Dear Sirs
Re Work-in-progress
This is in reply to your letter dated July 24, 1991 in which you requested our views on the application of paragraph 10(5)(a) and subsection 34(1) of the Income Tax Act (the "Act") and the method of inventory valuation in respect of the work-in-progress of a patent agency carried on by a partnership of a law firm and a professional engineer
Subsection 34(1) of the Act
The Department's general position with respect to the election, pursuant to subsection 34(1) of the Act, available to professionals to exclude work-in-progress from income is outlined in interpretation Bulletin IT457R dated July 15, 1988.
The election, pursuant to subsection 34(1) of the Act, is only available to a taxpayer carrying on a business that is the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor (a "designated professional business") By virtue of subsection 248(1) and paragraph 232(1)(c) of the Act, for the purposes of the Act, the word "lawyer" means "in the province of Quebec, an advocate, lawyer or notary and, in any other province of Canada, a barrister or solicitor". Accordingly, the provisions of subsection 34(1) of the Act are not available in computing the income of a taxpayer from a business that is the practice of a patent agent.
For greater certainty, paragraph 4 of IT-457R states, "The members of a partnership who carry on a business that is not a designated professional business cannot elect under paragraph 34(a) in respect of that business even if the partners are qualified to carry on a designated professional business."
Paragraph 10(5)(a) of the Act
Subsection 248(1) of the Act defines "inventory" as "a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year." The term "work-in-progress" is not defined in the Act and therefore must be given its ordinary meaning which it has in business usage. It is our view that work-in-progress would represent inventory to a patent agency. For greater certainty only, paragraph 10(5)(a) of the Act states that work-in-progress of a business that is a profession is inventory of the taxpayer.
Inventory Valuation
The Department's general position with respect to inventory valuation is outlined in Interpretation Bulletin IT-473 dated March 17, 1981 Paragraph 8 of IT-473 states:
"In the case of inventories of work-in-progress.... cost means the laid-down cost of materials plus the cost of direct labour applied to the product and the applicable share of overhead expense properly chargeable to production. Either direct costing, which allocates variable overheads to inventory or absorption costing, which allocates both variable and fixed overheads to inventory, will be accepted by the Department as a method of costing inventory, but if overhead is included in inventory on an acceptable basis for financial statement purposes, the method of valuation used for tax purposes must not be inconsistent with the method used for financial statement purposes. Prime costing, a method in which no overhead is allocated to inventory, is not accepted by the Department as a method of costing inventory."
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. In accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 the comments
expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.
We trust our comments are of assistance
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch