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GST 201: BAD DEBT GST RECOVERY HAS STRICT RULES

SEVERAL CONDITIONS MUST BE MET TO RECOVER TAX PAID ON UNCOLLECTIBLE DEBT

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For businesses dealing with unpaid invoices, section 231 of the Excise Tax Act (ETA) offers a vital form of relief: the ability to recover GST/HST previously remitted on debts that have become uncollectible. However, as the recent Tax Court of Canada (TCC) decision Heydary Green Professional Corporation v. The King, 2026 TCC 69 (“Heydary”) demonstrates, this relief is only available to those who strictly adhere to the ETA’s technical requirements.

In this GST 201 Series blog, we review section 231 and the statutory rules for bad debts, as well as what Heydary shows about the process that must be followed to benefit from this section.

The Section 231 Regime for Bad Debts

Section 231 of the Excise Tax Act provides a mechanism for taxpayers to recover GST/HST previously remitted on debts that have become uncollectible. However, the legislation places several strict preconditions on this deduction through its various subsections.

The core requirements are established in section 231(1): the supplier must have been dealing with the recipient of the supply at arm’s length, it must have been a taxable supply (i.e., not zero-rated), the debt must have become a bad debt, and the supplier must have formally written off the debt in its books of account.

Additionally, under section 231(1.1), a taxpayer cannot claim the deduction unless they have already reported and remitted all net tax payable for the reporting period in which the tax at issue first became collectible.

If these conditions are all met, then the supplier can deduct that amount from the net tax remittable from that reporting period, or a subsequent reporting period.

The Heydary Decision

The appellant, a law firm in the midst of a complex winddown after internal fraud, deducted over $37,000 in GST/HST related to "at least fifty" unrecovered client accounts. Despite the firm’s difficult circumstances and the fact that it had made some effort to get back some of the debts, the TCC dismissed the appeal, reinforcing the "strict compliance" standard required for section 231. The TCC’s reasoning highlights three critical pitfalls that businesses must avoid if they want to claim deductions for bad debt.

First, the appellant failed to prove that each specific debt had become “bad”, i.e. provided evidence specific to each individual debt that it had pursued the debt and made best efforts to collect it. Second, a business must actually “write off” the debts in its formal books of account – this step cannot be skipped over out of convenience. And finally, as section 231(1.1) says, ALL tax collectible for the period in which the bad debt arose must have been paid BEFORE claiming the deduction. Paying the tax after claiming the deduction is insufficient.

Takeaways

Section 231 of the ETA allows businesses to recover GST previously remitted on bad debts. The section comes with multiple conditions, however, which MUST be strictly complied with if a business is to recover any of these taxes.

Experienced Tax Counsel can help businesses navigate section 231 and other complex rules from the ETA. The CRA routinely scrutinizes these deductions, and the TCC will strictly enforce the statutory preconditions. A lax approach can leave a business needlessly out of pocket, as demonstrated in Heydary.

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