The Power of Perspectives

The Canadian Bar Association

Kim Covert

Billed-basis accounting and access to justice: CBA submission

October 25 2017 25 October 2017

 

When the Finance Department released draft legislation in September to limit the use of billed-basis accounting, the CBA was happy to see that the government had acted to address one of the Association’s major concerns with the changes.

When the government announced as part of the 2017 budget that it planned to change billed-basis accounting and the way work in progress is taxed, the CBA said the proposed two-year implementation was far too short, given the amounts of WIP that may be subject to an unanticipated and accelerated tax consequence. The draft legislation will change that implementation period to five years.

“The CBA welcomes the longer transition period,” President Kerry Simmons, Q.C., wrote to Finance Minister Bill Morneau. “A five-year transition period will alleviate significant compliance and administrative costs for law practices and clients. We thank the government for taking note of our recommendation.”

That said, access to justice issues remain. The changes to the Income Tax Act could still make it harder for lawyers to take on work for people who can’t afford to pay immediately. To reduce the chances of the law inadvertently hindering access to justice, the CBA reiterated its earlier recommendations:

1)      The government clarify that three payment arrangements – classic contingency fees, de facto contingency fees and deferred payments – not be affected by the BBA proposal. (The Canada Revenue Agency has confirmed that the BBA changes are not expected to have any impact on contingency fee arrangements, but the scope of the CRA guidance is still unclear.)

2)      The Income Tax Act clarify the principles relevant to determining the cost of work in progress.

3)      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 proposal to eliminate the option to use BBA is interpreted by many lawyers as requiring them to pay tax on income that will not be realized for several years, if at all, or that is too uncertain to quantify,” the CBA President wrote. “Lawyers currently accommodate many clients who don’t have the means to pay up front through different types of deferred-payment arrangements. This results in a significant amount of work in progress being carried by the lawyer.”

The amount a lawyer will eventually bill for work in progress, and the time at which the lawyer is able to bill, often depend on future events and multiple factors outside the lawyer’s control, the letter says. Moreover, the fee charged to the client is affected by many factors and doesn’t necessarily bear any relation to the time the lawyer or others actually spent on behalf of the client.

The CBA applauds the objective of tax fairness, but says the government is proposing major changes to longstanding practice that can have a significant – and unintended – impact on Canadians seeking legal services.

“While measuring all business income on an accrual basis and the perfect ‘matching’ of expenses and revenues may suggest equality on its face, we suggest that the tax system must be flexible enough to reflect the differences in the manner in which various businesses are carried on (and the reasons for those differences). For the legal profession, we believe that tax policy must recognize the unique relationship clients have with their lawyer sand how it ensures access to justice.”

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