20 June 2000 External T.I. 2000-0028115 - Contingency fee-receiving struct. settlement

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether legal fees which will be paid over a period of time as the lawyer's client receives amounts from a structured settlement may be included in income as received.

Position: It depends on the contract between the lawyer and the client. If the client will be billable at the time the lawsuit is settled, the whole amount must be included in income under paragraph 12(1)(b). This is so in spite of the fact that the client will only receive the settlement over a number of years and will not be able to pay the fee all at once.

Reasons: Under the rules in paragraph 12(1)(b), an amount receivable in respect of property sold or services rendered is recognized on the earlier of the day the account for the service is rendered, or the day on which the account for the services would have been rendered if there were no undue delay in rendering the account (notwithstanding that the amount or any part thereof is not due until a subsequent year). As a result of these rules, revenues in respect of service contracts are recognized when the fee for the service is billed or able to be billed.

XXXXXXXXXX 	J. Gibbons
		2000-002811
June 20, 2000

Dear XXXXXXXXXX:

We are replying to your facsimile of May 25, 2000, in which you requested our views concerning the timing of the reporting of a contingency fee if the client is paid over a period of time through a structured settlement. You want us to confirm that, since, under the terms of the contract between you and your client, you may not be able to charge your client until he receives payments, you should only report the amounts as they are received.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

Income (or loss) from a business is computed under the rules set out in subdivision b of Division B of the Income Tax Act (the "Act"). Under these rules (more specifically under the rules in paragraph 12(1)(b)), an amount receivable in respect of property sold or services rendered is recognized on the earlier of the day the account for the service is rendered, or the day on which the account for the services would have been rendered if there were no undue delay in rendering the account (notwithstanding that the amount or any part thereof is not due until a subsequent year). As a result of these rules, our view is that revenues in respect of service contracts are recognized when the fee for the service is billed or able to be billed. Accordingly, the appropriate treatment to be followed in your case would depend on the contract between you and your client. If your client will be billable at the time the lawsuit is settled, the whole amount must be included in income under paragraph 12(1)(b). This is so in spite of the fact that your client will only receive the settlement over a number of years and will not be able to pay your fee all at once.

In your letter, you asked whether you would be able to write off your fee as a bad debt, if it is included as income immediately. Subparagraph 20(1)(p)(i) of the Act authorizes a deduction for a bad debt if the following requirements are met:

(a) the debt was owing to the taxpayer at the end of the taxation year,

(b) the debt became bad during the taxation year, and

(c) the debt was included or is deemed to have been included in the taxpayer's income for that taxation year or a previous taxation year.

As indicated in paragraph 6 of Interpretation Bulletin IT-442R, "Bad Debts and Reserves for Doubtful Debts," there are no specific conditions that must be met before a debt may be classed as a bad debt. Such a decision should be made only after determined efforts to collect the debt have been unsuccessful or there is clear evidence to indicate that the debt has in fact become uncollectible. If a debt is merely doubtful of collection, it should not be claimed as a bad debt but should be considered for purposes of a reserve for doubtful debts under subparagraph 20(1)(l)(i). The requirements for a reserve for doubtful debts are the same as for bad debts except as to the degree of doubt concerning the collectibility of the debts. That is, it is sufficient that there is reasonable doubt about the collectibility of a debt for it to be included in a reserve for doubtful debts. We refer you to paragraphs 22 to 27 of IT-442R for additional details on the reserve for doubtful debts.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

??

- 2 -