Principal Issues: [TaxInterpretations translation] Is there a need for written invoicing for management services between two non-arm's length corporations?
Position: Not according to the Income Tax Act but remains proof of income tax liability under the Income Tax Act.
Reasons: Information Circulars IC78-10R4 and IC05-1 provide the necessary information and guidance for any corporation required to keep accounting records.
2006-018060 XXXXXXXXXX Lucie Allaire (613) 952-5803 January 3, 2007
Dear Madam,
Subject: Request for technical interpretation: Need for written invoicing of management services between two affiliated corporations.
This is in response to your letter of January 26, 2006, in which you asked whether there was a need for billing for management services between affiliated corporations, which are two separate legal entities.
Facts
- XXXXXXXXXX holds 100% of the shares of XXXXXXXXXX and the two corporations trade with each other
- The same principal officer is responsible for both corporations
- The same accounting department, which is supervised by the same person, is shared by both corporations
- Various costs, such as a share of the principal officer's salary and benefits, a share of the accounting and administrative department's benefits, rent and office supplies, are charged by each corporation
- No taxes are charged
- The same accounting department, which is supervised by the same person, is shared by both corporations. Various expenses, such as a share of the principal officer's salary and benefits, a share of the accounting and administrative department employees' benefits, rent and office supplies, are charged by each corporation to the other.
- No taxes are charged to either corporation: they have duly so elected.
- Both corporations are Canadian residents and both are required to pay tax under the Income Tax Act (the "Act").
Question
You wish to know if there is a need for written invoicing of management services between the two affiliates.
Analysis
You have attached a copy of excerpts from the Canada Revenue Agency's ("CRA") policy on the transfer pricing legislation set out in Information Circular 87-2R. We are of the view that the provisions of that Circular do not apply in this case as IC87-2R deals with a situation as between a resident corporation and a non-arm's length non-resident person.
The Act does not specifically require written inter-affiliate billing, but we put forward the proposition that that this remains the best way to establish income tax liability.
Indeed, every corporation must keep accounting records in Canada under section 230 and subsection 149(1) and the definition of "person" in subsection 248(1). The definition of "record" in the same subsection includes invoices.
The CRA's policy regarding the retention of books and records of a Canadian taxpayer is set out in Information Circular 78-10R4. It is our view that these requirements also apply to the retention of any records and documents kept by a Canadian taxpayer with respect to the affairs of a non-arm's length corporation. Paragraph 11 of IC 78-10R4 sets out the general principle:
The Canada Revenue Agency recognizes:
- traditional books and records (including supporting source documents) produced and retained in paper format; and
- books and records produced and retained in an electronically readable format that can be related back to the supporting source documents and which are supported by a system capable of producing an accessible and useable copy.
Paragraph 4 of IC 05-1, on electronic record keeping, states that all business records in an electronically readable format must be retained by taxpayers. Paragraphs 14 of IC 78-10R4 and 7 of IC 05-1 provide details of the electronically readable medium so that the information is supported by a system capable of producing an accessible and usable copy. Paragraph 14 of IC-05-1 reiterates that persons using electronic business systems must ensure that sufficient information is captured and produced so that income tax amounts administered by the CRA can be determined and verified. Finally, paragraph 36 of the same Circular states that the electronic records must show an audit trail from the source document(s), whether paper or electronic, to the summarized financial accounts.
We hope that these comments are of assistance.
Best regards,
Phil Jolie
Business and Partnerships Director
Income Tax Rulings Directorate