In a September 1, 2015 Tax Court of Canada case (L’univers Gym Fitness Inc. vs. H.M.Q., 2014-2465(GST)I), at issue was whether the taxpayer, who operated a fitness centre, could claim a deduction of $5,078 in computing net tax for GST/HST purposes on account of bad debts (Subsection 231(1) of the Excise Tax Act).

more comprehensive collection action

When customers of the fitness facility failed to make payments to the business, access to the defaulting customers was denied by deactivating the magnetic chip entrance cards and following up with phone calls to the customers. However, no letter or notice of default was sent out to the customer. According to the taxpayer’s accountant, this was normal procedure in the industry to recover defaulted payments.

Taxpayer loses
The Court noted that to determine whether a debt is bad, it must be determined whether the creditor took reasonable measures, without success, to collect the debt. In this case, the Court found the steps the taxpayer took did not enable the taxpayer to conclude that the debt was bad. Further, passage of time was not sufficient to conclude that the debt was bad.

whether the debt has gone bad

The Court also referred to a summary of the generally applicable criteria for a “bad debt” as stated in the Federal Court of Appeal case Rich vs. H.M.Q. (A-666-01):

• the history and age of the debt;
• the financial position of the debtor, its revenues and expenses, whether it is earning income or incurring losses, its cash flow and its assets, liabilities and liquidity;
• changes in total sales as compared with prior years;
• the debtor's cash, accounts receivable and other current assets at the relevant time and as compared with prior years;
• the debtor's accounts payable and other current liabilities at the relevant time and as compared with prior years;
• the general business conditions in the country, the community of the debtor, and in the debtor's line of business; and,
• the past experience of the taxpayer with writing off bad debts.

Editors’ Comment
For GST/HST purposes the debt must actually be considered to be bad, as compared to “doubtful” for income tax purposes.