The federal government’s policy rationale for repealing section 34 of the Income Tax Act – the billed-basis accounting tax provision for several groups of professionals – may seem sound, but doing so will create uncertainties and compliance burdens that have sunk similar proposals in the past, says the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada.
The federal government announced in its March 2017 budget that it would remove the exemption available to professionals including doctors, dentists, accountants and lawyers to exclude work-in-progress from their year-end income.
“The Joint Committee appreciates the overall policy rationale for this proposal, namely that recognition of revenues should not be deferred while associated expenses are deducted,” it says in a submission to Finance Canada, noting that similar amendments were contained in the the 1967 Carter Commission report and in the 1981 federal budget, but that neither proposal proceeded.
The Joint Committee makes several technical suggestions and recommendations to ease the way if the government decides to go ahead with its plan to repeal section 34:
- There should be legislative or regulatory guidance on how costs should be measured.
“We expect that professionals who are not covered by existing section 34, such as engineers, architects, etc., tend to progress bill and have a better measure of the proportion of a job that is completed. Designated professionals who rely on section 34 have not previously had a need to address the issue of what constitutes the cost of WIP.”
- The transition period should be longer than the two years that is currently proposed.
“For most longstanding practices, unwinding the deferral resulting from the build-up of a WIP balance could result in a very large tax liability relative to the practice’s current cash flow (which itself is fully taxable). This additional liability for tax might be quite onerous if it can only be spread over two years.”
- Methods of valuation should not be fixed until the end of the transition period.
“Many small and medium-sized professional practices, which have not devoted time and resources to navigating the tax implications and nuances of the taxation of WIP, are likely to simply report their year-end WIP at gross billing value … in that first year to avoid complexity,” the submission says.
- A de minimis exemption should be allowed firms billing under a certain amount over a period of time – eg., less than $2 million in aggregate revenues and costs over the previous five years – given that income fluctuates from year to year.
- The Act should be amended to clarify the treatment of contingency and other deferred-payment arrangements