Anonymised, illustrative composite. An Ontario accounting firm's books, and its tax returns, still assumed an election the Income Tax Act stopped offering designated professionals years earlier.
At a glance
A five-partner Ontario accounting firm, structured as a professional corporation with a partnership on top, was selling a majority interest to a national consolidator. The firm had billed clients monthly in arrears for as long as anyone could remember and had never once carried work in progress as an asset on its financial statements. Its bookkeeping habit predated most of the people now running it, and nobody on the deal had asked why.
The buyer's tax due-diligence team asked a narrower question: not is the WIP recorded, but is the WIP taxed. Until 2017, section 34 of the Income Tax Act let a designated list of professionals — accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors — elect out of including unbilled work in progress in income at all. That election is gone. The consolidated statute now shows the section as “[Repealed, 2017, c. 33, s. 7]”, and nothing in the current Act revives it. The firm's accounting habit had outlived the law that justified it.
An independent review of time-and-billing records valued unbilled, unrecorded work in progress at $340,000 as at the most recent fiscal year end — work partners and staff had performed and not yet invoiced, on files that were still active. None of it appeared on the balance sheet the deal was priced from, and none of it had been included in the firm's taxable income for the year it was earned.
Two provisions do the work, and it matters which one applies to which fact. The repeal of s.34 removed the professional's ability to opt out of recognizing WIP; it did not, on its own, tell anyone how to value it. That is section 10(4)(a), which supplies a fair-market-value formula specifically for “work in progress at the end of a taxation year of a business that is a profession”: it “means the amount that can reasonably be expected to become receivable in respect thereof after the end of the year.” Read together with s.10(1)'s lower-of-cost-or-fair-market-value rule, a professional practice's unbilled time is inventory, and it has a defined tax value the day the year ends — whether or not the practice's own books show it.
That is a narrower rule than it looks. It exists only because s.34 was ever there to repeal, and s.34 only ever applied to the six designated professions. A trades or service business that simply has not invoiced yet was never inside the old election, so there is no repeal effect for it to trip over — unbilled revenue for a contractor or consultant is an ordinary accounting and billing-cycle question, not a statutory transition. The mechanic in this file is specific to a profession that once had, and no longer has, the option to look away from its own WIP.
The parties treated the $340,000 as a real, if previously unbooked, asset for purchase-price purposes — it went into the working-capital calculation rather than being ignored as an off-balance-sheet curiosity. More consequentially, the firm's outside accountant confirmed that the practice's corporate tax returns for the two years since the transition had in fact been filed without a WIP inclusion, at odds with s.10(4)(a). The purchase agreement was amended to make the vendors responsible for refiling those returns and for any resulting tax, interest or penalty, with the buyer's counsel reviewing the amended filings before closing rather than after.
Closing without adjustment would have left the buyer, now controlling the professional corporation, holding two years of returns that understated taxable income under a rule that had been in force the whole time — an exposure that surfaces on CRA's own timetable, not the buyer's, and that a working-capital peg built off the unadjusted balance sheet would not have priced at all.
The tell was institutional memory outliving the law it was built on. Nobody could say why the firm did not carry WIP; the honest answer was that a rule permitting exactly that had once existed, had been gone for years, and had never been replaced with a new habit.
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