Principal Issues: [TaxInterpretations translation] Is a management fee paid by a partnership to a related corporation reasonable?
Position: Question of fact. Reasonableness depends on factors such as the nature of the services rendered and the time required to render the services, as well as the fees that could have been paid to obtain similar services from third parties.
Reasons: Previous positions.
2009-035280
XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc.
May 20, 2010
Dear Sir,
Subject: Reasonableness of management fees
This is in response to your two letters dated December 23, 2009 requesting our opinion as to whether a management fee paid by a partnership to a corporation is reasonable.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
You referred to individuals resident in Canada who are partners and who carry on a business of providing professional services and selling property through a partnership. You indicated that a corporation, whose only shareholders are the partners or persons not dealing at arm's length with the partners, provides services to the partnership in consideration for management fees. We have assumed that the corporation has employees to perform the functions for which the partnership is billed.
You added that the management fees are paid as consideration for the supply of a service, which includes the management of personnel, leasing, and administrative services. You specified that the value of the consideration for the services is determined based on a formula that multiplies the partnership's cost of goods sold by a fixed percentage.
Finally, you indicated that the consideration is based on an hourly rate charged by firms specializing in the supply of human resources in the partnership's field of operation and that the method for determining the value of the management fees is based on the fair market value of similar services rendered in the market.
Your Question
You are asking whether the management fee in this case is reasonable under section 67.
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
Generally, in order to be deductible, the fees, by virtue of paragraph 18(1)(a), must have been incurred by a taxpayer for the purpose of earning income from a business or property.
In addition, section 67 precludes the deduction of an otherwise deductible expense except to the extent that the expense was reasonable in the circumstances.
The determination of the reasonableness of an amount for the purposes of section 67 is a question of fact. In this regard, we cannot make a determination as to whether a fee paid is reasonable in the circumstances without knowing all the relevant facts, including the type of business of the taxpayer, the type of services provided, the time required to provide those services, and the availability and cost of similar services that might be provided by other businesses.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.