A taxpayer rents out commercial property and the lessee ends up owing monies from the rental and loans. It was agreed that the lessee vacate the property in 2021 tax year (June) due to being unable to pay the outstanding rent. The taxpayer is not able to recoup the outstanding rentals. Does he write off the bad debt relevant to 2020 year in the 2020 year of assessment and the balance of the bad debt relevant to 2021 in 2021 tax year?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
We accept that you want to make the deductions under section 11(j) of the Income Tax Act. In other words, the debt is not doubtful (or section 11(i) doesn’t apply). The relevant word in section 11(i) are the following: “…the amount of any debt due to the taxpayer which has during the year of assessment become bad …” They require little explanation. We accept that with, “balance of bad debt related to 2021 year to be written off in the 2021 year of assessment” you are referring to the amounts of rent that accrued in the 2021 year. They cannot be a bad debt in the previous year – the requirement is that it must be an “amount … included in the current year of assessment or was included in previous years of assessment in the taxpayer's income”. The write off of the loan will not qualify as a deduction under section 11(i) or 11(a) – capital in nature.