Managing Invoices and Bad Debts for Freelancers

Introduction
Understanding managing invoices and bad debts for freelancers is essential for consultants, creators, contractors, service providers and independent professionals working across Canada and Québec. Unlike employees, freelancers must handle their own invoicing, collection, accounts receivable and the financial risks associated with unpaid work. Poor invoicing practices lead to inconsistent cash flow, disputes, delayed payments and uncollectible accounts. Meanwhile, the CRA and Revenu Québec apply strict rules regarding when freelancers may deduct bad debts. This guide explains best practices for managing invoices and bad debts for freelancers, improving cash flow, preventing losses and ensuring tax compliance.

Legal and Regulatory Framework
Managing invoices and bad debts for freelancers is guided by the Income Tax Act, Québec’s Taxation Act, and CRA invoicing requirements. Freelancers must:

• issue invoices that meet CRA and Revenu Québec documentation standards
• record revenue when earned (not when paid) for accrual accounting, if used
• track collections and overdue accounts
• document attempts to collect unpaid amounts
• deduct bad debts only when proven uncollectible

A valid invoice must include:

• freelancer’s legal name or business name
• GST/HST and QST numbers (if registered)
• unique invoice number
• invoice date
• detailed description of work performed
• rate and hours or project fee
• total amount and taxes charged

Bad debt deduction CRA rules require:

• the amount must have been previously included in income
• it must be uncollectible at year-end
• reasonable steps to collect the debt must be documented

Understanding managing invoices and bad debts for freelancers ensures both financial stability and tax compliance.

Key Court Decisions
Courts have issued key rulings that clarify managing invoices and bad debts for freelancers. Notable principles include:

• bad debts must be proven uncollectible — courts reject claims without documented collection efforts
• revenue must be reported before deducting bad debts — freelancers cannot deduct unpaid invoices never reported as income
• legal action is not always required — but reasonable attempts to collect must be shown
• poor bookkeeping invalidates deductions — missing invoices or unclear records often lead to denial
• mixed personal-business arrangements complicate deductibility

Québec courts have reinforced the need for proper invoices and collection documentation when claiming provincial bad debt deductions. These decisions highlight the importance of recordkeeping when managing invoices and bad debts for freelancers.

Why CRA Targets This Issue
The CRA frequently reviews claims involving managing invoices and bad debts for freelancers because:

• some freelancers attempt to deduct unpaid invoices without recording revenue
• documentation is often incomplete
• invoices sometimes lack mandatory details
• the line between “late payment” and “bad debt” is frequently misunderstood
• cash-based freelancers may not maintain sufficient records

Common audit triggers include:

• large bad debt deductions compared to revenue
• repeated bad debts year after year
• missing GST/QST documentation
• vague or missing invoices
• clients disputing the validity of the invoice or service

Revenu Québec has additional scrutiny for QST-related bad debts, requiring separate documentation. Proper management dramatically reduces audit exposure.

Mackisen Strategy
Mackisen CPA provides a complete system for managing invoices and bad debts for freelancers:

• creating compliant invoice templates for Canada and Québec
• implementing cloud-based invoicing tools (QuickBooks, Wave, Xero)
• establishing due dates, payment terms and late-fee policies
• tracking accounts receivable and overdue balances
• documenting collection attempts (emails, calls, reminders)
• determining when an invoice qualifies as a deductible bad debt
• reconciling GST/HST and QST adjustments for bad debts
• advising freelancers on deposits, retainers and milestone billing
• preparing year-end tax filings that accurately reflect receivables

Our approach keeps freelancers organized, financially stable and fully tax-compliant.

Real Client Experience
Many freelancers approach Mackisen after facing issues with managing invoices and bad debts. One consultant invoiced clients without specifying payment terms. Several invoices went unpaid, creating disputes. Mackisen created clear invoicing rules and a structured contract to prevent future issues.

Another Québec freelancer deducted large bad debts without proof of collection efforts. Revenu Québec denied the deduction. We reconstructed communication records, refiled the return and recovered some of the deduction.

A digital marketer used only bank deposits to track income and had no invoice numbers. CRA questioned the revenue. Mackisen implemented proper bookkeeping and alignment with tax records.

A self-employed contractor chased unpaid invoices for months without a process. We developed a standard collection sequence, implemented payment reminders, and significantly reduced overdue accounts. These cases show how managing invoices and bad debts for freelancers is critical for financial success.

Common Questions
Freelancers often ask:

• Do I need a contract?
Yes—a written contract prevents most disputes and strengthens collection efforts.

• When can I deduct a bad debt?
Only after including it in income and proving it is truly uncollectible.

• Do I need to take legal action?
Not always, but reasonable attempts to collect must be documented.

• Are deposits taxable?
Deposits become taxable once applied to an invoice or when work is completed.

• Do QST/GST need adjustments for bad debts?
Yes—they must be reversed when the bad debt is confirmed.

• Does cash accounting apply?
Not unless you are a farmer, fisher or eligible for restricted-use rules. Most freelancers use accrual accounting.

These questions clarify managing invoices and bad debts for freelancers.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you're filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency and protection from audit risk. When managing invoices and bad debts for freelancers, Mackisen provides full invoicing systems, collection strategies, documentation support and compliance planning to protect your income.