An estimate made before the loss is certain
Accounts receivable is recorded at the full invoiced amount, but not every customer pays. The allowance adjusts the balance sheet to the amount you realistically expect to collect, and the related expense lands in the same period as the sales that created the risk. BDC describes the same idea as a provision for doubtful debts: a way of recording a potential future expense in advance, so that a loss does not arrive as a surprise.
The allowance is usually built from experience. Look at how much of your invoicing has historically gone uncollected, and at the age of today’s unpaid balances. Older invoices and customers in dispute generally carry more risk than invoices still within terms.
An illustrative example
Suppose a business has $50,000 in receivables at year end. After reviewing its aged report, it judges that about $2,000 will probably not be collected and sets the allowance at $2,000. The balance sheet shows net receivables of $48,000, and a $2,000 expense reduces profit for the year. The figures are round and for illustration only.
Next year, one customer owing $1,200 is confirmed as uncollectable. The business writes off that invoice against the allowance, so profit is not hit a second time. If the business later collects more than expected, the unused portion of the allowance is reduced, which increases income.
Accounting estimate versus tax deduction
The allowance in your books and the amount you can deduct for tax are not the same thing. For a sole proprietor, the CRA says you can generally deduct a bad debt when the receivable was already included in income and you determined in the year that it is a bad debt. For corporations, the T2 guide also lists a reserve for doubtful debts among the reserves tracked on Schedule 13. Any reserve claimed one year is added back to income the next year, and a new reserve is established.
This means your accounting allowance may differ from your tax reserve. Your accountant can reconcile the two so the return reflects the rules rather than the estimate.
What to discuss with your accountant
Bring an aged receivables report and a list of customers you consider at risk. Ask how the allowance should be calculated for your business, whether your lender or other users of your statements expect one, and how the amount is treated for income tax. Ask too how to handle GST/HST already reported on an invoice that goes unpaid.
Do not delete old invoices to tidy the report. Keep a record of collection attempts and the reason a balance was written off, since that supports the entry if anyone asks later.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Accounts receivableBDC
- Self-employed Business, Professional, Commission, Farming, and Fishing Income (T4002): Chapter 3 – ExpensesCanada Revenue Agency
- T4012, T2 Corporation – Income Tax Guide: Chapter 3, Page 3 of the T2 return (Schedule 4 losses)Canada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.