Accounts receivable — terms, follow-up, and writing one off properly

An unpaid invoice is not a neutral event for an incorporated business. If your corporation reports on the accrual basis — and almost every corporation does — the revenue was recognised when the invoice was issued, not when the money arrived. You have already recorded the income, and if the invoice carried GST/HST you have generally already remitted the tax, in the reporting period the sale was made. The customer is, in a real sense, being financed by you and by the CRA.

Set terms that can actually be enforced

Terms that appear for the first time on the invoice are not terms; they are a hope. They belong in the quote or engagement document, so the customer agrees to them before the work starts. Be specific: what triggers the clock, what the due date is, what happens after it, and what is required up front. Deposits and progress billing do more for collections than any follow-up sequence, because they move the risk before the exposure exists.

Invoice promptly. Delay in issuing the invoice is delay in getting paid, and it also signals that the timeline is flexible. Make sure the invoice contains what the customer needs to pay it — a purchase order or job reference where one exists, the payment methods you accept, and the information a registrant customer needs to claim their own input tax credits, including your GST/HST registration number. An invoice that cannot support the customer’s ITC claim will come back to you.

Follow-up that works

The point of a follow-up process is that it is a process — it runs on a schedule rather than on how you feel about the customer. A workable pattern: a short reminder a few days before the due date; a direct request on the due date; a call, not an email, once a week has passed; and a written notice with a specific deadline and a stated consequence at the month mark. Calls outperform emails once an account is genuinely late, because they surface the real reason, which is often a missing purchase order, a change in accounts payable staff, or an invoice that never reached the right inbox.

Document each contact. The record matters if the account eventually goes to a collection agency, to court, or to a write-off — in the last case because the deduction depends on your having established that the amount is genuinely uncollectible rather than merely late.

When to stop extending credit

Run an aged receivable listing monthly. The aging is the decision tool: it shows which balances are drifting and which customers are drifting, and it does so early enough to act. Three signals justify stopping work: an account past the point where your terms have been breached without an agreed plan, a balance that has grown while the previous one went unpaid, and any customer who stops answering. Continuing to work for a customer who has not paid for the previous job converts a recoverable problem into a large one.

Stopping is a commercial decision, but it is also a tax one, because everything you invoice after that point is income you report and tax you remit on money you are unlikely to see. In sectors where a portion of the contract is legitimately withheld, that is a different animal with its own accounting — see construction holdbacks.

Writing one off: the income tax side

When an account is genuinely uncollectible, writing it off removes the receivable from the balance sheet and gives the corporation a deduction against income — which makes sense, because that income was already reported when the invoice was raised. The deduction is not a matter of choosing a date that suits you: it belongs in the year the debt is established as bad, based on evidence. Your collection record is that evidence. The mechanics of establishing and claiming it are covered in the guide to writing off bad debts.

Note the flip side. If a written-off amount is later recovered, it comes back into income in the year it is received. A write-off is a timing position based on the facts as they stand, not a permanent decision.

Writing one off: the GST/HST side

This is the part most owners miss, and it is separate from the income tax deduction. If you reported and remitted GST/HST on a credit sale and all or part of the amount later became a bad debt, you can recover the tax you overpaid as a tax adjustment on your GST/HST return — on line 107 if you file electronically through GST/HST NETFILE or on paper, or in your line 108 calculation if you file by TELEFILE. Two conditions matter: you have to be dealing at arm’s length with the customer, and you have to actually write the amount off as a bad debt in your records first. The adjustment is calculated on the unpaid portion, including the tax and any applicable PST.

There is a deadline. The adjustment has to be made on a return filed within four years of the due date of the return for the reporting period in which you wrote the debt off. And the recovery rule applies here too: if you later receive a payment towards a debt for which you claimed the adjustment, the GST/HST part of that amount goes back on your return for the period in which it is recovered.

If you file GST/HST annually, this interacts with your instalment obligations — see GST/HST instalments for annual filers.

The habit that prevents most of it

Review the aging every month as part of the close, not once a year when the accountant asks. A monthly review keeps follow-up timely, keeps credit decisions in front of the exposure rather than behind it, and means that by the time year end arrives the list of genuinely bad accounts is short, documented and defensible. It fits naturally into a month-end close routine, and it is one of the few bookkeeping habits that pays for itself in cash rather than in tidiness.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.