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WIP Reserve Professionals

Friday November 10, 2017

In its March 2017 Budget, the Federal government proposed to eliminate the ability for certain professionals to claim a deduction for their work-in-progress (“WIP”) effective for taxation years beginning after March 21, 2017. In this context, WIP represents unbilled time and costs incurred in the rendering of services to clients. Prior to the 2017 budget, professionals such as accountants, lawyers, dentists, doctors, veterinarians and chiropractors were able to elect to deduct their year-end WIP from their taxable income, essentially allowing them to defer the taxation of this income until billed.

The Budget indicated that for taxation years that begin after March 21, 2017, professionals will be required to include WIP in their income at the lower of cost and fair market value. In order to facilitate this transition, professional taxpayer will be allowed to phase-in this revenue over the first two taxation years.

In early September 2017, additional draft legislation was released for public comment by the Department of Finance surrounding the tax treatment of WIP by professionals. The new draft legislation proposes a longer phase in period than originally considered for professionals to remove the WIP reserve from their tax toolkit.

Now beginning in taxation years starting after March 21, 2017, the loss of the reserve is to be effectively phased in at 20% per year, likely affecting tax years 2018 through 2022. What this means for our doctors, lawyers, accountants, dentists, veterinarians and chiropractors, is that they will soon pay tax on incomplete, non-billed work. The valuation of this amount becomes quite important now that the amount will be taxed sooner than ever before.

If you need assistance or would like to speak with us regarding this or any other issue, please call and speak with one of our experts.