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:
- You acquired it to earn income from a business or property
- You acquired it as consideration or payment for the sale of capital property in an arm's length transaction
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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