Writing Off an Unpaid Invoice: GST/HST Bad Debt Relief and the Income Tax Deduction

You already remitted the GST/HST on that invoice, because net tax is built from amounts that became collectible rather than amounts collected. Section 231 of the Excise Tax Act gives it back on an A x B/C formula - but only if you reported and remitted correctly in the first place, and only if you actually write the debt off in your books.

The 60-second version

You already remitted the GST/HST on that unpaid invoice. Net tax is built from amounts that became collectible, not amounts collected [4]. So a write-off is not just a revenue problem - you are out of pocket for the tax too.
Section 231 of the Excise Tax Act gives it back as a deduction from net tax, using the formula A x B/C: tax on the supply, times the unpaid amount written off, over the total consideration plus tax [1].
Three gates: the supply must be taxable (not zero-rated), the customer must be at arm's length, and you must actually write the debt off in your books of account [1]. A mental decision to stop chasing is not a write-off.
Subsection 231(1.1) is the trap. You only get relief if the tax was included in the net tax you reported for the period it became collectible, and all net tax remittable on that return was actually remitted [1]. Relief is only available to businesses that did the timing correctly in the first place.
Four-year limit. The deduction must be claimed in a return filed within four years after the day the return was due for the period in which you wrote the debt off [1].
If the customer later pays, you pay it back. Subsection 231(3) requires you to add back A x B/C on the recovered amount [1].
Income tax is a separate claim under a separate Act. Paragraph 20(1)(p) of the Income Tax Act lets you deduct debts established to have become bad in the year - but only if they were included in computing your income for that year or a preceding year [10].

Why you are already out of pocket for the tax

This article only makes sense once you accept an uncomfortable fact: on an unpaid invoice, you have almost certainly already given the government the GST/HST out of your own working capital.

The chain runs like this. Subsection 168(1) makes tax payable on the earlier of the day consideration is paid and the day it becomes due [6]. Subsection 152(1) deems consideration to become due on the earliest of the invoice issue date, the invoice date, the day you would have invoiced but for undue delay, and any contractual payment date [7]. Section 225 then computes net tax from amounts that became collectible in the period [4], and section 228 makes you remit it [5].

Nothing in that chain waits for the customer. We walked through the full timing analysis in when does GST/HST become payable. The practical result: invoice in March, remit in April, still unpaid in December. You financed the tax.

Section 231 is the provision that unwinds it. CRA guide RC4022 is the general registrant reference for the return in which you claim it [16].

What section 231 actually says

Subsection 231(1) sets four preconditions and then gives you a formula:

If a supplier has made a taxable supply (other than a zero-rated supply) for consideration to a recipient with whom the supplier was dealing at arm's length, it is established that all or a part of the total of the consideration and tax payable in respect of the supply has become a bad debt and the supplier at any time writes off the bad debt in the supplier's books of account, the reporting entity for the supply may, in determining the reporting entity's net tax for the reporting period that includes that time or for a subsequent reporting period, deduct the amount determined by the formula A x B/C [1].

Unpack the four:

Taxable supply, not zero-rated. Obvious once you see it - there is no tax to recover on a zero-rated supply, because the rate was 0% [1].
Arm's length. A receivable from a company you control does not qualify. This is the provision most likely to be tested if you write off an intercompany balance.
Established to have become a bad debt. Not "slow", not "disputed". See below on what establishes it.
Written off in the books of account. An accounting entry, at a point in time, that the four-year clock then runs from [1].

One definitional wrinkle. The deduction belongs to the "reporting entity", which subsection 231(5) defines as the supplier - unless an election has been made under subsection 177(1.1), in which case it is the person required under that subsection to include the tax collectible in their net tax [1][9]. For an ordinary business invoicing its own customers, that is you.

The formula, with numbers

Subsection 231(1) defines the variables [1]:

A is the tax in respect of the supply.
B is the total of the consideration, tax and applicable provincial tax remaining unpaid in respect of the supply that was written off at that time as a bad debt.
C is the total of the consideration, tax and applicable provincial tax in respect of the supply.

So the deduction is the tax, pro-rated by how much of the gross invoice you never collected. A partial payment gives you partial relief.

Worked example. A New Brunswick business invoices an arm's length customer $10,000 plus 15% HST, for a total of $11,500. The customer pays $3,500 and then stops. After collection efforts fail, $8,000 is written off in the books.

A = $1,500 (the HST on the supply)
B = $8,000 (the gross amount written off)
C = $11,500 (the gross invoice)

Deduction from net tax = 1,500 x 8,000 / 11,500 = $1,043.48.

Note that B and C are gross figures - consideration plus tax plus applicable provincial tax - not the pre-tax amount. Using $8,000 over $10,000 instead would overstate the claim. "Applicable provincial tax" is defined in subsection 231(5) as an amount reasonably attributable to a provincial tax, duty or fee that is prescribed for the purposes of section 154 [1], which is what brings QST into the arithmetic where it applies - see Quebec QST invoice requirements.

Subsection 231(1.1): the gate most businesses fail

This is the part worth reading twice, because it disqualifies exactly the businesses most likely to have bad debts.

A reporting entity is not entitled to deduct an amount under subsection (1) in respect of a supply unless (a) the tax collectible in respect of the supply is included in determining the amount of net tax reported in the reporting entity's return ... for the reporting period in which the tax became collectible; and (b) all net tax remittable, if any, as reported in that return is remitted [1].

Two conditions, both retrospective:

You reported the tax in the right period. If you were reporting GST on a cash basis without an approved accounting method, or if you simply never picked up the invoice in the period the tax became collectible, the tax was not "included in determining the amount of net tax reported" for that period. No relief.
You actually remitted what that return said. If the return was filed but the payment was not made, paragraph (b) is not satisfied.

The policy is coherent: section 231 refunds tax you gave the government, so you have to have given it to them. But the practical effect is that bad-debt relief rewards clean compliance and is unavailable to the business that was already behind. If your reporting has been loose, fix the timing first.

The four-year clock

Subsection 231(4) sets the limitation period, and it does not run from the invoice date or from the date the customer stopped paying:

A person may not claim a deduction under this section in respect of a bad debt relating to a supply unless the deduction is claimed in a return ... filed within four years after the day on or before which a return of the person was required to be filed for the reporting period in which the supplier has written off the bad debt in its books of account [1].

Read the anchor carefully. It is four years after the due date of the return for the period in which you wrote the debt off. Which means the write-off date is a date you control, and it starts the clock. Writing off a batch of ancient receivables today gives you a fresh four years to claim - assuming the 231(1.1) conditions were met back when the tax became collectible.

You do not have to claim it in the period of the write-off, either. Subsection 231(1) permits the deduction "for the reporting period that includes that time or for a subsequent reporting period" [1], so a claim missed in Q2 can be taken in Q3, subject to the four-year outer limit.

If they pay later, you give it back

Subsection 231(3) is symmetrical and mandatory - "the person shall" [1]:

If all or part of a bad debt in respect of which a person has made a deduction under this section is recovered at any time, the person shall, in determining the person's net tax for the reporting period that includes that time, add the amount determined by the formula A x B/C, where A is the amount of the bad debt recovered at that time; B is the tax in respect of the supply to which the bad debt relates; and C is the total of the consideration, tax and applicable provincial tax in respect of the supply [1].

Note that the variables are not the same as in subsection 231(1). Here A is the recovery, B is the tax, C is the gross invoice.

Continuing the example: eighteen months later, the customer's trustee distributes $2,000 against the written-off debt. The add-back is 2,000 x 1,500 / 11,500 = $260.87, in the reporting period in which the recovery happened.

The operational point: once you claim bad-debt relief, that invoice needs a permanent flag in your records. A recovery two years later still triggers an add-back, and there is no time limit on subsection 231(3).

Section 231 is not section 232, and the difference matters

These two get conflated constantly, and picking the wrong one produces the wrong number, the wrong deadline and the wrong paperwork.

Section 232 is for adjustments - you charged too much tax, or the consideration itself was later reduced by a discount, credit or renegotiated price [2]. It requires a credit note containing prescribed information, and it has its own limits: two years for excess tax charged, four years after the end of the reporting period in which consideration was reduced. CRA GST/HST Memorandum 12-2 covers it in detail [3].
Section 231 is for bad debts - the price was right, the tax was right, the customer simply did not pay [1]. No credit note is required, because nothing about the supply changed. The mechanism is a deduction in your net tax calculation, not a document you issue.

The test is simple: has the amount owing changed, or has your prospect of collecting it changed? A settlement where you agree to accept $6,000 on a $11,500 invoice reduces the consideration - that is section 232 territory, with a credit note. Giving up on collecting the full $11,500 is section 231.

Getting this wrong on a settlement is common. If you issue a credit note under section 232 and claim bad-debt relief under section 231 on the same amount, you have claimed the tax twice.

The income tax side is a separate claim under a separate Act

Bad-debt relief for GST/HST does not get you the income tax deduction, and vice versa. They live in different statutes with different conditions, and you have to make both claims.

Start with why the receivable was in your income at all. Section 9 of the Income Tax Act computes a taxpayer's income from a business as the profit from that business for the year [12], and paragraph 12(1)(b) includes in income any amount receivable in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount is not due until a subsequent year [11]. It even carries the same anti-delay logic as the GST rules: an amount is deemed receivable for services on the earlier of the day the account was rendered and the day it would have been rendered had there been no undue delay [11].

The deduction is paragraph 20(1)(p)(i), which permits:

all debts owing to the taxpayer that are established by the taxpayer to have become bad debts in the year and that have been included in computing the taxpayer's income for the year or a preceding taxation year [10].

Two conditions, and the second is the one people miss. The debt must have been included in computing income. If you were on a cash basis, or the amount was never booked as revenue, there is nothing to deduct - you cannot deduct income you never reported. The CRA lists bad debts among deductible operating expenses in its business expenses guidance [15] and in guide T4002 [14], but that inclusion condition is statutory.

Note also that paragraph 20(1)(p) is about debts on income account - trade receivables. Section 50 of the Income Tax Act deals separately with debts and shares on capital account, deeming a disposition where a debt owing to a taxpayer is established to have become bad in the year [13]. That is a capital loss regime, not a business expense, and it is not the route for an unpaid customer invoice.

When is a debt "established to have become bad"?

Both statutes use the language of establishment, and neither defines a bright line. What they do make clear is that the determination has to be defensible, at a point in time, on evidence.

What a file should be able to show:

The invoice was valid and undisputed. A disputed invoice is not a bad debt, it is a dispute - and if you settle it for less, that is a section 232 reduction in consideration, not a write-off.
You made genuine collection efforts. Statements, reminders, a demand letter, referral to collections, or a claim filed in small claims court. Dated, and in the file.
Something changed the prospect of recovery. The customer ceased operations, filed for bankruptcy or a proposal, went unreachable, or the amount is too small to pursue economically relative to the cost of recovery.
A dated write-off entry in the books. Section 231 requires it expressly [1], and it sets the four-year clock.

Charging interest on the account before it goes bad is worth doing, and is worth doing correctly - the Interest Act trap that voids most Canadian late-payment clauses is covered in charging interest on overdue invoices in Canada. A documented interest charge is also evidence that you treated the account as a live receivable rather than a gift.

What you have to keep

A bad-debt claim is a deduction taken on your own say-so, which makes it exactly the kind of entry an auditor asks about. Section 286 of the Excise Tax Act requires records sufficient to determine your liabilities and obligations, kept in Canada in English or French unless the Minister authorises otherwise, and retained until six years after the end of the year to which they relate [8].

For each written-off invoice, that means keeping the original invoice showing the tax charged (see what a compliant GST/HST invoice must show), the return in which the tax was originally reported and evidence it was remitted - because subsection 231(1.1) turns on both [1] - the collection correspondence, the dated write-off entry, and the A x B/C calculation itself. Retention mechanics are in how long to keep invoices in Canada.

If the invoice was denominated in a foreign currency, the tax figure was fixed at your chosen conversion date, and that is the A in the formula - not a re-conversion at write-off. See invoicing in a foreign currency.

The write-off checklist

Confirm the supply was taxable and not zero-rated, and the customer was at arm's length [1]. If either fails, section 231 is not available.
Confirm you reported the tax in the period it became collectible and remitted that return [1]. Check this before you calculate anything.
Document the collection effort and whatever event established the debt as bad.
Make a dated write-off entry in the books. This is a statutory requirement, not bookkeeping hygiene [1].
Calculate A x B/C on gross figures - consideration plus tax plus applicable provincial tax, not the pre-tax amount [1].
Claim the deduction in the net tax for that period or a later one, within four years of that period's return due date [1].
Claim the income tax deduction separately under paragraph 20(1)(p), and confirm the amount was included in income first [10][11].
Flag the invoice permanently for recovery. Any later payment triggers a mandatory add-back under subsection 231(3), with no time limit [1].
Do not also issue a credit note unless the consideration was genuinely reduced - that is section 232, and doing both claims the tax twice [2][3].
Fix the upstream problem. Most bad debts are visible as slow payment months earlier.

Frequently asked questions

Can I get back the GST/HST I remitted on an invoice the customer never paid?

Yes, through section 231 of the Excise Tax Act. Where an arm's length taxable supply that is not zero-rated produces a debt you establish to be bad and write off in your books of account, you may deduct an amount from your net tax calculated as A x B/C - where A is the tax on the supply, B is the gross amount written off, and C is the gross total of consideration, tax and applicable provincial tax. It is a deduction in your return, not a refund application, and it is not automatic: subsection 231(1.1) requires that the tax was included in the net tax you reported for the period it became collectible and that the net tax on that return was remitted.

How is GST/HST bad debt relief calculated?

