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Federal budget will change how lawyers recognize income

It’s not only smokers and drinkers who have been targeted by the federal budget. Sin taxes are to be expected, and are par for the course.

But professionals such as lawyers, doctors and accountants have been taken aback by the proposal in the federal budget to eliminate their ability to exclude the value of work in progress in computing their income for tax years that begin or after Budget Day.

Taxpayers are generally required to include the value of work in progress in computing their income for tax purposes. But some professionals used to have the option to exclude the value of work in progress in computing their income. That allowed them to defer recognition of income (compared to full accrual) while being able to deduct the related expenses in the year they are incurred.

The budget does however provide some transitional relief, notes Lawson Lundell LLP. For the first tax year after budget day, 50 per cent of the lesser of cost and fair market value of the work in progress will be taken into account for the purposes of determining inventory for tax purposes. After that tax year, the full amount of the lower of cost and fair market value will have to be accounted for.

But as a McCarthy Tétrault bulletin points out, the federal government is concerned that this “billed-basis accounting enables these taxpayers to defer tax by permitting the costs associated with work in progress to “be expensed without the matching inclusion of the associated revenues.”

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