An invoice that never got paid: can you write it off?

Income you counted, money you never got

You did the work, sent the invoice, and it went into your income. Then the client stopped answering, closed the doors, or went bankrupt. The sale is in your books. The money is never coming.

Left alone, that invoice costs you twice. You pay income tax on revenue you never received, and you have already remitted GST/HST that your client never paid you.

The law has a way out of both.

The income tax side: the bad debt deduction

Subparagraph 20(1)(p)(i) of the Income Tax Act allows a deduction for debts owing to the taxpayer that are established by the taxpayer to have become bad debts in the year and that have been included in computing the taxpayer's income for the year or a preceding taxation year.

Two conditions carry the weight.

First, the invoice must have gone through your income. You cannot deduct a loss on an amount that was never taxed. That is why the rule covers an issued and recorded invoice, not the lost profit on a contract that fell through.

Second, the debt must genuinely be uncollectible, and it is up to you to establish it. A slow client is not a lost client. What establishes the loss are facts: follow-ups that went unanswered, a business that closed, a bankruptcy, collection efforts abandoned for a serious reason. Keep that trail with the invoice.

The sales tax side: the GST/HST can come back

When you billed the sale, you reported the GST/HST and remitted it, even though your client never paid you.

Subsection 231(1) of the Excise Tax Act then lets you deduct, in computing your net tax, the tax portion of the amount written off. Several conditions apply:

• the supply was taxable and not zero-rated;
• you were dealing at arm's length with the client;
• you wrote the debt off in your books of account;
• the tax was included in the return for the period in which it became collectible, and the net tax on that return was remitted.

The word that matters is "wrote off". Recovering the tax follows the bookkeeping entry: as long as the invoice sits in accounts receivable as if it will be paid, the tax does not come back.

Timing matters too. The deduction must be claimed within four years after the filing deadline of the return for the period in which the debt was written off.

And if the client pays after all?

It happens. The amount you recover becomes income in the year you receive it, and the tax portion of that payment is added back to your net tax for that period. The write-off was never a gift, only a correction for a sale that did not turn into money.

What we do before year-end

We go through your accounts receivable before closing the year. Old invoices get sorted: late but still collectible, or truly gone. For the ones that are gone, we document why, write them off in the books, then claim the income tax deduction and recover the GST/HST in the right periods.

A dead invoice sitting in receivables inflates your income, your tax and your remittances. Catching it in time costs one conversation. Letting it sit costs you every year.