Unpaid Invoices and Bad Debts on the T2125: What Canadian Freelancers Can Claim

The Tax Question Behind an Unpaid Invoice

A client disappears, an invoice sits unpaid, and tax season arrives. Canadian freelancers often ask: can I deduct an unpaid invoice on my T2125? Sometimes — but only in a specific situation.

The CRA has a T2125 category for bad debts on line 8590. The key idea is that a bad debt deduction is meant to reverse income you already reported but later could not collect. It is not a bonus deduction for every client who ghosts you.

When an Unpaid Invoice Can Be a Bad Debt

You can generally consider a bad debt claim when all of these are true:

Example: you invoiced a client for $2,000 in December, reported that $2,000 as business income, followed up repeatedly, and later determined the client will not pay. That may be a line 8590 bad debt if the facts support it.

When You Usually Cannot Claim It

If you use a cash-based tracking approach and never included the unpaid invoice in your income, there is usually nothing to deduct. You did not pay tax on that income, so claiming a bad debt would double-count the loss.

You also generally cannot claim:

A bad debt should be tied to a real receivable, not a general feeling that some clients are risky.

What Does "Uncollectible" Mean?

The CRA expects a reasonable basis for writing off the debt. You do not always need to sue the client, but you should be able to show why collection is unlikely.

Useful evidence includes:

The stronger your documentation, the easier it is to defend the deduction if CRA reviews line 8590.

GST/HST Can Add a Wrinkle

If you are registered for GST/HST and already remitted tax on an invoice that later becomes a bad debt, there may be a GST/HST adjustment available. The income tax bad debt and the sales tax adjustment are related but not identical. If the amount is material, check your GST/HST return instructions or ask an accountant before filing.

How to Record It Cleanly

A simple year-end workflow:

1. Review unpaid invoices one by one

2. Confirm whether each amount was already included in income

3. Document collection efforts and why the debt is now uncollectible

4. Record the specific bad debt amount on T2125 line 8590

5. Keep the invoice and write-off notes with your tax records

Do not bury bad debts inside office expenses or miscellaneous deductions. Use the correct category so your records match the T2125.

Track Receivables and Write-Offs with ClaimHero

ClaimHero helps Canadian sole proprietors keep business records organized by T2125 category. If an invoice turns into a bad debt, you can keep notes, dates, and supporting details together so line 8590 is based on evidence instead of memory.