Introduction

Architecture and design projects typically span months or years, with revenue arriving in instalments tied to project milestones — a deposit at signing, payments at schematic design, design development, construction documents, and project completion. How a firm recognises this revenue for tax purposes affects which taxation year the income falls in — and by extension, the timing and amount of corporate tax owed.

The Revenue Recognition Question

For an architecture or design firm operating as a corporation, revenue is generally recognised on an accrual basis — meaning income is reported when it is earned, not necessarily when it is collected.

For project-based work with milestone billing, "when earned" is the key question. There are two primary approaches:

Percentage of completion: Revenue is recognised proportionally as work is completed — if 40% of a contract's work has been performed by fiscal year end, 40% of the contract revenue is included in income. This approach most accurately matches revenue with the period in which effort is expended.

Completed contract: Revenue on the entire contract is recognised only when the project is substantially complete. This approach defers income recognition but may not be available for all firms or contract types under the applicable accounting standards.

For income tax purposes, the CRA expects revenue recognition to be consistent with ASPE (Accounting Standards for Private Enterprises) for most private corporations. ASPE Section 3400 governs revenue recognition and distinguishes between the rendering of services (where percentage of completion is generally used) and the sale of goods (where delivery is the trigger).

Architecture and design services are the rendering of services — which means percentage of completion is the default approach. Firms that have been using an informal "recognise on billing" approach that does not reflect the actual stage of completion of work may be recognising income in the wrong periods.

Deposits and Retainers

Design firms frequently receive a deposit or initial payment at the start of a project — before any significant work begins. This amount is not earned income on the day it is received. It is deferred revenue — a liability on the balance sheet — until the services it represents are performed.

Treating a project deposit as income in the period received overstates income and accelerates tax. This is a common error in practices where the accounting system does not track deferred revenue, and all bank deposits are recorded as revenue on receipt.

Work in Progress at Year End

A firm with a fiscal year end of December 31 may have projects at various stages of completion — design development 70% complete, construction documents 30% complete, construction administration ongoing. Under percentage of completion, each of these projects contributes partially to the year's income.

The recognition calculation requires estimating the stage of completion for each project — typically as a percentage of total contract fees based on work performed to date relative to total estimated work. This requires current project tracking records, not just billing records.

Where a firm's bookkeeping tracks only billings and not work performed, the year-end income recognition may not reflect the actual economic position of the firm.

Cost Overruns and Loss Contracts

Where a project is expected to result in a loss — costs exceed the contract price — the expected loss should be recognised immediately, not deferred until project completion. Under ASPE, if a contract is expected to result in a loss, the full expected loss is accrued in the period when the expectation becomes clear.

Failing to recognise expected losses on loss contracts can overstate income in the current year and require a large correction in the completion year — which may create unexpected taxable income in one year and a loss in another.

When to Speak With a CPA

Architecture and design firms approaching fiscal year end should review their project status and ensure revenue recognition is correctly applied across all active projects. A CPA can help ensure that deferred revenue, work in progress, and expected losses are properly reflected, producing a year-end tax position that accurately matches the firm's economic reality.

Rotaru CPA works with architects and design professionals in Ontario on revenue recognition, corporate compliance, and annual tax planning. Book a consultation to review your year-end position.