Heydary - Tax Court of Canada finds that a failed law firm in trusteeship could not claim ex-client receivables over 3 years old as bad

The appellant, a law firm, went into Law Society of Ontario (LSO) trusteeship when it was discovered that its founder had absconded in November 2013 with trust funds of over $3 million. Over half of the client's accounts receivable that had been outstanding in November 2013 were claimed in the appellant's June 2017 return as bad debts.

In confirming the Minister's denial of the s. 231 HST credit, Russell J found that none of the three main conditions for s. 231 to apply had been met.

First, regarding the requirement that the receivable “had become a bad debt,” Russell J stated that “a debt becomes ‘bad’ when, despite reasonable steps having been taken to collect, the debt remains uncollected.” He noted that the evidence of collection for the 50 receivables included in the claim involved only four emails seeking payments and two statements of claim. He stated (at para. 24) that the receivables did “not become bad debts because the appellant is unwilling to properly pursue them with phone calls, letters and court proceedings if necessary.”

Second, regarding the requirement that the receivables have been written off in the supplier’s books of account, he found (at para. 28) that there was no evidence of such a write-off, nor of the appellant having approached the LSO to give it temporary access to the accounts in order to make the required write-off entry.

Third, the appellant had not remitted any of the HST included in the receivables by June 2013. On this point, Russell J stated (at para. 38) that the “law is clear that the paying of net tax subsequent to the time at which the deduction claim is filed does not satisfy the requirements specified in subsection 231(1.1)”.

This decision suggests that the s. 231 requirements are a trap for the unwary, e.g., where a law firm for client relationship or other good business reasons chooses to write off a client receivable rather than pursue its collection and does not timely issue a credit note complying with the s. 232 rules.

Neal Armstrong. Summary of Heydary Green Professional Corporation v. The King, 2026 TCC 69 under ETA s. 231(1).