Principal Issues: [TaxInterpretations translation] What is the tax treatment of a debt that has become bad in a taxation year and was previously included in the taxpayer's income for a previous taxation year?
Position: Generally, the taxpayer will be able to claim a deduction under paragraph 20(1)(p).
Reasons: Income Tax Act.
XXXXXXXXXX 2009-034986
December 7, 2009
Dear Sir,
Subject: Bad Debt Deduction
This is in response to your email of December 2, 2009 in which you requested our opinion on the above subject regarding the situation described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where, in the 2004, 2005, and 2006 taxation years, you included, in computing your income, Canadian-source interest that you were supposed to receive in November 2009. Due to the economic environment, you indicated that you received nothing in November 2009 and that interest that was previously reported in those years will never be collected.
You would therefore like to know if you need to amend your tax returns for the 2004, 2005 and 2006 taxation years or, alternatively, if you can use the amount of interest declared in advance but not collected to reduce your net income for the 2009 tax year.
Our Comments
The situation you indicated in your email appears to be related to an actual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not the Directorate’s practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation relates to a specific taxpayer and a completed transaction, you should forward all relevant facts and documents to the appropriate Tax Services Office for its views. We are, however, prepared to provide the following general comments, which we hope you will find helpful.
Subparagraph 20(1)(p)(i) allows a taxpayer to claim a deduction for bad debts provided that:
(a) they were debt obligations owing to the taxpayer at the end of the taxation year;
(b) they became bad debt during the taxation year;
(c) they were included, or deemed to have been included, in the taxpayer's income for the taxation year or a preceding taxation year.
Thus, paragraph 20(1)(p) generally allows a taxpayer to claim a deduction in the year in which a debt has become uncollectible for an amount equal to the amount of the debt that was included in computing the taxpayer's income for the taxation year or a preceding taxation year. Any amount deducted under paragraph 20(1)(p) that is subsequently recovered - to the extent of the amount deducted - will generally be required to be included in computing the taxpayer's income under paragraph 12(1)(i) in the year of recovery.
For more information on the tax treatment of bad debts, please refer to Interpretation Bulletin IT-442R, Bad debts and reserves for doubtful debts, which can be found on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/E/pub/tp/it442r/it442r-e.html.
In your situation, it is unfortunately impossible for us to confirm the tax treatment to be accorded to the amount of interest that was included in the calculation of your income for the years 2004, 2005 and 2006 since such a determination is a factual one that requires an analysis of the circumstances of your particular situation. If you would like confirmation of the tax treatment of such interest, we ask that you contact your local Tax Services Office.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.