| 19(1) | File No. 5-9567 |
| W.C. Bailey | |
| 957-2061 |
April 27, 1990
Dear Sirs:
Re: Opco's Business Income
This will reply to your letter of February 6, 1990 concerning the deductibility of management fees paid to the corporate shareholder of Opco in order to reduce Opco's business income. We apologize for the delay in replying.
You described the following situation:
1. All the shares of Opco are owned by Holdco.
2. Holdco shares are owned by several individuals including S/H.
3. S/H is an employee of Opco, as are Holdco's other shareholders.
4. Opco seeks to reduce its active business income by paying a management fee to Holdco. S/H would provide the management services to Opco on behalf of Holdco.
5. Holdco would any a shareholder-employee bonus to S/H in recognition of S/H's active involvement in Opco out of the management fee received.
6. The other shareholders of Holdco would not receive a bonus.
You are concerned as to whether the Department's position with respect to shareholder-employee bonuses as set out in Revenue Canada's response to a Round Table question, at P.840 of the 1984 Canadian Tax Foundation Conference report, can be extended to the management fees as set out in the situation above and therefore deductible in computing Opco's business income.
We regret to inform you that the aforementioned position cannot be extended to management fees paid to corporate shareholder managers. Any management fee paid by Opco to Holdco must be reasonable in the light of the services actually rendered by Holdco through its employees in order for the management fee to be deductible by Opco. However, the position would be applicable to bonuses paid by Holdco to its qualifying shareholder-employees.
We trust that these comments will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch