- A registrant charges HST when it invoices a customer and generally has to remit that HST on the applicable return, whether or not the customer has actually paid yet.
- To claim a bad debt adjustment, a registrant generally needs to show: - [ ] The amount was consideration for a taxable supply, and the HST on it was already reported and remitted to CRA…
- CRA and the courts look at objective indicators that a debt is genuinely gone — the customer has become insolvent, has disappeared, has refused to pay after real collection efforts, or…
When a customer never pays an invoice, the seller doesn't just lose the underlying revenue — if HST was charged and remitted to CRA on that invoice, the seller has also paid tax on money it never actually collected. The Excise Tax Act provides a way to recover that HST once a debt is genuinely written off as uncollectible, but it comes with conditions, and it isn't automatic.
This article explains how the HST bad debt adjustment works, what CRA expects you to prove, and what happens if the customer surprises you by paying after all.
Why This Rule Exists
A registrant charges HST when it invoices a customer and generally has to remit that HST on the applicable return, whether or not the customer has actually paid yet. Without a bad debt mechanism, a business could end up remitting HST on revenue it never collects and never will. The bad debt adjustment lets a registrant recover that HST once the debt is genuinely uncollectible.
The Conditions You Need to Meet
To claim a bad debt adjustment, a registrant generally needs to show:
- [ ] The amount was consideration for a taxable supply, and the HST on it was already reported and remitted to CRA
- [ ] The debt has actually become uncollectible — not just late or disputed
- [ ] The amount has been written off as a bad debt in the business's own books and records
- [ ] The write-off is also being treated as a bad debt for income tax purposes
Simply deciding not to chase a customer anymore, without a genuine, documented write-off, isn't enough to support the adjustment.
"Uncollectible" Is a Real Test, Not a Feeling
CRA and the courts look at objective indicators that a debt is genuinely gone — the customer has become insolvent, has disappeared, has refused to pay after real collection efforts, or collection has become impractical relative to the amount owed. A customer who's simply slow to pay, or who disputes the invoice in good faith, doesn't automatically qualify as a bad debt yet.
How to Claim the Adjustment
- Confirm the original supply was taxable, and that HST was charged and remitted on it.
- Formally write off the debt in your books, consistent with how you treat bad debts for income tax purposes.
- Calculate the HST portion of the amount written off.
- Report the adjustment on the applicable HST return as a deduction from net tax.
- Keep the paper trail — the original invoice, collection efforts, the write-off entry, and the calculation.
What If the Customer Later Pays After All?
If a customer pays some or all of a debt you already wrote off and claimed a bad debt adjustment for, the Excise Tax Act requires you to account for it — you generally have to repay the HST portion of whatever you recover, on the return for the period the payment is received. Keep tracking written-off accounts even after you've claimed the adjustment, since a later partial recovery still needs to be reported.
Bad Debt for HST vs. Bad Debt for Income Tax
These are related but separate claims:
| HST bad debt adjustment | Income tax bad debt deduction | |
|---|---|---|
| What it recovers | The HST portion already remitted | The underlying revenue amount, for income tax purposes |
| Where it's claimed | On your HST return, as a deduction from net tax | On your income tax return |
| Core condition | Debt genuinely uncollectible and written off | Debt genuinely uncollectible and written off |
The two often move together, since both depend on the same underlying write-off, but they're claimed on different returns and aren't automatically linked — missing one doesn't necessarily mean you missed the other, but it's worth checking both when a debt goes bad.
Frequently asked questions
Do I need a court judgment against the customer before I can claim a bad debt adjustment?
No, a judgment isn't required, but the debt does need to be genuinely uncollectible and properly written off. Some businesses do pursue a judgment as part of their collection efforts, which can also help demonstrate that the debt is truly bad.
Is there a deadline for claiming an HST bad debt adjustment?
Yes, there's a limitation period, and like other HST timing rules it's specific and worth confirming directly rather than relying on a remembered figure — don't assume you can wait indefinitely after the write-off.
What if I only recover part of the invoice through a settlement?
You claim the adjustment based on the actual amount that remains uncollectible after any partial recovery, and if you recover more later, you account for that recovery in the period you receive it.
Can I claim a bad debt adjustment on an invoice I never actually reported HST on?
No. The adjustment only recovers HST you already reported and remitted. If the original supply's HST was never reported for some other reason, that's a different problem to sort out first.
This is a tax question
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