If a debt is owed to you (other than a debt under a mortgage or a debt resulting from a conditional sales agreement) and 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 subsection50(1) of the Income Tax Actto apply to the bad debt. Attach this letter to your return.
If the debt is from the sale of personal use property to a person with whom you deal at arm's length, the situation is different. You can claim the capital loss in the year that the debt becomes a bad debt. However, the capital loss cannot be more than the capital gain you previously reported on the sale of the property that created the debt.
The recovery of any bad debt claimed as a capital loss will be treated as a capital gain in the year of recovery.
