In determining the cost of the work-in-progress of a professional practice, how should overhead expenses and the cost of labour be computed? CRA responded:
[Both] the direct costing method [and] the absorption costing method, take into account variable overheads in determining the cost of work in progress.
With respect specifically to the cost of labour of professionals, the CRA is of the view that these costs, including of employee benefits, should also be included in the calculation of the cost of work in progress.
However, where a taxpayer chooses the direct cost method, the taxpayer is not required to include fixed overhead costs in the cost of work in progress. Consequently, in such a case, the costs associated with renting office space or premises would not be required to be included … .
Furthermore, where a partner or owner of a business that is a profession contributes to the work in progress, the amount representing this contribution is not to be included in the cost of such work. …