If you have a professional corporation then the new work in progress tax rules will likely affect you!
Professional corporations are typically set up and used by accountants, lawyers, dentists, doctors, veterinarians and chiropractors. Instead of running their business as a sole proprietor, everything happens under an incorporated entity.
Work in progress (WIP) includes any work that has been completed, but has not yet been billed to the client. Often professionals in these areas of work cannot bill their clients until the work is complete, which could mean weeks, months or even years before the work is billed.
With the implementation of the new rules proposed in the 2017 federal budget, professional corporations are no longer allowed to elect to exclude the value of WIP from business income.
Under the old rules, professionals could elect to exclude the value of any WIP at year end from their corporate income for the year. This meant that you could defer tax on that work until it was completed, but still deduct the costs related to that WIP in the current year. Under this method, professionals would also value their WIP at regular bill out rates. Therefore any revenue would not be taxed until it was actually billed. This had a huge impact on professionals as it allowed for increased cash flow while the work was being performed.
Professional corporations that previously deferred their WIP will be allowed five years to transition to the new rules. WIP will need to be included in income using one of the following options:
After this transition period is over, the full amount of WIP will need to be included in income.
It is difficult to know what portion of overhead and other costs such as office supplies and indirect salaries should be included. While this requires a considerable amount of judgement, it is important to remember that you must demonstrate that your income levels have been accurately reflected. CRA has indicated that they will accept either direct or absorption costing methods.
Sometimes contingency fee arrangements arise where your income will be dependent on the outcome of the scenario. The Canada Revenue Agency has indicated that professionals should use the amount of the fee that is reasonably expected to be receivable. If it is not possible to determine an amount, the value of the WIP will be nil.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Stephanie Kwan of KWB Chartered Professional Accountants for providing this content.
Other Posts by Stephanie
Personal Services Business (PSB)
In the past, it was OK and even advisable to conduct business through an incorporated company even if PSB rules applied.
With recent changes to the rules, though, this is no longer true. So what are these changes, and what do they mean to you?
Companies with Internet Based Sales
Do you sell any products or services online?
If your answer is yes, the CRA has introduced a new form that needs to be filed with your corporate tax return. Schedule 88 on Internet Business Activities is required if your business earns income from any websites, or is involved in any of the following:
Cost of Being Found to be a Personal Services Business (PSB)
We often hear about individuals who decide to incorporate while working as an employee for a business. But is it really beneficial to do so?
Let’s look at an example. Joe works as an employee and earns employment income (a T4 slip) in Alberta. On July 1, he incorporates. Although he has incorporated, he continues
Tuition and Education Amounts
As a student, you may be wondering what deductions you can make on your tax return. Can you claim the cost of textbooks? Can you transfer your credits to someone else?
What deductions can I claim?
There are three credits available: tuition, education, and textbook amounts. These are non-refundable tax credits that can be
EI for the self-employed
An advantage to being self-employed is that you don’t pay into Employment Insurance (EI) like employees do.
However, a program was introduced in 2010 which allows self-employed individuals to opt in to pay Employment Insurance (EI) premiums. Now that this has been in effect for a number of years, let’s revisit some of the key
CRA Online Mail
Tired of waiting for snail mail? The Canada Revenue Agency (CRA) now allows you to receive some of their correspondence electronically through their My Account service.
What correspondence does this apply to?
Notices of Assessment (issued after February 9, 2015)
Notices of Reassessment (issued after February 9, 2015)
Tax Free Savings Account letters (issued after
Taxpayer Bill of Rights
There are 16 rights set out in the Taxpayer Bill of Rights that you should expect when dealing with the CRA. These apply regardless of whether you are an individual or own a business. Their goal is to increase transparency, accountability, and to improve the quality of service they provide.
You have a right to:
Electing out of CPP payments
Did you know that if you are receiving CPP benefits, are still working and are between the ages of 65 and 70, you can elect to stop making CPP contributions.
Contributing to the Canada Pension Plan (CPP) is mandatory for working Canadians between the ages of 18 and 64, but optional after age 65.
Apprentice Tax Credit
If you have apprentices working for you, then you should be taking advantage of the apprenticeship job creation tax credit. (Apprentice Tax Credit)
An investment tax credit can be claimed on eligible salaries paid to eligible apprentices. The credit is equivalent to 10% of salaries and wages paid to that individual, to a maximum of
New Home Rebate
Buying or building a new home? Did you know that if you purchase a new home or have substantially renovated your own, you can claim a rebate on the GST or HST you paid through CRA’s new home rebate.
Your home must meet the following conditions:
Must be you or your relation’s primary
Have you ever wondered about CRA statistics like how many tax returns get filed each year or how much Canadians pay in taxes each year? Earlier this year, CRA released their 2014-2015 Annual Report to Parliament which included the following CRA statistics:
28 million tax returns were filed for the 2014 year. Approximately 1% of
Small Business Deduction
The current Small Business Deduction in Canada allows corporations to pay a lower rate of tax on their first $500,000 of active business income. Active business income includes income earned from a company’s regular operations, but excludes other income such as rental or investment income.
Budget 2016 released by the federal government has introduced
Changes to the Principal Residence Exemption
The Canada Revenue Agency (CRA) made a major change to the Principal Residence Exemption that affected Canadians when filing their 2016 tax returns. Regardless of whether the sale is exempt or not, individuals are now be required to report the sale of their principal residence on their personal tax return.
Under the Principal Residence Exemption
Many companies may experience a Canada Revenue Agency (CRA) audit. Here’s what you need to know:
Types of Audits:
Not all CRA audits are the same! In some cases, they may only want to see records pertaining to one area or it could be a full audit. Here are a few details regarding the different
GST Compliance Campaign
If you have received mail from the Canada Revenue Agency (CRA) regarding previously filed GST returns it is likely part of their GST compliance campaign.
In December 2016 and March 2017, the Canada Revenue Agency (CRA) launched a pilot project GST compliance campaign and sent over 750 letters to businesses registered for GST/HST. The letter
Allowable Business Investment Loss
An allowable business investment loss can arise in many ways:
1) Through a disposition of shares in a small business corporation
2) Through a disposition of debt owed to you by a small business corporation
3) When amounts that you have loaned to a small business corporation become uncollectible, or the corporation has gone bankrupt
CRA Service Standards
CRA service standards have been set by the CRA to give you an idea how long it should take to receive a response to your submission.
The CRA service standards for 2017 & 2018 have been released and the turnaround times that Canadians can expect are as follows:
Document or Service
CRA Audit Approaches
If you have been selected for a CRA audit, you may be wondering what kind of tests they will perform.
While this largely depends on whether the CRA auditor believes your records are accurate and reliable, they are also required to perform a number of indirect tests to verify that what you have earned has
TSheets is a website application that is used to track time and help with scheduling. If you’re tired of tracking your time sheets manually, this may be the solution for you!
Regardless of whether you are an employee, management, moving from one job site to another, or work in the same office each day, there
Capital Dividend Account
The capital dividend account (CDA) is used to track the amounts that can be paid out to shareholders, tax free.
How is the capital dividend account balance calculated?
Capital gains and losses – The balance increases by 50% of any capital gains your company incurs, and decreases by 50% of any capital losses your company