In FAQ #5, CRA stated that in the case of professionals’ contingency fee arrangements, e.g., for personal injury lawyers, “no amount is receivable by the professional until the right to collect the amount is established” and that “for purposes of determining the value of the professional’s work in progress at the end of the year, no amount would normally be recognized.” How can this be reconciled with the wording of s. 10(4)(a), under which the amount of work-in-progress (“WIP”) that a professional is required to value is the amount that can reasonably be expected to become receivable after the end of the year? (The professional could value its contingent fee files to determine what amounts could reasonably be expected to become receivable after the end of the year.)
CRA noted that 2017-0709101E5 F and 2018-0743031E5 now provide more detail.
When a designated professional, as part of an agreement, undertakes to provide services in exchange for contingency fees, sometimes a portion or all of these fees cannot be known or determined until an event occurring after the taxation year in which the professional provided the services. In that situation, at the end of the year, the fair market value of the WIP would be nil.
However, in certain circumstances, it is possible at the end of the year to establish an amount that can reasonably be expected to become receivable in respect of the WIP after the end of the taxation year, in which case, the fair market value of such WIP should correspond to this amount.