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Accounting encyclopedia · Bookkeeping

Bad debt

A bad debt is an amount a customer owes your business that you have concluded you will not be able to collect. It is written off from accounts receivable as an expense. The CRA says you can generally deduct a bad debt if you determined in the year that the account receivable is bad and you had already included it in income.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

An unpaid invoice becomes a write-off

A receivable already counted as income is written off once you decide it cannot be collected, with the GST/HST adjusted if it applied.

Visual labels: Invoice unpaid; Collection steps; Written off as bad debt.

When a receivable becomes a bad debt

An overdue invoice is not automatically a bad debt. Customers dispute invoices, pay late and sometimes pay after a long delay. A bad debt is a balance you have actually concluded is uncollectible, for example after the customer has closed, cannot be found or has not responded to repeated collection steps. An aged receivables report shows which balances are candidates.

Because the write-off is a decision, record why you reached it and when. Notes on calls, emails and any collection steps are worth keeping with the invoice.

An illustrative example

Suppose a business invoices a customer $3,000 in March, records it as income, and by December concludes the customer will not pay. Writing off the balance removes the receivable and records a $3,000 bad debt expense, which reduces profit for the year. If the customer later pays, the recovery is recorded as income again. The figures are illustrative only and exclude sales tax.

The income tax rule is tied to the income already being reported. A business that never recorded the sale as income has nothing to deduct when the customer fails to pay.

GST/HST on a bad debt

If you already reported and remitted GST/HST on a credit sale and part of the amount later becomes a bad debt, you may be able to recover the tax you overpaid as an adjustment on your return, provided you deal with the customer at arm’s length. The CRA says the adjustment must be made on a return filed within four years of the due date of the return for the period in which you wrote the debt off. If you later collect on it, the GST/HST part of the recovery has to be added back.

If you use the quick method of accounting, the CRA says you generally cannot adjust net tax for bad debts, except for supplies not eligible for the quick method calculation.

What to discuss with your accountant

Bring the aged receivables report, the invoices in question, and your notes on collection efforts. Ask which balances should be written off now, how the tax adjustment is reported, and whether an estimate for doubtful balances belongs in your books as well. That estimate is an accounting practice with its own treatment, covered separately under the allowance for doubtful accounts.

Avoid deleting an old invoice to tidy the report. A proper write-off keeps the audit trail intact.

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.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.