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What Can You Do About Bad Debts for Tax Purposes?

What can you do about bad debts

Many businesses big or small tend to extend credit to their customers.  They may allow anywhere between 30 to 90 days to pay their invoices. At times this doesn’t work well because the odd customer ends up not paying. So what type of tax situation does that create for the business owner?

The CRA has made provisions for this type of situation but just as with any other claim you make with your taxes you must prove to the tax department that it is valid. In order for the debt to be bad it has to be such that you have made the proper efforts to collect the debt to no avail.   This may be by way of sending out additional invoices, reminders and other forms of contact.   If you have taken valid steps to collect the debt ,and by the end of your taxation year it still remains unpaid with no signs that payment is forthcoming then you will be able to claim it as a bad debt.

Now, if you have been following your standard accounting practices the amount of money owing on this invoice would probably have been entered into your income records, likely in the accounts receivable.   You cannot claim the bad debt if it has not been included in your income.   Also, what we are talking about here is invoices and not other types of loans or debts, as there may be separate CRA criteria pertaining to these.   It is important to keep a paper trail of all of your attempts that you made to collect the outstanding amount.

Sometimes a Company has several outstanding or what they feel are uncollectible invoices and they will use a collection company or debt discount Company to collect the money.   In this case you may not be able to write the debt off, until the collection company ascertains that the debt cannot be collected.

Hopefully you are using an experienced bookkeeper and a reputable accountant for your business and they will be able to advise you concerning your bad debt issues.   Depending on the size of you company and often the bad debt issue arises they may suggest that you claim a reserve for doubtful accounts.   This may be something that you want to talk to your accountant about in more detail.

Many businesses really don’t like having to deal with the Canada tax laws because they can be confusing and complex.   This is just another reason why it is so important to utilize the services of an accounting expert.   In most cases if you have good record keeping practices, an expert to help you with your tax dealings and a good paper trail, meeting your tax filings without incidence is not difficult.

 

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Sam Seidman, CPA, CA, LPA
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Toronto, Ontario
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Email: sam@torontoaccountant.ca

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