Work In Progress (WIP): Budget Update for Contingency Fee Arrangements

Budget 2017, released on March 22, proposes to eliminate the ability for designated professionals to elect to use billed-basis accounting; that is, the ability of taxpayers to defer tax by permitting the costs associated with WIP to be expensed without the matching inclusion of the associated revenues. This is a measure that will apply to taxation years that begin on or after March 22, 2017 (also known as “Budget Day”).

In our previous publication, Work in Progress (WIP): Why and How it will be Taxable, we explored the potential impacts and pitfalls that these proposed changes will have on firms and legal professionals who are paid on a contingency basis. In such cases, WIP can build up over time and current rules excluded this WIP from taxable income until the case was settled and the firm was paid. Under the proposed changes, firms would be required to pay tax on WIP associated with these cases even though the firm has not yet received any payment from their client.

The Canada Revenue Agency (CRA) has released some guidance on the Budget 2017 proposals in this area. Specifically, the CRA has stated the proposed change to eliminate the ability of designated professionals to elect to use billed-basis accounting is not expected to have any impact on contingency fee arrangements. The reasoning behind this position is that there exists no liability for the client to pay the professional and, consequently, no amount is receivable by the firm until the right to collect the amount is established. Under these circumstances, it is the CRA’s view that for the purposes of determining the professional’s WIP at the end of the year, no amount would be recognized – which would mean no income inclusion at the end of year.

The CRA further clarified its position with respect to expenses incurred by a designated professional who earns income under a contingency fee arrangement, confirming that expenses incurred to earn income under such fee arrangement would be deductible in the year the expenses were incurred.

The commentary provided by the CRA is welcome for professionals as it alleviates the need to value WIP that may never be recovered. It also eliminates potential cash flow issues for these firms as they will not have to pay the tax cost upfront prior to receiving payment from the client.

There is no indication if these proposed measures will be enacted. As noted in our prior article, the Canadian Bar Association (CBA) has already commenced their efforts to discuss these proposed changes with the Liberal Government and they are pleased with the guidance provided by the CRA regarding contingency fee arrangements. However, the Association continues to work with the government to clarify uncertainty in several areas – including the ability to continue working on cases that increase access to justice for many Canadians, the definition of cost/valuation of work in progress, and concerns about the transition period. If you wish to view the CBAs most recent advocacy memo, follow the link to

We will continue to provide updates on this matter and other Budget 2017 proposals as information becomes available. Stay tuned!


By: Joe Figliomeni, CPA, CA


The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.