| 922172 | |
| 24(1) | L. Holloway |
| (613) 957-2104 |
Attention: 19(1)
September 14, 1992
Dear Sirs:
Re: Work in Progress - Technical Interpretation
This is in reply to your letter dated June 5, 1992, requesting a technical interpretation with respect to section 34 of the Income Tax Act (the "Act").
Specifically you had asked whether the section 34 election to exclude work in progress must be made at the individual or at the partnership level. In addition you had whether the election would result in the exclusion of total time charges plus all disbursements from income in the case of law firm on unbilled amounts.
Our Comments
In response to your first question, paragraph 2 of Interpretation Bulletin IT-457R provides:
"Under the professional business method, provision is made for a taxpayer to elect not to include in income for a taxation year from each designated professional business an amount in respect of work in progress at the end of the year. Where a taxpayer is a member of a partnership, subsection 96(3) provides that a valid election not to include work in progress can be made only by the partnership, i.e., it must be made or executed on behalf of all partners by one partner authorized to act for the partnership. Once this has been done, all other partners are deemed to have made a valid election and are bound by it. Where one member of a partnership is itself a partnership, the election must be made or executed as set out in IT-413 "Partnership as "Person' or "Taxpayer' for subsection 97(2)"."
Your second question concerned the components of work in progress inventory of a law firm. The Department's general position with respect to inventory valuation is outlined in Interpretation Bulletin IT-473. Paragraph 8 of IT-473 states:
"In the case of inventories of work in process and finished goods, 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. Again, where they are significant, storage costs should be reflected in product cost."
It is our view that the method used for valuing work in progress should be the same for tax and financial statement purposes.
We trust the above comments will be of assistance.
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch