Work in Progress (WIP): Why and How it will be Taxable

Canadian Federal Budget 2017In Budget 2017, the federal government proposed to substantially change the landscape for reporting income by professionals like lawyers, doctors and accountants. If you are one of these professionals then read on to find out more about the changes that may affect you, specifically the proposed changes to reporting WIP in your income.


Taxpayers are generally required to include the value of work in progress (WIP) in computing their income for tax purposes. However, members of certain designated professions (i.e., lawyer, dentists, lawyers, medical doctors, veterinarians, chiropractors and accountants) may elect to exclude the value of WIP in computing their income. This election effectively allows income to be recognized when the work is billed (billed-basis accounting). Billed-basis accounting enables taxpayers to defer tax by permitting the costs associated with WIP to be expensed without the matching inclusion of the associated revenues.


Budget 2017 released on March 22, 2017, proposes to eliminate the ability for designated professionals to elect to use billed-basis accounting. This measure will apply to taxation years that begin on or after March 22, 2017 (“Budget Day”). This is consistent with the Liberal government’s ongoing agenda to “crack down” on the use of small business corporations by professionals. The 2016 Budget saw similar changes that impacted professionals as the Liberals eliminated the multiplication of the Small Business Deduction where a separate Canadian-controlled private corporation (CCPC) was used to provide services to a professional partnership.

Transitional relief is proposed in the Budget to mitigate the effect these provisions will have on taxpayers. A transitional period will be provided to phase in the inclusion of WIP into income. For the first taxation year that begins on or after Budget Day, 50 percent of the lesser of the cost and the fair market value of WIP will be taken into account for the purposes of determining the value of inventory held by the business under the Income Tax Act. For the second, and each successive, taxation year that begins on or after Budget Day, the full amount of the lesser of the cost and the fair market value of work in progress will be taken into account for the purposes of valuing inventory.


The provisions require inclusions of WIP in taxable income even though the client has yet to be billed. A determination of the cost of the WIP is needed which may not be readily available.

For law firms, most time in WIP can be attributable to Partners time on a file. However, in determining the cost of WIP, no time spent by an individual Partner should be included as it is generally accepted that a partnership cannot pay a salary to a Partner. As such, the amount included in WIP for tax purposes may not be as significant as the dollar amount in WIP. In this case, the WIP will likely only include salaries at cost of other professionals working on a file (i.e. associates, paralegals, etc.). These costs associated with other professional staff included in the WIP must be included in taxable income.

Firms paid on a contingency basis will be heavily impacted if the changes are implemented. WIP for these cases 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 proposed changes, firms would be required pay tax on WIP associated with these cases even though the firm has not received any payment from their client. This is problematic because firms will pre-pay tax without receiving consideration and they must value cost of WIP that may never be recovered. This could be grounds for discounting the cost of the WIP if it is evident that it may not be fully recoverable. If these measures are enacted, it could impact the future of contingency fee arrangements as firms will not want to realize the tax cost upfront.

There is no indication if these proposed measures will be enacted. The Canadian Bar Association has already commenced their efforts to discuss these proposed changes with the Liberal government. A letter dated March 23, 2017 was sent to Prime Minister Trudeau from the Association expressing their concerns about the impacts of removing billed-basis accounting on professionals and their clients.

If you wish to review a copy of the letter, go to


The changes to the reporting of WIP will have an impact on the incomes of designated professionals. As part of ensuring the “lowest” number possible is reporting in income, a review of WIP like the annual review of accounts receivable will be required. Get prepared to attack that number!!!

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