Warning: Watch out for bad-debt tax schemes!
The Canada Revenue Agency (CRA) is warning Canadians about getting involved in tax schemes where promoters, including some tax representatives and tax preparers, are claiming that individuals can get a tax write-off by claiming a bad-debt deduction.
What is a bad debt?
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.
When calculating income from a business or property, the Income Tax Act allows a taxpayer to establish the debt as a “bad debt” deduction under the following conditions:
- the debt was owing to the taxpayer at the end of the taxation year;
- the debt became bad during the taxation year; and
- the debt was previously included in the taxpayer’s income.
The following are some examples that do not qualify as a bad debt for tax purposes:
- a defaulted loan or mortgage (unless the taxpayer is in the business of lending money)
- an amount owed or not paid, due to employment.
What are tax schemes?
Tax schemes are plans and arrangements that try to deceive taxpayers by promising to reduce the taxes they owe, for example, through large deductions or promises of tax-free income. Schemes can include other creative ways to convince people they could pay less tax.
Be careful. Here’s how a bad debt scheme works:
Some tax preparers and tax representatives are advising their clients that they are able to claim expenses, defaulted loans and other transactions as bad debt on their tax returns. Bad debt can only be claimed on tax returns in specific circumstances. Misrepresenting bad debt on tax returns can result in reassessment and penalties.
Be careful. Before claiming a bad debt, ask yourself:
- Was the claimed amount already included in income?
- Can you document the facts so that you can support your claim if any questions are raised?
- Is someone advising you to claim a bad debt without substance to the claim?
- Do you understand the meaning of bad debt?
- Have you exhausted all efforts to collect the debt?
- How long has the debt remained unpaid?
Your actions may have serious consequences
If you claimed a bad-debt deduction that you shouldn’t have claimed, you may face serious consequences, including penalties, court fines, and even jail time. The same goes for those who promote these schemes.
People who avoid or evade taxes take resources away from social programs that all benefit all Canadians
All taxpayers, including those who pay tax experts to prepare their income tax and benefit return, are legally responsible for the accuracy of their return.
Remember: It’s your responsibility to keep proof to support any claim you make.
What can you do?
The CRA encourages all Canadians to seek an independent second opinion from a reputable tax professional on important tax matters.
If you suspect someone of promoting or participating in an abusive tax scheme, you can report it online at canada.ca/taxes-leads or by contacting the Informant Leads Centre line at 1-866-809-6841. Steps will be taken to protect your identity. Also, you may provide information anonymously.
The CRA continues to encourage taxpayers to come forward and correct their tax affairs through the Voluntary Disclosures Program: canada.ca/taxes-voluntary-disclosures.
For more information on tax schemes, please go to canada.ca/tax-schemes.
For general inquiries:
Canada Revenue Agency
Canada Revenue Agency
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