The client's bankruptcy filing became the answer to a missed deadline

The situation

Kajan had already tried two things before he called us. First, he had simply jotted a private note to himself writing off the unpaid invoice, hoping, without any particular plan, that it would sort itself out by the time year end came around. Second, when it did not sort itself out, he had gone back and tried to file an amended return claiming the HST bad debt adjustment on the invoice, only to be told by the tax authority's call centre that the window to make that adjustment on that particular invoice had already closed, with no further explanation of why or whether anything could be done about it. Neither attempt had worked, and Kajan came to us assuming the money, and the associated HST he had already remitted on an invoice he was never actually paid for, was simply gone for good.

Kajan worked as an early childhood educator during the week and ran a small side business doing weekend workshop facilitation for community organizations, registered for HST because his combined revenue from both activities crossed the threshold that requires registration. He had invoiced a client, Tom, for a series of workshops delivered roughly a year and a half earlier, a booking that had seemed straightforward at the time. Tom paid the first invoice promptly and then stopped responding to calls and emails about the remaining sessions. Kajan had already remitted the HST on the unpaid invoices to the tax authority, as required at the time each invoice was issued, on the reasonable assumption that Tom would eventually pay as agreed. When it became clear over the following months that Tom would not, Kajan was entitled to claim an adjustment recovering that HST as a bad debt, but that entitlement comes with a deadline tied to when the debt is formally written off as uncollectible in the taxpayer's own accounts, and Kajan wrongly believed he had already let that window close before he understood how the timing actually worked.

The amount involved was in the range of $15,000 to $50,000, a meaningful sum for a sole proprietor running a modest side business alongside a full-time job. Kajan's bookkeeper, Emily, had flagged the missed deadline when she was preparing his year-end filings and noticed the discrepancy between what had been remitted and what had actually been collected, and she was the one who suggested he get advice before simply accepting the call centre's answer and treating the amount as a total loss.

What made the file worth a second look was a detail Kajan had mentioned almost in passing, not realizing its significance: Tom's business had gone through a formal insolvency proceeding a few months after payments stopped, and that proceeding, as far as Kajan knew, was still open at the time he came to us.

What the documents showed

The bad debt adjustment rules generally allow a supplier to recover HST already remitted on an amount that has become a bad debt, but the claim must be made within a set window measured from the point the debt is actually written off as uncollectible in the supplier's own books of account, not from whenever the supplier privately gives up hope of being paid. Kajan had jotted an informal note to himself more than a year before he sought advice, marking the invoice as a loss he did not expect to collect, but that note had never been entered into his actual bookkeeping records, and a private assumption is not the same thing as a formal write-off for this purpose. Kajan mistakenly believed that early note was what had started the clock, and it was that mistaken belief, more than any real deadline, that made the file look hopeless by the time Emily flagged it.

What the documents from Tom's insolvency proceeding actually showed was that no formal write-off had ever been entered into Kajan's books at all, informal note or not, until the question was raised. The proceeding records showed that Tom's business had filed for insolvency protection several months after Kajan's private note, and the proof of claim process associated with that filing had only recently concluded with a formal determination that unsecured creditors, including Kajan, would recover nothing from the estate. That determination gave Kajan exactly what a proper write-off requires: a documented, independently verifiable basis for treating the debt as genuinely uncollectible, rather than an unrecorded private assumption that Tom would never pay.

This mattered a great deal, because it meant the adjustment window had not actually started running when Kajan first assumed it had. The clock only begins once a write-off is properly recorded, and Kajan's had not been, until now. Recording the write-off formally, anchored to the insolvency determination, meant Kajan was not scrambling to excuse a late claim against an old deadline. He was making a timely claim against a deadline that, properly understood, had not begun yet.

The documents also showed that Kajan had properly filed a proof of claim in the insolvency proceeding at the time it opened, something Emily had prompted him to do purely as routine practice without expecting it to matter for tax purposes later. That filing turned out to be the single piece of paperwork that made the later argument possible at all. Without a filed proof of claim clearly identifying Kajan as a participating creditor tied to specific invoice amounts, there would have been no clean documentary link between the insolvency outcome and Kajan's particular unpaid invoices.

