Six years of carrying the same allowance on the books had used up nothing. The tax deduction was still sitting there when the shares changed hands.
Short answer
No — an allowance for doubtful accounts on a company’s financial statements is an accounting estimate that reduces the receivables balance for reporting purposes, and it has no automatic effect on the corporation’s tax return. A bad-debt reserve is only tax-deductible if it was actually claimed under Income Tax Act s.20(1)(l), and a business can carry a book allowance for years without ever having claimed the corresponding tax reserve, leaving the full deduction still available.
Section 20(1)(l) allows “a reserve determined as the total of (i) a reasonable amount in respect of doubtful debts...that have been included in computing the taxpayer’s income for the year or a preceding taxation year.” That reserve has to be claimed every single year to stay claimed: s.12(1)(d) requires the corporation to add back “any amount deducted under paragraph 20(1)(l) as a reserve in computing the taxpayer’s income for the immediately preceding taxation year” before it can claim a fresh reserve in the current year. If the returns show no s.20(1)(l) reserve ever claimed, nothing was ever added back under s.12(1)(d) either — the deduction is intact, whatever the book allowance says.
On a share purchase, the timing matters as much as the amount: an acquisition of control is a loss restriction event under s.251.2(2)(a), and s.249(4)(a) deems the corporation’s taxation year to end immediately before it. Whichever short taxation-year “stub” an eventual write-off falls into gets the deduction — which side of closing that stub sits on decides who is filing the return that actually claims it.
See it decided in the allowance-for-doubtful-accounts case file, the section-22-election case file and the share-deal-has-no-s.22-election file.
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