20 June 2003 External T.I. 2003-0015775 - INCOME CONTINGENCY FEE ARRANGEMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: When is legal fee income taxable under a contingency fee agreement if the lawyer can only bill amounts as the client receives compensation under a structured settlement?

Position: At the earlier of the time an amount is billed or becomes billable. However, if for any reason any amount is received before it is billable, it must be included in income when received since the legal services have already been rendered.

Reasons: Paragraph 12(1)(b) and subsection 9(1) of the Act.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-957-8973
2003-001577
June 20, 2003

Dear XXXXXXXXXX:

Re: Legal Fee Income From A Contingency Agreement

We are writing in response to your letter of April 28, 2003, wherein you requested our opinion on the above-noted issue.

In your letter, you described a hypothetical situation where, under the terms of a written contingency fee agreement between a lawyer and client, legal fees are only billable by the lawyer on a periodic basis as amounts are received by the client under a structured settlement. You have asked us to confirm that, pursuant to paragraph 12(1)(b) or any other provision of the Income Tax Act (the Act), the lawyer is not required to include any amount in income in respect of the legal services rendered, until it is billable under the contingency fee agreement.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.

A taxpayer's income (or loss) from a business or property is computed under the rules set out in subdivision b of Division B of the Act. In accordance paragraph 12(1)(b) of the Act, a taxpayer must include in income for the year any amount that becomes receivable in respect of property sold or services rendered in the course of a business in the year, even when the amount or any part thereof is not due until a subsequent year. For purposes of this provision, an amount is deemed to become receivable on the earlier of:

(i) The day on which the account in respect of the services was rendered, and

(ii) The day on which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services;

Provided no amount has been received prior to the time it is billed or has become billable under the terms of the contingency fee agreement, it is our view that in the situation described in your letter, the legal fees will not have to be included in income until the taxation year during which it is billed or becomes billable for purposes of paragraph 12(1)(b) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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