A x B/C, on gross figures. A is the tax in respect of the supply. B is the total of consideration, tax and applicable provincial tax remaining unpaid that was written off. C is the total of consideration, tax and applicable provincial tax on the supply. Example: a $10,000 invoice plus 15% HST is $11,500 gross; the customer pays $3,500 and $8,000 is written off. The deduction is 1,500 x 8,000 / 11,500 = $1,043.48. Using the pre-tax $10,000 as C instead of $11,500 overstates the claim, which is the most common arithmetic error in this area.

What is the deadline for claiming GST/HST bad debt relief?

Four years, measured from a date you partly control. Subsection 231(4) requires the deduction to be claimed in a return filed within four years after the day on or before which a return was required to be filed for the reporting period in which you wrote the bad debt off in your books of account. The clock therefore runs from the write-off, not from the invoice or from when the customer stopped paying. Subsection 231(1) also lets you take the deduction in the period of the write-off or in a subsequent period, so a missed claim can be picked up later within that four-year window.

What if the customer pays after I have written the invoice off?

You add the tax back. Subsection 231(3) says that if all or part of a bad debt on which you claimed a deduction is recovered, you shall, in determining net tax for the reporting period that includes that time, add A x B/C - where A is the amount recovered, B is the tax on the supply, and C is the gross total of consideration, tax and applicable provincial tax. Note the variables differ from those in subsection 231(1). There is no time limit on this add-back, so a written-off invoice needs a permanent flag in your records.

Do I issue a credit note when I write off a bad debt?

No. A credit note belongs to section 232, which covers tax charged in excess and reductions in the consideration itself - a discount, a partial credit, a renegotiated price - and requires prescribed information on the note. A bad debt is different: the price was right and the tax was right, the customer simply did not pay, so nothing about the supply changed. Section 231 works as a deduction in your net tax calculation with no document issued to the customer. Doing both on the same amount claims the tax twice.

Can I claim bad debt relief on an invoice to a company I control?

No. Subsection 231(1) is only available where the supplier was dealing with the recipient at arm's length. Intercompany and related-party receivables are outside the provision entirely, however genuinely uncollectible they are. The same subsection also excludes zero-rated supplies, which is arithmetically obvious - there was no tax at 0% to recover.

Is the income tax deduction for a bad debt automatic once I claim the GST relief?

No, they are separate claims under separate Acts and you have to make both. The income tax deduction is paragraph 20(1)(p)(i) of the Income Tax Act, which allows debts established to have become bad in the year that have been included in computing income for that year or a preceding year. That inclusion condition is the one businesses miss: if you were reporting on a cash basis, or the amount was never booked as revenue, there is nothing to deduct. Paragraph 12(1)(b) is what puts trade receivables into income in the first place, even where the amount is not due until a later year.

What evidence do I need that a debt has become bad?

Enough to defend the determination at a point in time. Both statutes use the language of a debt established to have become bad, without a bright-line test, so a file should show that the invoice was valid and undisputed, that you made genuine and dated collection efforts, that something changed the prospect of recovery - cessation of business, bankruptcy or proposal, an unreachable debtor, or a balance too small to pursue economically - and that you made a dated write-off entry in the books of account. Section 286 of the Excise Tax Act then requires those records to be kept in Canada, in English or French, for six years after the end of the year to which they relate.

Sources cited in this article

Excise Tax Act, s. 231 - Bad debt deduction from net tax (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-231.html
Excise Tax Act, s. 232 - Refund, adjustment or credit of tax (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-232.html
CRA - GST/HST Memorandum 12-2, Refund, Adjustment or Credit of the GST/HST under Section 232
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/12-2/refund-adjustment-credit-gst-hst-under-section-232-excise-tax-act.html
Excise Tax Act, s. 225 - Net tax (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-225.html
Excise Tax Act, s. 228 - Calculation and remittance of net tax (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-228.html
Excise Tax Act, s. 168 - When tax payable (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-168.html
Excise Tax Act, s. 152 - When consideration due (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-152.html
Excise Tax Act, s. 286 - Keeping books and records (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-286.html
Excise Tax Act, s. 177 - Supply on behalf of person not required to collect tax (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/E-15/section-177.html
Income Tax Act, s. 20(1)(p) - Deduction for bad debts (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-20.html
Income Tax Act, s. 12(1)(b) - Amounts receivable (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-12.html
Income Tax Act, s. 9 - Income from business or property (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-9.html
Income Tax Act, s. 50 - Debts established to be bad debts (Justice Laws)
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-50.html
CRA - Guide T4002, Self-employed Business, Professional, Commission, Farming and Fishing Income
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002.html
CRA - Business expenses (operating expenses, including bad debts)
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html
CRA - RC4022 General Information for GST/HST Registrants
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4022.html

All sources verified August 27, 2026. Spotted a link that has moved? Email [email protected] and we will correct it.