Write-offs, write-downs & bad debt

A write-off says one thing: “we billed this, we tried to collect, and we are giving up on the rest.” The bill stays as issued, the revenue stays recognised, and the unpaid balance is relieved as bad debt.

That is a tax position, not just a bookkeeping entry. Every sales-tax regime that lets a supplier recover tax already remitted on a debt that went bad attaches conditions to it — and the one that firms fail is “collection was genuinely doubtful”, which in practice is proven by evidence that you tried to collect. This page is about capturing that evidence, and about what happens if the client later pays anyway.

Which operation is this?

Three operations reduce a bill, and they are not interchangeable. The difference is not cosmetic — it decides which tax provision the reduction is tested against.

Operation	What it says	How the tax is treated
Write Off	”We billed this, we tried to collect, we are giving up on the rest.” Takes the unpaid balance to zero; revenue stays recognised and the loss books to Bad Debts.	Bad debt — conditional relief, and the condition is evidence of collection attempts.
Write Down	The same act, taken to only part of the balance.	A partial bad debt — the same family as a write-off, and the same evidence obligation.
Credit Memo	”We should not have charged you this.” A discount. Reverses the revenue and the tax on it. Applied to a portion already paid it becomes a refundable client credit.	An adjustment of consideration — a credit note. No collection evidence required.

Read the two tests as one question: was the bill right?

If the bill was right and the client simply will not pay → Write Off (all of it) or Write Down (part of it). The client owed it; the firm gave up.
If the bill was wrong and you agree the client should not have been charged → Credit Memo. Nothing went bad; the price changed.

Two other operations look similar and are not reductions at all — Amend restates what the invoice says (up, down or sideways; nothing is forgiven), and Void says the record should never have existed. See Void, Reverse & Undo.

Collection evidence

When you write off — in full or in part — Athenty asks for more than a reason. It asks you to describe what you did to get paid, and to attach the documents that show it.

What to record

Two halves, and the deduction leans on both:

The narrative — free text, in your own words. What you did and when: reminder letters, statements re-sent, phone calls placed and their outcome, emails, a formal demand letter, a referral to a collections agency, an instalment arrangement the client broke. Dates matter more than adjectives.
The documents — attach the actual files from the matter’s Drive: the demand letter, the collections correspondence, the email thread, a call log, the returned-mail notice.

A sentence is not a file. “Client never paid” is a reason; “statement re-sent 2026-01-08, called 2026-01-22 (no answer), demand letter 2026-02-14 attached, no response in 30 days” plus the letter is evidence.

Where it is kept, and why there

Evidence attaches to the write-off event, not to the invoice. An invoice can carry more than one write-off, each with its own date, amount and story — and the deduction is assessed per bad debt, not per invoice. Keeping the record on the event is what lets each one stand or fall on its own.

Each attachment also stores the document’s name as it stood when you attached it. If that file is ever purged from the Drive, the record still says a document named “2026-02 demand letter.pdf” was attached to this write-off, and it is no longer here — an honest, auditable statement. A link that vanished with the file would silently read as “no evidence was ever attached”, which is the one thing this record must never say by accident. Attaching the same file twice is treated as a slip, not as a second piece of evidence.

It is encouraged, not enforced

Athenty prompts for evidence; it does not refuse a write-off without it. There are legitimate reasons a firm has the record somewhere else, and blocking the bookkeeping entry would not create evidence that does not exist.

Write-offs recorded before this feature shipped have no evidence, and nothing was invented for them. They read as empty rather than as complete. Manufacturing a plausible collection history for an old write-off would be fabricating audit evidence — materially worse than an honest blank.

A write-down carries the same obligation

A write-down is a write-off of part of the balance — one operation, taken to a smaller number. There is no separate “discount or bad debt?” question to answer, because a write-down is always the bad-debt one. It prompts for collection evidence exactly as a full write-off does, and it books to the same accounts.

If what you actually mean is “the bill should have been lower”, that is a credit memo, not a write-down.

A credit memo never asks for it

A credit memo is an agreed reduction in price. Nothing went bad, so there is nothing to have chased — and asking an operator to document attempts to collect money the firm has just agreed not to charge would be asking for the wrong thing entirely. Athenty does not ask, and no credit memo carries a collection-evidence record.

