Principal Issues: [TaxInterpretations translation]
Could the CCRA apply paragraph 18(1)(a) or section 67 of the Act to deny the deduction of agent's fees paid by the professional?
Position:
Yes, if no services have been rendered or if the fee does not represent the fair market value of the services rendered by the agent.
Reasons:
The position taken by the CCRA in 1985 regarding the reasonableness of management fees not exceeding 115% of the costs of management services does not apply where the company acts as agent for the professional, nor when the company renders no services to the professional.
| December 18, 2002
XXXXXXXXXX |
Headquarters 2002-016481 |
Company acting as agent for a professional
This is further to your email of September 24, 2002, in which you asked for our opinion concerning the agent fees charged by a management company to a professional for services rendered under a mandate.
Facts
A professional appointed his management company as his mandatary to act on his behalf in several areas related to the management of his practice and the purchase and rental of property. For example, the mandatary could act on the professional's behalf in the selection, hiring, remuneration and management of technical, secretarial and maintenance personnel, the negotiation and payment for the purchase, rental, acquisition or repair of all furniture, equipment and accessories, or the negotiation and payment for the rental or purchase of a heated, lighted premises equipped with all the services and equipment required for the practice of the principal's profession.
Generally speaking, in consideration for the services required by the professional as principal, the professional undertook to pay to the agent a sum representing XXXXXXXXXX% of the cost of all fees, expenses and disbursements incurred by the professional or on his behalf in connection with the mandate.
However, the mandate contract setting out these various provisions has not been signed. In addition, an analysis of the management company's expenses shows that it has no employees to carry out the tasks stipulated in the contract with the professional. All management-related salaries and expenses are deducted and paid by the professional, including the salary of the person responsible for the administration of the XXXXXXXXXX. The fees charged by the management company as agent, however, are calculated on those salaries and expenses incurred by the professional, i.e., XXXXXXXXXX% of those expenses.
You stated that the professional is not the one who performs the tasks stipulated in the agency agreement on behalf of the company.
Question
You wish to know whether you can disallow, pursuant to section 67 of the Income Tax Act (the "Act"), the deduction of the agent's fees paid by the professional to the management company, or a portion thereof, because they do not represent reasonable expenses.
Our Comments
In the situation you have presented to us, we are of the view that you could disallow the deduction of the agent's fees by invoking paragraph 18(1)(a). According to the information you have obtained, the agency agreement has not been signed, and the services required of the company under the agency agreement are not provided by the company, but by the professional's employees. Consequently, you could argue that the professional is not making the payment to the company in order to earn income from his business. It is therefore a non-deductible expense pursuant to paragraph 18(1)(a).
On the other hand, you may wish to consider the application of section 67 if the corporation renders certain services to the professional, but the fees paid by the professional for these services do not seem reasonable.
The position taken at the 1985 Canadian Tax Foundation conference, that the CCRA considers fees paid by a professional to a genuine management company that is related to be reasonable if they do not exceed 115% of the costs of such services, does not apply in cases where the company is merely the professional's agent. In the case of an agent, we are of the view that the fees paid by the professional should be reasonable and correspond to the fair market value of the services rendered by the agent. Furthermore, if it were a genuine management company and not an agent of the professional, the CCRA would question the deductibility of the XXXXXXXXXX% fee if the management company had no employees to perform the functions for which the professional was billed.
Consequently, the portion of the agent's fees paid to the management company that does not correspond to the fair market value of the services rendered by the company would not be reasonable, and you could disallow this portion in accordance with section 67.
As stated in 1985, if the CCRA disallows the deduction of some or all of the management fees a professional pays to a management company, the CCRA will generally reduce the management company's income by the amount of the disallowance. In our view, this position also applies in the case of unreasonable agent fees.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the CRA library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnership Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 3 -