14 August 2002 GST/HST Interpretation 39701 - Insurance Indemnification of Bad Debts

Dear XXXXX:

Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your client's operations. I apologize for the delay in responding. Your client, a vendor XXXXX[.]

Interpretation Requested

In the first instance in the circumstances described, would the vendor be able to recover the GST/HST portion of the bad debt being written off from the Canada Customs and Revenue Agency (CCRA)?

In the second instance, is the reimbursement of the bad debt to the vendor, by the insurance company, subject to GST/HST?

Interpretation Given

Based on the information provided, the vendor would be able to recover the GST/HST portion of a bad debt where all the requirements of subsection 231(1) of the Excise Tax Act (ETA) are met. Policy P-029R: BAD DEBTS DEDUCTION WHEN ACCOUNTS RECEIVABLE ARE BOUGHT OR TAKEN BACK deals with this issue. Where a person agrees to buy or take back a receivable, in whole or in part, that was previously transferred to a third party, the person may claim a deduction under the ETA for GST/HST remitted.

However, the following requirements must be met. The person must report the tax collectible in respect of an arm's length taxable supply (other than a zero-rated supply) on its GST/HST return for the appropriate reporting period, must remit the net tax remittable on that return, and must subsequently write off all or part of the consideration and tax for the supply as bad debt. The amount deducted may be determined in accordance with the formula set out in that section.

If the debt is subsequently recovered in whole or in part, subsection 231(3) of the Act applies and the person will be required to add an amount to its net tax for the reporting period in which the recovery is made.

In respect of the second issue, the receipt of an insurance claim for loss of a bad debt, as per policy statement P-058R: RECOVERY OF BAD DEBTS, the receipt of an insurance claim with respect to a bad debt does not represent the recovery of a bad debt for purposes of subsection 231(3) of the Act as long as the claim does not include an amount for the GST/HST. Accordingly in the circumstances described no GST/HST would be exigible on the amount paid to the insured by the insurance company.

However, where an amount collected through subrogation is collected through the insured who recovered a bad debt from a debtor prior to remitting it to the insurer, the insured is required by subsection 231(3) of the Act to add an amount equal to the tax fraction of the bad debt recovered in determining the net tax for the reporting period of the insured in which the amount is recovered. This applies where the insured has previously made a deduction of the tax related to the bad debt under subsection 231(1) or (2) of the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8811.

Yours truly,

John Nowak
Financial Institutions Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate

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