As a small business owner, you probably find yourself having to extend credit to some of your customers to get sales. Eventually, some of these customers default, and you end up never collecting the balance owed to you. Being able to recover at least part of the goods and services tax/harmonized sales tax takes a bit of the sting out of the loss.
GST/HST Payable Even If Not Collected
- When a sale for goods or services is made, the GST/HST a company must charge is remitted to the Canada Revenue Agency.
- Even if that sale is on credit and the GST/HST has not yet been collected, the company still has to pay the tax to the CRA.
Conditions for the GST/HST Write-Off Deduction
- An adjustment to reduce a GST/HST remittance is allowed by the CRA only after the bad debt has been written off.
- In addition, the sale must have been made at arm’s length (not a related party).
GST/HST Only Sales Example
The CRA has a policy that the GST/HST must be at least in part uncollectible to claim the deduction.
An example is when a company makes a special offer for customers to pay only the tax at the time of the sale. If the customer defaults on the balance, the company cannot claim the GST/HST bad debt deduction – only the portion of the uncollected sales debt.
Example of Partial Bad Debt HST Recovery
In many cases, part of the debt is collected and part of it gets written off.
In the following example of HST recovery, an account receivable balance is collected in part and the remaining balance is written off.
Company A sells $2,260 of items on account to Company B, which includes $260 of HST. Company A manages to collect $900 before Company B goes bankrupt. The remaining $1,360 is written off to bad debt. Company A can get back the part of the $260 HST it paid at the time of the sale in proportion to the bad debt amount. It is calculated as follows:
- $260 x ($1,360 / $2,260) = $156.46
- Company A can then make an adjustment of $156.46 to reduce the HST remittance at any time in the four years following the date when the bad debt write-off occurred.
Example of 100 Percent of Bad Debt HST Recovery
Using the same example, Company A sells $2,260 of items on account to Company B, which includes $260 of HST. However, Company B goes bankrupt before Company A can collect any of its money and has to write off the full $2,260 balance to bad debt. Company A can get back the $260 HST it paid at the time of the sale. It is calculated as follows:
- $260 x ($2,260 / $2,260) = $260
- Company A can then make an adjustment of $260 to reduce the HST remittance at any time in the four years following the date when the bad debt write-off occurred.