According to the Canadian government, If a debt is owed to you (other than a debt under a mortgage or a debt resulting from a conditional sales agreement), and it remains unpaid after you have exhausted all means to collect it, it becomes a bad debt.
The debt will be a capital loss in the following situations:
In most cases, the capital loss is equal to the adjusted cost base of the debt. To claim a capital loss on a bad debt, you have to file an election with your income tax and benefit return. To make this election, write and sign a letter stating that you want subsection 50(1) of the Income Tax Act to apply to the bad debt. Attach this letter to your return.
If the bad debt involves a small business corporation, see Allowable business investment loss (ABIL).
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