When a written-off debt is later recovered

A client sometimes pays a bill the firm had already given up on. Two rules govern what happens, and the first one surprises people:

1. Money arriving never reverses a write-off by itself

Receiving money is not an election. Reversing a write-off is a tax-relevant decision — where a deduction was claimed on the write-off, recovering the debt requires that deduction to be added back in the reporting period of the recovery, in proportion to the amount recovered. Making that election on the operator’s behalf because money happened to arrive is not a shortcut; it decides a tax position invisibly, and the operator never sees it happen.

So a payment is recorded as a payment. A written-off invoice claims nothing, so nothing is applied to it — and what arrives is handled as money that arrived against a bill with no balance (see below).

2. The recovery and its add-back are one deliberate operation

Correcting a write-off — restoring the balance, reversing the matching ledger entries, and generating the tax add-back when the reason is recovery rather than error — is a separate, deliberate action, gated to the same people who may write off in the first place.

The distinction the operation turns on is worth knowing before you need it:

Why you are undoing the write-off	What it means
Recovery — the client paid after all	The debt was real and the write-off was right at the time. Where a deduction was claimed, it is added back in the period of the recovery, proportionally to what was recovered.
Error — it should never have been written off	There was no bad debt. Nothing is added back, because nothing was properly deducted.

If no deduction was ever claimed on the write-off, there is nothing to add back either way. That is why the figure is always a suggestion to check against your own filings, never a determination.

Where money that arrives goes instead

Two doors, two different answers. Both follow the same principle: money does not change the meaning of a record just because the amounts do not line up.

Paid into the operating account

The payment applies to whatever the invoice still claims — its total, less what has been paid, written off, and credited. Anything beyond that is a genuine overpayment, and it is held as a refundable client credit against the client, not against this invoice. It can be applied to another bill or refunded.

Because a written-off invoice claims nothing, money that arrives on one becomes a client credit in full. That is deliberate: the firm now holds money it has not attributed to anything, which is visible and correctable — rather than a write-off quietly reversing itself and a tax deduction quietly disappearing.

Settled from trust

A trust settlement that would move more than the invoice claims is refused outright. Nothing is recorded — not the withdrawal, not a credit.

The surplus stays in the client’s trust account. It is the client’s money, and moving it to the operating account because there happened to be an overage is precisely the kind of withdrawal trust rules exist to prevent. If a settlement is refused this way, the invoice was written off, written down, amended or paid between raising the requisition and posting it. Either restore the invoice balance so it claims the full amount and re-run the settlement, or reverse the trust withdrawal to return the funds to the client’s trust.

Sources & authorities

The tax treatment above traces to statute. These are the provisions behind the bad-debt deduction, its recovery add-back, and the separate credit-note rule — linked to the official text.

What it governs	Authority	Section	Status
Bad-debt deduction — the relief a write-off or write-down claims, and the conditions attached to it (arm’s-length supply, the debt written off in the books, the amount genuinely doubtful of collection)	Excise Tax Act, RSC 1985, c E-15	s. 231 — “Bad debt — deduction from net tax”	Suggested — verify · attorney-review-pending
Tax must have been reported and remitted before the deduction is available	Excise Tax Act	s. 231(1.1)	Suggested — verify · attorney-review-pending
Recovery add-back — where a deducted bad debt is later recovered, the tax portion is added back in the reporting period of the recovery, in proportion to the amount recovered	Excise Tax Act	s. 231(3) — “Recovery of bad debt”	Suggested — verify · attorney-review-pending
Credit note / adjustment of consideration — the separate provision a credit memo sits under. No collection-evidence condition	Excise Tax Act	s. 232 — “Refund or adjustment of tax”, with the credit note itself at s. 232(3)	Suggested — verify · attorney-review-pending
Québec mirror — bad-debt deduction (the federal rule is not universal)	Act respecting the Québec sales tax, CQLR c T-0.1	s. 444 (conditions at s. 444.1)	Suggested — verify · attorney-review-pending
Québec mirror — recovery add-back	Act respecting the Québec sales tax, CQLR c T-0.1	s. 446	Suggested — verify · attorney-review-pending
Québec mirror — four-year limit on claiming the deduction	Act respecting the Québec sales tax, CQLR c T-0.1	s. 446.1	Suggested — verify · attorney-review-pending

Athenty posts to the invoice’s own tax accounts whichever regime applies, and keeps the bad-debt and credit-note populations in separate ledger accounts so each can be tested against its own provision. It does not choose the provision for you.