GST/HST bad debt in Canada is a frustrating issue for freelancers and sole proprietors: you invoice a client, charge GST/HST, report the sale, and then the client never pays. The good news is that the CRA has a bad debt adjustment that may let you recover the GST/HST you already remitted on an unpaid invoice.
This matters because GST/HST is usually based on amounts that became collectible, not only cash in your bank account. If you use invoices to bill clients, an unpaid invoice can create real tax pain unless you know how to clean it up properly.
GST/HST bad debt in Canada: the basic rule
If you made a taxable sale, charged GST/HST, included that tax in your net tax calculation, and later wrote off all or part of the receivable as a bad debt in your books, you may be able to claim an adjustment on a GST/HST return. In plain English: if you remitted tax on money you never collected, the adjustment can help reverse the GST/HST portion.
This is not the same as simply deleting an invoice because the client is late. You need a genuine bad debt writeoff. That usually means you have taken reasonable collection steps, decided the amount is uncollectible, and recorded the writeoff in your accounting records.
When this happens to freelancers
Say you are an Ontario consultant and you invoice a client $5,000 plus 13% HST. The total invoice is $5,650. You file your GST/HST return and include the $650 of HST as tax collected or collectible. Months later, the client disappears and the invoice is clearly not going to be paid.
If you write off the full invoice as a bad debt, you may be able to claim an adjustment for the GST/HST included in that bad debt. If only part of the invoice is written off, the adjustment is generally prorated. Keep the math tied to the actual taxable amount and tax rate shown on the invoice.
What records should you keep?
The CRA expects your records to support the adjustment. Keep a clear file showing:
- The original invoice with your GST/HST registration number
- The taxable amount, GST/HST rate, and tax charged
- Payment history, if the client paid part of the invoice
- Collection emails, reminders, or notes from follow-up calls
- The date and accounting entry where you wrote off the bad debt
- The GST/HST return where you claimed the adjustment
If your invoices are messy, start with our guide to invoicing with HST as a Canadian freelancer. A clean invoice makes later adjustments much easier to prove.
Does an unpaid invoice count toward the $30,000 threshold?
Usually, yes, if it was consideration for a taxable supply you made. The small supplier threshold is about taxable supplies, not only cash collected. An unpaid taxable invoice can still be part of the revenue you track for registration purposes.
That is why threshold tracking should happen when you issue invoices or make taxable supplies, not only when deposits hit your bank account. For the full mechanics, read our explanation of how the $30,000 GST/HST threshold works. You can also use HST Hero to track invoices, payments, and your rolling threshold before an unpaid invoice turns into a surprise.
What if the client pays later?
Sometimes a “bad” debt comes back to life. If you claimed a GST/HST bad debt adjustment and later recover some or all of the amount, you generally need to add the recovered GST/HST portion back into your net tax for the period when you received the payment. In other words, the adjustment is not free money; it follows what was actually collected.
Keep the recovery tied to the old invoice. If the client pays 50% after a settlement, record which invoice it relates to and calculate the tax portion consistently. Do not treat the later payment as unrelated income.
Should you use cash or accrual records?
Many small business owners think in cash terms, but GST/HST reporting can still require attention to when tax became due or collectible. If you are registered, review how your accounting software is set up and make sure your GST/HST return agrees with your invoices. Our guide on filing your first GST/HST return explains the basic return workflow.
The bottom line
- Unpaid taxable invoices can still create GST/HST reporting issues
- A bad debt adjustment may recover GST/HST you remitted but did not collect
- You need a real writeoff and records that support it
- If the client pays later, you may need to reverse the adjustment
- Unpaid taxable invoices may still matter for threshold tracking
The practical habit is simple: keep invoices, payments, writeoffs, and GST/HST returns connected. When a client does not pay, do not ignore the tax side. Document the debt, write it off properly, and claim the adjustment only when your records support it.