Bad debts, unpaid invoices, and GST/HST in Canada

Late does not automatically mean bad debt. An invoice can be overdue, disputed, under a payment plan, sent to collection, or genuinely uncollectible. Keep those states distinct. The collection trail protects the commercial claim; the write-off record supports any accounting and GST/HST treatment.

This guide does not decide when a debt is legally unrecoverable or provide a tax calculation. It shows the invoice evidence to retain and the point at which professional review becomes useful.

Move through defined collection states

Federal bad-debt relief conditions

Section 231 of the Excise Tax Act provides a net-tax deduction in specified circumstances for an arm's-length taxable supply, other than a zero-rated supply, when all or part of the consideration and tax has become a bad debt and is written off in the supplier's books. It also sets a four-year claim limit tied to the return for the write-off period.

That does not mean every late balance qualifies. Preserve proof that the invoice and tax were reported, the debt was actually written off, and the statutory conditions fit. If money is later recovered, the Act contains a corresponding recovery rule. Have your accountant calculate and report the amount.

Documents for the write-off file

• Original invoice and any credit or debit notes.
• Contract, estimate acceptance, change orders, and proof of delivery.
• Customer correspondence and a dated reminder timeline.
• Dispute notes and resolution attempts.
• Partial payments, processor fees, and remaining principal and tax.
• Collection or insolvency information available to the business.
• The authorized journal entry and write-off date.

Do not erase or fake a credit

A bad debt is not the same as a price reduction. Do not issue a credit note merely to make an unpaid invoice disappear if the customer still owes the original price. A genuine negotiated reduction or cancelled supply can require a credit-note workflow; an uncollectible receivable uses the bad-debt analysis.

For a disagreement about scope or quality, start with How to Handle a Client Invoice Dispute. For an agreed reduction, use Credit Notes and Invoice Corrections in Canada.

Prevent the next loss

• Verify the legal customer and billing contact before starting.
• Use a written estimate, deposit, milestones, and change approvals for larger jobs.
• Send the invoice promptly with a due date and easy payment instructions.
• Follow up consistently before the balance becomes old.
• Limit new work while a material prior invoice remains overdue.
• Record recoveries against the written-off invoice instead of creating new sales.

Is an overdue invoice already a bad debt?

R: No. It may still be collectible, disputed, or under a payment plan. A bad-debt conclusion needs facts and a write-off in the books.

Should I issue a credit note for non-payment?

R: Not solely because the client has not paid. A credit changes the amount charged; bad-debt treatment addresses an amount that remains owed but becomes uncollectible.

Can GST/HST relief be claimed years later?

R: Section 231 includes a four-year filing limit tied to the reporting period in which the debt was written off. Confirm the exact deadline with an accountant.

What happens if the customer later pays?

R: Record the recovery against the original debt and apply the Act's recovery treatment in the appropriate reporting period.