22 February 1996 External T.I. 9533075 - BAD DEBT - UNPAID INVOICE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a non-capital loss or a business investment loss can be claimed in respect of the outstanding amount of an invoice submitted for services rendered.

Position:

Although it does not qualify as a business investment loss, the outstanding amount may be eligible for a deduction as a bad debt.

Reasons:

The debt is not receivable on capital account but on income account. If the amount of the invoice was included in income, it may be deductible as a bad debt.

		5-953307
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

February 22, 1996

Dear XXXXXXXXXX:

Re: Non-Capital Loss or Business Investment Loss

We are writing in reply to your letter which we received December 19, 1995, wherein you requested our comments regarding the deductibility as a non-capital loss or a business investment loss of the outstanding account receivable in respect of services you rendered over a period of approximately four years.

In order for a debt receivable to constitute a business investment loss pursuant to paragraph 39(1)(c) of the Income Tax Act (the "Act"), the debt must be receivable on capital account. Since the invoice you submitted was in respect of the services you provided, it would be considered to be an account receivable on income account and not on capital account. Therefore, as the debt arising from the outstanding amount of your invoice is not on capital account, a business investment loss could not be claimed in respect thereof.

As regards non-capital losses, they may arise where income from a business exceeds the expenses incurred in earning that business income. In this regard, you should note that you may be able to claim a deduction for the outstanding amount of your invoice under subparagraph 20(1)(p)(i) of the Act. This provision provides for a deduction in respect of a bad debt, if the debt was owing to the taxpayer at the end of the taxation year, the debt was established to have become bad during the taxation year and the debt was included in the taxpayer's income for that taxation year or a previous taxation year. Since it is not clear from your letter whether the amount of the invoice was included in your income, as required by paragraph 12(1)(b) of the Act, nor at what point in time the debt originating from this invoice became a bad debt, we cannot determine whether you would be entitled to claim a deduction pursuant to subparagraph 20(1)(p)(i) of the Act.

We are enclosing a copy of Interpretation Bulletin IT-442R, which discusses the tax treatment of bad debts and reserves for doubtful debts, for your information. As the situation you describe is a completed transaction, should you have further questions regarding this matter, we suggest you contact your local Tax Services office.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.