CRA will exclude contingent-fee WIP from professionals’ post-Budget income

The 2017 Budget proposed that professional accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors no longer be permitted to use billed-basis accounting for taxation years beginning after March 21, 2017, subject to a 50% phase-in rule for the first such taxation year. CRA has now announced that the old rule (respecting no requirement to include work-in-progress in income) will continue to apply to WIP relating to a “contingency fee arrangement,” which it defines as follows:

Under the terms of a contingency fee arrangement, all or a portion of a designated professional’s fees may only become known and billable at some time after the taxation year in which the professional provided services under the arrangement (e.g., where, under the terms of a written contingency fee agreement between a personal injury lawyer and a client, legal fees are only billable by the lawyer on a periodic basis as amounts are received by the client under a negotiated settlement or a court judgment). Until such time, there is often no liability on the professional’s client to pay any fee; consequently, no amount is receivable by the professional until the right to collect the amount is established.

There can be arrangements under which the fees of professionals respecting an acquisition or sale, financing, or reorganization contingent on lenders' or shareholders' approval, cannot be rendered until the closing, with an indeterminate "haircut" to be negotiated for a failed transaction. These may be contingency fee arrangements.

Neal Armstrong. Summary of Billed-basis Accounting (28 April 2017) under s. 10(5)(a).