Billed-basis Accounting

Under billed-basis accounting, a designated professional can elect to exclude the value of work in progress of the business at the end of a taxation year from business income for that year, and instead generally recognize the amounts in income only when the work is billed or billable.

Work in progress of a designated professional refers to partly finished goods or services which are in the process of completion and have not yet reached the stage where the professional can bill the client. This work in progress is considered inventory for the purposes of the Income Tax Act, and must generally be valued at the lesser of its cost and fair market value at the end of the year (i.e., the amount that can reasonably be expected to become receivable for that work in progress after the end of the year).

For taxation years that begin after March 21, 2017, Budget 2017 proposes to eliminate the ability of a designated professional to elect to use billed-basis accounting. As a consequence, these professionals will be required to include the lesser of the cost or fair market value of work in progress of the business at the end of a taxation year in computing its business income for that year, similar to other taxpayers.

To mitigate the impact of this change on designated professionals that elected to use billed-basis accounting for their last taxation year that began before March 22, 2017, a transitional period will be provided to phase in the inclusion of work in progress into income. For the first taxation year of the professional that begins after March 21, 2017, 50% of the lesser of the cost and the fair market value of work in progress will be taken into account for the purposes of determining the value of inventory held by the business under the Income Tax Act. For each subsequent taxation year, the full amount of the lesser of the cost and the fair market value of work in progress will be taken into account for the purposes of valuing inventory.

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. Under these circumstances, for purposes of determining the value of the professional’s work in progress at the end of the year, no amount would normally be recognized. As a result, the proposed change to eliminate the ability of designated professionals to elect to use billed-basis accounting is not expected to have any impact on these types of contingency fee arrangements where the terms and conditions of such arrangements are bona fide. 

Where a designated professional incurs expenses to earn income under a contingency fee arrangement, and the terms of the arrangement provide that the client has no risk or obligation to the professional in respect of those expenses unless and until some successful outcome is obtained in the future, the expenses would be deductible by the professional in computing business income for the taxation year in which they were incurred, assuming no other provision of the Income Tax Act would prohibit the deduction.

The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2017 documents for details.