Principal Issues: [TaxInterpretations translation] 1. Can a management corporation charge a professional corporation or an unincorporated professional business reasonable management fees for expenses directly related to the practice of a professional business where there is no longer a prohibition against carrying on the professional business through a corporation?
2. Would the answer be different if a professional order requires that only members of the professional order in question may be shareholders of the professional corporation?
Position: Question of fact.
Reasons: Legislative analysis and positions already taken by the CRA.
XXXXXXXXXX 2009-034397 I. Landry, M. Fisc. May 13, 2010
Dear XXXXXXXXXX,
Subject: Services companies for professionals
This is in response to your email of October 9, 2009 in which you asked us to confirm that a service corporation may charge a professional corporation or unincorporated professional business reasonable management fees for expenses directly related to the practice of a professional business where there is no longer a prohibition against carrying on the professional business through a corporation. You also asked us whether the answer would be different if a professional order requires that only members of the professional order in question may be shareholders of the professional corporation.
Following recent amendments to the Professional Code of Quebec, several professional orders have now adopted a regulation allowing their members to carry on their professional business through a corporation.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
The situation you indicated in your e-mail appears to be related to an actual situation, which concerns specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not the practice of the Directorate to issue a written opinion regarding proposed transactions otherwise than through advance income tax rulings. If your situation involved specific taxpayers and a transaction, you should submit all relevant facts and documents to the appropriate Tax Services Office for its views. However, we can offer the following general comments that we hope may be helpful to you.
Where a professional order has adopted a by-law allowing its members to carry on their professional business through a corporation, we are generally of the view that a related management corporation may perform actual real management and administrative services for their professional business in relation to expenses directly related to their professional practice. The deduction of management fees is not, however, subject to special legislative rules. To be deductible, management fees must in accordance with paragraph 18(1)(a) have been incurred by a taxpayer for the purpose of earning income from a business or property, subject to section 67 which limits the deduction to an amount that is reasonable in the circumstances. In general, reasonable management fees correspond to the fair market value of the services rendered.
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.