Billed-Basis Accounting - CRA opines the elimination of WIP election will not impact bona fide contingency fees.

On April 28, 2017, CRA updated its website to provide a FAQ on the 2017 Federal Budget proposal to remove the election for professionals to value work in progress at nil, however, it also discussed the issue of contingency fees. The Release noted:

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 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.

Editors’ Comment
Some practitioners have opined that the administrative concession relating to contingency fees has little or no basis in law. As such, practitioners should be cautious placing reliance on these administrative comments. As these changes proceed through the legislative process, the treatment of contingency fees will hopefully be clarified.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 430