Dear Sirs:
Re: Deductibility of Management Fees
This is in response to your letter dated January 3, 1991, requesting a technical interpretation on the tax treatment of paying intercorporate management fees.
Specifically, you have asked how the payor corporation and the recipient corporation would be taxed in the following hypothetical situation:
Corporation X
Preliminary income $1,000.000
Fees paid to Corporation A (280,000)(Corporation A owns 35%
Fees paid to Corporation B (240,000)(Corporation B owns 30%
Fees paid to Corporation C (200,000)(Corporation C owns 25%
Fees paid to Corporation D $ (80,000)(Corporation D owns 10% ------------
Income after payments of fees $ 200,000
Our Comments
Fees paid from Corporation X to any one of its corporate shareholders would be subject to the tests of reasonableness. The reasonableness of any management fee paid is a question,of fact that can only be determined in light of the services actually rendered by corporations A, B, C, and D to corporation X. In determining the reasonableness of a fee the following should be considered:
a) the nature of the services rendered and time expended in performing those services; and
b) the fees which would be paid to obtain similar services from other services.
Whether a particular management fee would be reasonable in the circumstances is a matter which is best determined by your local District Taxation Office.
Our position with respect to the payment of salaries or bonuses to an employee-shareholder remains as stated in previous Canadian Tax Foundation Conference reports. Generally, the Department would not challenge the reasonableness of bonuses paid to individual shareholders active in the corporation's business where the corporation has established either a practice of distributing profits to such employee-shareholders in this manner or a policy of declaring bonuses to shareholders to remunerate them for the profits the corporation has earned that in fact are attributable to special know-how or skills of the shareholder. This policy cannot however be extended to management fees paid to corporate shareholders in the manner suggested in your hypothetical example. As stated above, in order to be deductible, any fees paid to a corporate shareholder must be reasonable in light of the services rendered by it.
We trust our comments will assist you in this matter.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch