It says *Thankfully, CRA has also recently confirmed that a partner/**sole proprietor’s time contribution is not part of a professional’s WIP cost, as they are entitled to the net residual profits of the business. * Further, in the past the Courts have interpreted Section 9 of the Income Tax Act to require that a taxpayer’s methodology to account for income should be an accurate picture of its profit for the given year.
Taxpayer:
Lawyer sole practitioner (sole proprietorship)
First-year of business - 2021
Practice is part-time (Earned $22,000)
He has one invoice for $1050.00 + HST that he billed for in early 2022, however, 90% of the work was completed in 2021.
What is the way of reporting this income on the T2125 transaction for income tax and the HST return purposes for the 2021 tax year, if any?
I know the WIP rules changed (as stated in the article per your link). I have been trying to get my professional clients on-side ever since. Several of the lawyers argue, however, that a majority of their WIP is contingent on winning court cases, or satisfactorily completing matters for their clients. As such, they refuse to provide any calculation of WIP. From what I recall, the statute still includes an exception for contingent billings that cannot be reasonably estimated.
That said, it sounds like you are concerned with only the one item which was billed in 2022. Since you actually KNOW the amount of the bill, you can calculate the amount that was WIP for 2021 - to be included on the T2125.
Sorry, I don’t know if there is a similar statute in the ETA regarding WIP. However, given the dollar amount you are inquiring about, I wouldn’t worry too much - the amount is so small, I’d judge the risks (from incorrect reporting) to be just as insignificant.
The key to this particular situation is that he is a sole proprietor - who therefore reports on a cash basis. No WIP to adjust for (see the Manning Elliott link to back me up on this one)
@dklassencga
Can you provide that Manning Elliot link? I’ve never heard of it. I have the CRA guideline which says everyone except fishers and farmers must use the accrual method:
For a part time practice with all of $22k in gross revenues, I’d just book the full $1,050 as 2021 AR. From a materiality standpoint, it’s a non-factor ($1,000 gross rev vs $950. The $50 difference = around $17 in tax. It functionally doesn’t matter.)
More importantly, it’ll make the filing balances for both the tax and HST reconcile a lot more cleanly than doing anything else.
I have never been able to reconcile the “for tax purposes” gross revenues of my proprietorship lawyer clients with their HST returns.
In addition to Fees (which include WIP) for the T2125 there are Client’s Disbursements paid out of the lawyer’s general account and collected through billings;
Disbursements Advanced (taxable for HST)
Disbursements Advanced (non-taxable for HST)
Disbursements Recovered (taxable for HST)
Disbursements Recovered (non-taxable for HST)
In a perfect world clients disbursements advance and clients disbursements recovered should net out to zero, however, somehow these professionals always seem to make a profit off disbursements.
How would this sound for the WIP section of a Note 1?
Work in progress calculated using the full absorption method and valued using the lower of cost or net realizable value. Contingency files valued at zero.
Wish I could be more help, but my focus is on US/Cross-border tax stuff. I can’t remember the last time I’ve had to do proper ASPE/IFRS note disclosures.
I have never been able to reconcile the “for tax purposes” gross revenues of my proprietorship lawyer clients with their HST returns.
In addition to Fees (which include WIP) for the T2125 there are Client’s Disbursements paid out of the lawyer’s general account and collected through billings;
Disbursements Advanced (taxable for HST)
Disbursements Advanced (non-taxable for HST)
Disbursements Recovered (taxable for HST)
Disbursements Recovered (non-taxable for HST)
In a perfect world clients disbursements advance and clients disbursements recovered should net out to zero, however, somehow these professionals always seem to make a profit off disbursements.
How would this sound for the WIP section of a Note 1?
Work in progress calculated using the full absorption method and valued using the lower of cost or net realizable value. Contingency files valued at zero.
I remember having a discussion in one of the seminar, sole proprietor professionals doesn’t have to include unbilled times in WIP
WIP includes the cost of labour of designated professionals, including employee benefits, but does not include the time contributed to the WIP by partners or sole proprietors (as no costs are typically associated with this work).