Can you claim a reduction in your net tax for GST/HST/QST if you write off a contract debt where there was no payment made for a year, the debtor’s directors had declared it insolvent, and it had made an arrangement with suppliers (including you) to avoid bankruptcy? Sure, under ETA s. 231.
If your written evidence shows that you only wrote off part of the debt, can you claim a reduction in net tax for the full amount of the GST/HST on the debt if your other evidence shows you intended to write off the full amount? Yes. (Paras. 37-40.)
Instead of writing off a bad debt, could you give your customer a credit note, reducing the amount owing to nil, and claim the corresponding reduction in your net tax? Yes, under ETA s. 232.
And if you took 23 months to issue the credit note, could you satisfy the condition that you issued the note “within a reasonable time”? Yes. (Paras. 53-57.)
This decision repeats a helpful list of criteria for deciding if a debt has become bad. Justice Tardif relied on these criteria found in the FCA decision Rich v. Canada, 2003 FCA 38 (Rothstein, now on SCC) at para 13:
“1. the history and age of the debt;
2. the financial position of the debtor, its revenues and expenses, whether it is earning income or incurring losses, its cash flow and its assets, liabilities and liquidity;
3. changes in total sales as compared with prior years;
4. the debtor’s cash, accounts receivable and other current assets at the relevant time and as compared with prior years;
5. the debtor’s accounts payable and other current liabilities at the relevant time and as compared with prior years;
6. the general business conditions in the country, the community of the debtor, and in the debtor’s line of business; and
7. the past experience of the taxpayer with writing off bad debts.
This list is not exhaustive and, in different circumstances, one factor or another may be more important.”
A creditor need not “take proactive measures if he believes sincerely and reasonably that repayment is impossible … [based] on the factors enumerated earlier [i.e., from the Rich case].” (Tardif in Vivaconcept at para. 19.)
See Vivaconcept International Inc. c. La Reine, (2013 CCI Tardif)