19 September 1989 Income Tax Severed Letter AC58507 - Meaning of Cost of Work in Progress of a Business that is a Profession

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.

19(1)                                        5-8507
                                             A.W. Larochelle
                                             (613) 957-2140

Dear Sirs:

Re: Meaning of Cost of Work in Progress of a Business that is a Profession

This is in reply to your letter dated August 11, 1989, requesting the above-noted subject matter.

The Department has in the past expressed its views that in valuing cos of inventory, " cost" for tax purposes will be given its accounting sense as recommended by the CICA. The CICA accepts the principle of the inclusion of overhead in inventory and indicates that "prime costing" which excludes all overhead is not generally acceptable. These principles have been made known to the public though various Departmental Bulletins including Interpretation Bulletin IT-473 and IT-457R which deal with inventory valuation.

In our opinion, the cost of work in progress of a business that is a profession could only be interpreted in that same manner, that is, to include overhead. However, the Department is prepared to accept the direct costing method by which variable overhead cost only would be included in the work in progress. We do not believe that this contradicts in any way the statement made on December 189, 1981 by the Minister of Finance to which you refer in your letter.

Specifically, you have requested our view on the following points with respect to the cost of work in progress of a profession:

1. Are direct overhead expenses such as employee benefits of professional employees included in work in progress?

2. Are fixed or indirect overhead costs, such as rental, secretarial and general office expenses excluded from work in progress?

3. If a business that is a profession includes fixed and indirect costs in its financial statement work in progress, is it required to be consistent for income tax purposes?

Our Comments

In answer to your first question, it is our view that the total cost of professional labour including employee benefits should form part of the cost of the work in progress.

Regarding your second question, as indicated in Minister of Finance Release number 81-126 the cost of work in progress need not include fixed or indirect overhead costs, such as rental, secretarial and general office expenses.

In reply to your question, we would refer you to paragraph 4 and 16 of Interpretation Bulletin IT-473 and also the special release to this bulletin. You might also refer to IT-457R and in particular paragraph 11. As stated therein, it is our view that the method used should be the same for tax and financial statement purposes, except that for tax purposes, the taxpayer will not be required to imputer the cost of the partner's or proprietor's time.

We trust that the above will be of assistance. We would, however, caution that these comments are based on the limited information submitted in your letter, and as such, are not binding on the Department.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch