Proposed Income Tax on WIP? How Working with a Litigation Funder Might Help
In its recent budget, the federal government proposed the elimination of billed-basis accounting (BBA) for designated professionals. Before this change, lawyers could elect to exclude WIP from their income, and pay tax on the amounts only when billed to the clients. If this change is implemented, lawyers may be required to income pay tax on WIP.
There is considerable uncertainty as to how contingency fees fit into this picture, and the Canadian Bar Association has asked Finance Canada for clarification on this point.
For lawyers carrying significant WIP, litigation funding can play a role in responding to this development. First, a litigation funder can pay all or a portion of the legal fees incurred as a case progresses. Lawyers therefore receive their fees on a timely basis, but the client does not have to pay. This ensures that the lawyer pays tax on income actually in hand, rather than income that may be received later (or never), while offering creative fee structures to clients.
Second, a litigation funder could develop a comprehensive funding package for a law firm that may include advancing funds to satisfy any tax liability for WIP. This would permit the law firm to carry WIP where he or she so chooses, without incurring a loss until the fees are actually paid.
Alongside lawyers and advocacy groups, Bentham will be watching this development closely. If you have questions about how litigation funding might play a role in your practice, please contact us.
UPDATE (April 28, 2017): The Canada Revenue Agency has now clarified that this proposed change is not intended to have an impact on contingency fee arrangements. That is, where there is a bona fide contingency fee arrangement, no amount is receivable by the professional until the right to collect the amount is established by a negotiated settlement of court judgment.