Sometimes an invoice is never paid. When you have already counted that sale as income, the amount you gave up on can come back off. On Form T2125, it goes on line 8590, Bad debts.
What belongs here
You can generally deduct an amount for a bad debt if you meet both of these conditions:
- you had determined that an account receivable is a bad debt in the year
- you had already included the account receivable in income
Both have to be true. The second is the one people miss.
What does not belong here
Money you were never paid and never reported. If the amount was never included in your income, there is nothing to write off — you simply have no income from it to reduce, so it doesn't go on the form.
An amount you later recover. If a debt you wrote off is paid after all, report it as other income on Form T2125 in the year it comes in, rather than reducing this line.
What to keep
A bad debt rarely has a receipt behind it. What supports it is the original invoice, showing the sale you already reported, together with whatever shows you tried to collect and concluded you could not — reminders, correspondence, or a collection file.
Keep a record of all your income and expenses with the documents behind them. Don't send them in with your return. Keep them in case the Canada Revenue Agency (CRA) asks to see them. Business records follow the same six-year retention rule as your personal documents.
Official CRA sources
Source: Canada Revenue Agency (canada.ca). Not tax advice.