CRA indicates that a bad debt credit cannot be claimed for uncollectible GST/HST assessed on audit
ETA s. 231(1.1) provides that a supplier cannot claim a bad debt deduction unless “the tax collectible in respect of the supply is included in determining the amount of net tax reported in the reporting entity’s return … for the reporting period in which the tax became collectible.” CRA considers that the quoted language means that where a supplier is assessed on audit for failure to charge and remit the tax, no bad debt deduction is available for the uncollectible tax where, for example, the customer declared bankruptcy before the audit and resulting assessment.
Not a problem! CRA stated:
[S]ection 232 does appear to offer a solution where the consideration is reduced. Where the supplier issues a credit note to the customer (which is now bankrupt) to relieve it of that debt, the supplier would be entitled to claim a deduction if all conditions set out in paragraph 232(3)(b) are met.
The point appears to be that if the supplier is willing to give up its claim against the bankrupt estate for, say, $100, it can generate a bad debt deduction for the GST/HST (say, $13) provided it issues a credit note for the $100.
Neal Armstrong. Summary of 18 September 2017 Interpretation 176502 under ETA s. 231(1.1).