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: Tax Treatment of a Lawyer's Disbursements
This is in reply to your facsimile letter of September 2, 1993 asking if the technical interpretation on the above noted subject given in a letter dated March 4, 1986 is still valid.
As noted by you in your letter and as discussed (Thornley/XXXXXXXXXX) on September 13, 1993, the answers given in the letter in question were based on Interpretation Bulletin IT-129 and the writer's understanding of the subject. IT-129 has now been superseded by IT-129R, dated November 7, 1986 and although our views are basically the same as set out in the letter of March 4, 1986 there is, perhaps, more of an emphasis on GAAP principles. In this respect, 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.
It is our view then, as expressed in paragraph 6 of IT-129R, that it is only the disbursements that a lawyer customarily makes in the ordinary course of practice which are not chargeable directly to funds advanced by clients or which are not properly chargeable to the client under the terms of an agreement which are considered to be the lawyer's own expenses. Such expenses of a business nature incurred in a taxation year are deductible in computing income for that year for income tax purposes unless the lawyer chooses to defer such expenses that relate to work in progress.
We trust our comments will be of assistance to you.
Yours truly,
R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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