What we did

1. Reviewed the full timeline against the actual rule rather than against Kajan's own assumption, checking whether his informal note had ever been entered into his real bookkeeping records and comparing that against the insolvency filing date and the later date the proof of claim process concluded. This confirmed no formal write-off had happened yet, which meant the deadline Kajan feared he had missed had never actually started running in the first place.
2. Obtained the insolvency proceeding's documentation directly, including the original notice of the filing and the final distribution or no-distribution determination affecting unsecured creditors like Kajan, to establish a clear, independently dated record of uncollectibility that did not depend on Kajan's own memory or on an unrecorded personal note that would not have held up if it were ever questioned.
3. Confirmed Kajan's proof of claim had been properly filed and recorded in the insolvency proceeding at the appropriate time, since an adjustment supported by the insolvency outcome depends entirely on being able to show Kajan was a formally recognized creditor in that specific process, tied to those specific invoice amounts, rather than simply someone who happened to know the debtor had gone under.
4. Prepared a bad debt adjustment claim keyed to a proper write-off entered in Kajan's books at the time of the insolvency determination, rather than resting on the earlier informal note Kajan had mistakenly assumed already governed the timing, since only a write-off actually recorded in the books starts the clock the rule cares about, and building the claim on that correct foundation was what made it defensible.
5. Filed the adjustment with the supporting insolvency documentation attached from the outset, anticipating that a claim filed considerably later than the original invoice date would naturally attract closer scrutiny, and preempting likely questions by including the proceeding records up front. A claim filed late without an obvious explanation invites exactly the kind of scrutiny that slows an otherwise straightforward adjustment down.
6. Advised Kajan on write-off timing for future unpaid invoices in his ongoing side business, explaining plainly that a properly recorded bookkeeping write-off is what starts the clock, not a private assumption jotted down somewhere else, and that formal write-offs should be timed deliberately with the tax consequences in mind, not made casually and informally the moment a client goes quiet.
7. Set up a simple flag with Emily for future unpaid invoices, so that any invoice going unpaid past a set point would trigger a conversation about timing the formal write-off correctly, before Kajan made another informal notation on his own that could later be mistaken for the real trigger date and cause the exact same confusion to happen a second time.
8. Reviewed the rest of Kajan's outstanding receivables for similar exposure, since the same habit of noting off a debt informally, without ever recording a proper write-off, could easily have been repeated on other unpaid invoices sitting quietly in his books. Catching that pattern early meant the same confusion would not surface again on a different client's account down the road.

The outcome

The adjustment was accepted on the basis of the insolvency determination date, and Kajan recovered the full amount of HST he had remitted on the unpaid invoices, without the file turning into a dispute or triggering a reassessment. Because the claim was filed properly from the start and supported with the insolvency documentation attached rather than promised later, it went through the system as a routine adjustment rather than becoming a contested, drawn-out file requiring further correspondence.

This was not a case where Kajan received something he was not genuinely entitled to. The HST had legitimately been remitted on invoices he was never paid for, and the adjustment simply corrected that imbalance in his favour, as the rules always contemplated it would if claimed properly. What was avoided was the far worse outcome Kajan had already quietly resigned himself to before Emily pushed him to get a second opinion: permanently losing the recovery altogether, because his first, self-directed attempt had used the wrong trigger date and, by the time the problem was flagged, appeared on its face to have missed the deadline entirely and irreversibly.

Kajan later said the insolvency filing had felt, at the time it happened, like just another piece of bad news about Tom's failing business, entirely unrelated to his own tax problem and not something he thought to mention until asked directly about Tom's situation. It turned out to be the exact detail that fixed the file. The lesson he took away, and the one Emily now builds into her own conversations with other small clients, is that a debt you personally write off and a debt that is formally, legally uncollectible are not the same thing under the rules, and the difference between those two dates can matter far more than it looks like it should at the time.

What you can learn from this