When can I deduct a bad debt from a former client?
Under Income Tax Act s. 20(1)(p), you can deduct a bad debt in the tax year you establish that it has become uncollectible, provided the debt was previously included in your income (accrual-basis accounts receivable) or is a bad-debt from money lent in the ordinary course of a money-lending business. HST previously remitted on the bad debt is separately recoverable under ETA s. 231.
Test for uncollectibility. CRA looks for evidence of reasonable collection effort: written demand letters, collection agency referral, litigation or judgment, bankruptcy or CCAA filing by the debtor, or the debtor’s dissolution. Simple non-payment for a few months is not enough; you must demonstrate that recovery is unreasonable to pursue.
Example: an Ontario contractor invoiced a client $30,000 plus $3,900 HST in March 2026. Client stopped responding; two demand letters and a collection-agency referral produced no recovery. In November 2026 the contractor writes off the $30,000 as a bad debt under ITA s. 20(1)(p) (accrual-basis – the amount was in income when invoiced). The contractor also files a s. 231(1) bad-debt adjustment on the next GST34, reducing net tax remittable by the $3,900 HST originally remitted.
If partial recovery occurs later, ITA s. 12(1)(i) requires it to be included in income in the year received. HST recovery follows the same recapture logic under ETA s. 231(3).
Cash-basis taxpayers (rare) cannot deduct bad debts because the receivable was never in income. Instead they simply do not have the income to include.
Note: Related-party or shareholder loans have specific rules. A bad debt claim on money loaned to your own corporation may be denied under ITA s. 40(2)(g)(ii) unless the ABIL (Allowable Business Investment Loss) tests are met.
Source: canada.ca â Bad debts
— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA
Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.