Most professionals subject to the new 2017 Budget rule would choose to value their work-in-progress at the lower of cost and fair market value. However, there is only limited guidance on determining cost of professional WIP. In IT-463R and 5-807, CRA indicated that the cost of WIP means the total of laid-down cost of materials, the cost of direct labour (including benefits) and the applicable share of overhead; and that either direct or absorption costing is acceptable. In the December 18, 1981 Notes of the Department of Finance on the similar proposal in the 1981 Budget, it stated that the cost of WIP would not include: fixed or indirect overhead costs, such as rental, secretarial, and general office expenses; and the cost of the time of partners or proprietors. This should be clarified.
Given that s. 10(4)(a) would appear to contemplate that the valuation of WIP should be determined based on what the professional can reasonably expect will be collected under a fee arrangement in a subsequent year, rather than on what is collectible at year end, the legal basis for the CRA position, of not requiring the recognition of WIP associated with contingent fee arrangements, is unclear.
A longer transitional period than two years may be warranted respecting the phasing out of the deferral under s. 34 given that many of the primary beneficiaries of the WIP deferral may no longer be with the firm, so that the current partners, who may have had limited benefit from the deferral, will bear the entire cost of unwinding the deferral.
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