Spotlight on billed-basis accounting

  • June 08, 2017

When the federal  government tabled its budget on March 22, the CBA found in it a lot of positive measures – and one bombshell that has a potential to be a game-changer for lawyers in all kinds of practices, and severely hinder access to justice.

In a chapter devoted to tax fairness was an announcement of the government’s intention to “Eliminate the use of billed-basis accounting for income tax purposes by a limited group of professionals in order to avoid giving these professionals a deferral of tax that is not available to other taxpayers.”

That “limited group” includes accountants, dentists, medical doctors, chiropractors, veterinarians and of course lawyers. The proposed measure could mean that lawyers could now be taxed on their work in progress – income that might not be realized for several years, if at all, or that is too uncertain to quantify.

The CBA leapt into action immediately, writing a letter to Prime Minister Justin Trudeau and Justice Minister Jody Wilson-Raybould, among others, expressing concern with what this measure could mean for Association members who rely on contingency billing and deferred payment arrangements – and, importantly, with what it would mean for clients who could not otherwise afford a lawyer’s services. What might have looked to Finance officials like the closing of a tax loophole could become a barrier to access to justice.

The Association also sent out a call through its various publications for testimonials from members about the impact this measure could have. We received an unprecedented number of responses with a similar message:

  • One family lawyer says “(T)he lawyer’s work accrues significant WIP which cannot reasonably be billed because the agreement with the client is that the account will not be paid until assets have been realized and claims have been settled.”
  • An Aboriginal law specialist says, “(Many clients) are unable to pay retainers in advance and contingency fee arrangements are not viable solutions because much of the legal relief being sought against the Crown tends to be declaratory.”
  • A criminal lawyer adds, “It is not uncommon for Legal Aid to cut the hours of time allowed for a case and thus cut my bill … It is an exercise in theory to evaluate the work in progress as if it was real billable time, much less actual money coming in.”

Working with these responses and with input from the CBA National Tax Law Section, the CBA has been in talks with MPs as well as department and ministerial officials from Finance and Justice portfolios.

An early win for the CBA came when the Canada Revenue Agency confirmed that the proposed budget measure will not affect contingency fee arrangements.

The BBA provision was not part of the first budget implementation bill, which means it will likely not come up for discussion in the House before the fall. In the meantime, a letter from President René Basque was sent to Finance Minister Bill Morneau. It lays out our issues with the proposed measure – specifically, that it may hinder access to justice by creating a disincentive for lawyers to take on work from people who won’t be able to pay up front, and that the implementation period is too short. It offers the following recommendations

  • The government clarify that three payment arrangements – classic contingency fees, de facto contingency fees and deferred payments – will not be affected by the proposal
  • That the Income Tax Act clarify the principles relevant to determining the cost of WIP
  • The proposal be implemented over five to seven years
  • That a de minimis exception for smaller legal practices be crafted as a practical way to exclude situations where the required compliance and administrative costs are disproportionate to the anticipated tax impact.

The Joint Committee on Taxation of the CBA and CPA Canada also made a submission, which addresses the proposal from a technical perspective. 

We’ll continue to communicate with the Finance and Justice departments, and keep you updated on any new developments as they happen.