31 August 1993 External T.I. 9318225 F - Lawyer's Disbursements

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Lawyers's Disbursements

This is in reply to your letter of June 17, 1993 requesting our opinion with respect to the claiming of billed and unbilled disbursements.

In particular you ask if a lawyer may, in computing income, deduct

1.     unbilled specific disbursements or are they non-deductible because they have been identified as relating to a specific client?

2.     unbilled general disbursements on the basis that they are really just overhead charges which are still in work in progress ("WIP")?

3.     the billed specific and general disbursements on the grounds that no funds have been advanced by the client and that even though such amounts are set up as accounts receivable there is no certainty that they are actually recoverable until the client pays the bill?

We are to assume that the lawyer has elected pursuant to section 34 of the Income Tax Actto exclude WIP in the computation of income.

As a final matter, you indicate that there would appear to be some ambiguity between paragraphs 4 and 6 of Interpretation Bulletin IT- 129R.

Our Comments:

With respect to the perceived ambiguity between paragraphs 4 and 6 of IT-129R, paragraph 4 relates solely to expenditures made on behalf of the client that are in fact the clients expenditures and does not relate to expenses of the practice, whether or not recoverable from the client. The amounts referred to in paragraph 4 are items such as an amount to pay out a mortgage or purchase a house for a client, funds paid by the lawyer to purchase investments for the client or an amount to cover bail. These disbursements are generally covered by amounts deposited by the client with the lawyer which go into his trust account. In cases where there is a close relationship between lawyer and client or where there is a long history of dealings the lawyer may make these types of expenditure without having the funds in his trust account and collect it later but we suggest that this happens quite rarely. The funds are largely the clients and the disbursements are in reality the clients, as such they do not enter into the lawyers determination of income for tax purposes. Paragraph 6 on the other hand has to be read in conjunction with paragraph 5. Paragraph 5 describes disbursements (other than those in paragraph 4) which are properly chargeable to the client and, thus, the lawyer's account is not affected whereas paragraph 6 describes disbursements that are not chargeable directly to the client, i.e., office type expenses which are deductible by the lawyer unless deferred by being charged to WIP.

As you are aware, the matching principle requires the matching of specific costs with the related earned revenue for the purpose of determining income for an accounting period. Where such revenue is recognized in an accounting period subsequent to that in which the related expenditure is made, the matching principle prescribes deferral of the deduction until the later period.

The Department's view is that this principle, which is part of the larger set of generally accepted accounting principles, is mandatory subject to any contrary provision of the Income Tax Act, i.e., an election under section 34 of the Act. Paragraph 34(a) of the Act permits a lawyer to elect to exclude WIP in computing income. If this election is made, disbursements which would otherwise be included in WIP, will be deductible when incurred.

The answer to question 1. above appears to be answered by the third sentence in paragraph 5 of IT-129R where it states:

"If a disbursement made on behalf of a client from whom an advance is received is not so charged in circumstances where it is reasonable to consider that eventually the lawyer can legally withdraw from the trust fund an amount equal to the amount of the disbursement, no amount is deductible by the lawyer for tax purposes in respect of the disbursement."

This is similar to the statement in paragraph 4 of the Bulletin that states:

"Disbursements on behalf of a client which are chargeable directly to funds advanced by a client, or would be so chargeable if such funds had been advanced, are essentially expenditures of the client and are not deductible by the lawyer."

The answer to question 2. above would appear to be answered by paragraph 6 of the Bulletin.

The answer to question 3. above is that the lawyer cannot deduct the billed specific and general disbursements on the grounds that no funds have been advanced by the client as they are in fact receivable and there are other remedies in the Act, i.e., bad debts, for uncollectible receivables.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch