Work in Progress (WIP) Rules: How Lawyers and Accountants Must Report Unbilled Time — CPA Firm Near You, Montreal

Introduction

Lawyers and accountants in Quebec often perform substantial work before issuing invoices — known as Work in Progress (WIP). CRA and Revenu Québec have strict rules about whether WIP must be included in income, depending on the type of practice and billing method. Many firms misunderstand the rules, leading to income underreporting, tax reassessments, or cash-flow mismatches. This guide explains how WIP is taxed for legal and accounting professionals and how a CPA firm near you in Montreal can help ensure accuracy and compliance.

Legal and Regulatory Framework

Under the Income Tax Act and the Taxation Act of Quebec, WIP treatment depends on the nature of the professional practice:

Lawyers

• Since 2017, lawyers may elect to exclude WIP from income until the earlier of:
– Billing the client
– Collecting payment
• This is done under the “Elimination of WIP for Lawyers” rules
• Without the election, WIP may be included at cost or FMV

Accountants

• Accountants must include WIP in income at the end of the fiscal year
• Must choose between:
– Cost (salary cost of work performed)
– Fair market value (equivalent to billable rate)
• Once chosen, the method must be used consistently

Common Stats for Both Professions

• GST/QST applies once invoices are issued
• Trust-funds or retainers do not count as income until earned
• Firms must track time entries, disbursements, and project status

Key Court Decisions

Courts have ruled that:
• WIP must be recognized consistently — switching methods without CRA approval is not allowed
• Lawyers must document elections properly to defer WIP
• Accountants cannot undervalue WIP by excluding partner time or using unrealistic cost bases
• Firms failing to track detailed time entries face reassessment
• Retainers must not be prematurely recognized as income

Judges emphasize the need for accurate timesheets and fee agreements.

Why CRA and Revenu Québec Target WIP

Unbilled time is a major audit trigger because:
• Firms may delay billing to defer income
• WIP amounts can be large and subjective
• Disbursements may be improperly recognized
• Hourly rates and staff allocations may not match claims
• WIP methods may be inconsistently applied year-to-year
• Trust account records often conflict with revenue reports

Auditors compare engagement letters, time-tracking logs, trust ledgers, and billing schedules.

Mackisen Strategy

At Mackisen CPA Montreal, we help legal and accounting firms manage WIP accurately and minimize tax exposure. We:
• Determine whether the law firm should elect to defer WIP
• Select and apply consistent WIP valuation methods for accountants
• Install time-tracking systems aligned with CRA rules
• Reconcile trust accounts with WIP and billing
• Prepare WIP schedules for year-end financial statements
• Ensure GST/QST is remitted correctly on billed time
• Defend WIP calculations during audits

Real Client Experience

A Montreal law firm failed to elect out of WIP recognition and was reassessed on years of accumulated unbilled time. We filed late elections under relief provisions and reduced the reassessment. An accounting firm undervalued WIP by excluding partner hours; we corrected valuation methodologies and established proper tracking systems.

Common Questions

Do lawyers have to report WIP?

Not if they elect out under the special rules — but they must document it properly.

Do accountants have to report WIP?

Yes. Accountants must include cost or FMV WIP annually.

Is GST/QST charged on WIP?

Only when invoiced or collectible.

What records are needed?

Timesheets, engagement letters, task notes, disbursement logs, and billing histories.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps lawyers and accountants comply with WIP rules while minimizing unnecessary tax. Whether you operate a small practice or a large firm, our expert team ensures precision, documentation, and audit protection.