is received.
There can also be a GST/HST consequence.
Where a GST/HST bad debt adjustment was previously claimed and part of the debt is later recovered, CRA requires the appropriate GST/HST amount to be added back to the return for the period in which the recovery occurs.
Your accounting system should therefore retain a history of written-off customer balances rather than deleting the customer record completely.
Partial Bad Debts Can Matter Too
A customer does not always default on the entire invoice.
Suppose a customer owes:
$50,000
You negotiate a final settlement of:
$20,000
and agree that the remaining $30,000 will not be collected.
Depending on the facts and legal arrangement, the unpaid portion may require bad debt analysis.
The important issue is to document exactly why part of the balance became uncollectible and whether the amount satisfies the applicable income-tax and GST/HST requirements.
Do not simply post the difference to “discounts” without understanding the substance.
Credit Notes Are Not the Same as Bad Debts
This distinction can prevent bookkeeping mistakes.
Suppose the customer refuses to pay because:
The product was defective.
Your company performed incomplete work.
The invoice was incorrect.
The parties negotiate a lower selling price.
That may represent a sales adjustment, credit note or contractual dispute rather than a true bad debt.
A bad debt generally assumes that the underlying amount was genuinely owing but later became uncollectible.
If the customer never legally owed the full invoice because the price was reduced or services were not properly delivered, the accounting and tax analysis may be different.
This is similar to the revenue-timing issues discussed in Aterna’s Customer Deposits Are Not Always Revenue.
Stop Asking Only “How Old Is the Invoice?”
Accounts receivable aging is useful.
But a 180-day-old invoice is not automatically bad, and a 60-day-old invoice is not automatically collectible.
The stronger question is:
What evidence exists today about this customer’s ability and willingness to pay?
Management should consider things such as the customer’s financial condition, bankruptcy or restructuring, broken payment arrangements, disputes, security held, collection-agency feedback and realistic collection costs.
CRA’s bad debt guidance has historically emphasized this factual analysis rather than a single fixed number of overdue days.
Bad Debt Problems Usually Begin Before the Invoice Becomes Bad
Writing off the debt is the final step.
The real problem may have started months earlier.
Maybe the business had:
No customer credit checks.
No deposit requirements.
No signed contract.
No credit limit.
Weak payment terms.
No collection process.
No aging review.
No follow-up responsibility.
Strong accounts receivable management can reduce the number of invoices that ever become bad debts.
Aterna’s How to Build a 13-Week Cash Flow Forecast for Your Canadian Business emphasizes reviewing customer receipts individually because late payments can create cash shortages even while the income statement shows strong revenue.
Aterna’s article on How Poor Cash Flow Management Kills Growing Businesses also identifies slow customer payments as a major cause of liquidity pressure.
A Better Accounts Receivable Process
A growing Canadian business should have one documented collection policy that covers when invoices are issued, when reminders begin, when management becomes involved, when credit privileges are suspended, when accounts move to collection, and when a receivable is reviewed for doubtful or bad debt treatment.
The process does not need to be aggressive.
It needs to be consistent.
A simple 30-day delay may require a friendly reminder.
A 60-day balance might trigger direct contact.
A 90-day balance could require management review.
A significantly older balance may require formal collection action.
The exact process should match the industry and customer relationship.
What Should Your Bad Debt File Contain?
Before claiming a significant deduction, make sure you can explain the history.
A useful file can contain one concise collection record showing the original invoice, when revenue was recorded, payment terms, amounts collected, dates of collection attempts, correspondence, customer financial information known to the business, collection or legal action taken, management’s conclusion and date of write-off.
This is especially important if CRA later asks why the deduction was taken in one taxation year instead of another.
If CRA has already requested records, Aterna’s What to Do If You Receive a CRA Audit Letter explains why businesses should organize supporting documents before responding rather than sending unreviewed records.
Seven Questions to Ask Before Writing Off an Invoice
Use this checklist before year-end:
- Was the receivable already included in business income?
- Does the customer legally owe the amount?
- What collection steps have we taken?
- What evidence shows the balance is now uncollectible rather than simply late?
- Did the debt become bad during this taxation year?
- Have we already reported and remitted GST/HST on the sale?
- Do our accounting records clearly show the write-off and supporting documentation?
If your team cannot answer these questions, review the account before claiming the deduction.
Frequently Asked Questions
How long does an invoice have to be unpaid before it becomes a bad debt in Canada?
CRA does not provide a universal rule saying an invoice becomes bad after 90, 120 or 180 days.
Whether the debt has become bad depends on the facts.
The age of the debt is relevant, but businesses should also consider collection efforts, the debtor’s financial condition, payment history, security and realistic prospects for collection.
Can I deduct an invoice simply because the customer refuses to pay?
Not automatically.
First determine whether the customer actually owes the amount.
A genuine contractual dispute over defective goods, incomplete services or pricing may require a sales adjustment rather than bad debt treatment.
Can a corporation deduct a bad customer debt?
The Income Tax Act’s business bad debt rules are not limited to sole proprietors. The core requirements under subsection 20(1)(p) concern whether the debt was owing, became bad in the year and had previously been included in income.
Can I claim a deduction if the invoice was never included in revenue?
For the normal business bad debt deduction relating to an account receivable, CRA states that the amount must already have been included in income.
What is a doubtful debt reserve?
A doubtful debt has not necessarily become completely bad, but there is reasonable uncertainty about collection.
A reasonable reserve may be available in qualifying circumstances under paragraph 20(1)(l). The reserve is generally included back in income the following year, and a new reserve is determined based on the updated facts.
Can I recover GST/HST on a bad debt?
Potentially, yes.
If your business previously reported and remitted GST/HST on a credit sale and the amount later becomes a bad debt, CRA provides a bad debt adjustment mechanism where the applicable requirements are satisfied.
What happens if the customer pays after I wrote off the debt?
The recovered amount generally has to be included in business income. If a GST/HST bad debt adjustment was claimed, the appropriate tax portion of the recovery must also be reported.
Do Not Let Bad Receivables Hide Inside a Strong Revenue Number
A company can report excellent sales and still have a serious collection problem.
Revenue does not pay payroll.
Invoices do not pay suppliers.
Cash does.
If accounts receivable continue growing while actual collections slow down, the business can become profitable on paper but increasingly short of cash.
Bad debt deductions provide relief after an amount becomes genuinely uncollectible.
They are not a substitute for strong credit and collection procedures.
The better strategy is to identify trouble earlier.
Review your accounts receivable aging monthly.
Follow up consistently.
Document collection efforts.
Separate doubtful accounts from clearly bad debts.
Review GST/HST adjustments when debts are written off.
And make sure your financial statements do not continue showing receivables that management no longer expects to collect.
Aterna Advisors provides Canadian businesses with accounting, bookkeeping, tax compliance and advisory support. Their Tax Services include corporate tax and CRA compliance support, while stronger monthly financial controls can help identify receivable problems before they become major cash losses.
