Anonymised, illustrative composite. An Alberta electrical subcontractor was owed $84,000 when its general contractor filed for bankruptcy protection — and found that the Income Tax Act and the Excise Tax Act each had a specific mechanism for what came next.
At a glance
An Alberta electrical subcontractor had completed and invoiced its scope on a mixed-use project for a general contractor it had worked with before without incident. The invoice was standard: $84,000 for completed work, plus GST at the federal 5% rate under ETA s. 165(1), for a total of $88,200. Alberta has no provincial sales tax layered on top, so the GST-only total was the whole tax picture — no separate provincial component to track.
The GC filed for bankruptcy protection before paying. The subcontractor was left holding an unpaid $84,000 receivable — and had already remitted the $4,200 of GST on that invoice to CRA as part of its normal net tax reporting, months before the GC failed. The money was gone twice over: once as unpaid revenue, and once as tax remitted on revenue that was never actually collected.
Fourteen months after the bankruptcy filing, the estate made a pro-rata distribution to unsecured creditors: 15% of the claim, or $12,600 against the $84,000 owed. Under the GST bad-debt recovery rule, any later recovery requires giving back the proportional GST embedded in it: $12,600 ÷ 1.05 = $12,000 pre-tax recovered, × 5% = $600 of GST to recapture on the recovery, leaving $12,000 as a genuine, tax-clean recovery against the $84,000 bad debt.
Two federal provisions did the actual work, and neither depends on which province the subcontractor was in. First, the income side: ITA s. 20(1)(p) allows a deduction for “all debts owing to the taxpayer that are established by the taxpayer to have become bad debts in the year and that have been included in computing” income — the $84,000 was deductible in the year it was established as bad, since it had already been reported as revenue. Second, the tax side: ETA s. 231 lets a supplier recover GST/HST already remitted on an amount later written off as bad, subject to a four-year deadline under s. 231(4) measured from the return-filing deadline for the period the debt was written off — and s. 231(3) requires the recapture worked through above if any part of the debt is later recovered.
The subcontractor claimed the $84,000 ITA bad debt deduction in the year the GC’s bankruptcy established the debt as uncollectible, and filed the $4,200 ETA s. 231 GST adjustment for the same period — well inside the four-year window. When the $12,600 estate distribution arrived over a year later, its bookkeeper correctly recaptured the $600 GST portion under s. 231(3) instead of treating the whole distribution as tax-free recovered capital. For the records that made both filings straightforward, see what records a contractor needs to keep for CRA and how GST/HST actually applies to construction work.
Had the subcontractor missed the four-year window under ETA s.231(4), the $4,200 GST already remitted on an invoice it never collected would have been permanently unrecoverable — a second loss stacked on the $84,000 unpaid receivable, with no cure once the deadline passed, unlike the receivable itself, which retained value through the later estate distribution. $4,200 ÷ $88,200 total invoice is 4.76% — the exact share of the loss the ETA claim recovered that the ITA bad-debt deduction alone would not have touched.
The deadline that matters is measured from the return-filing deadline for the period the debt was written off, not from the invoice date or the bankruptcy filing date — three different dates on the same file, only one of which starts the four-year clock. Confirm which date your bookkeeping is actually using before assuming the window is wider than it is.
The ITA bad-debt deduction and the ETA GST recovery are not the same clock, even though they arise from the same failed invoice: the ITA deduction is claimed for the year the debt is established as bad, while the ETA s.231(4) recovery runs four years from the return-filing deadline for the period the debt was actually written off in the subcontractor's books. Filing both in the same period, as this subcontractor did, kept the two claims aligned and simple; a business that establishes the bad debt for tax purposes in one year but delays writing it off in its GST returns until a later year risks running the two clocks out of sync, with the ETA deadline measured from whichever period the write-off actually lands in, not from when the debt first went bad.
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