1991 Intercorporate Management Fees
QUESTION #46
Provided amounts paid to shareholders in their capacity as employees of a company meet the guidelines of the Department given at the 1981 (Q.42) and 1984 (Q.82) Revenue Canada Round Tables, the amounts will likely be deductible by the company.
What about the situation where the shareholders are employees of Holdco, which, in turn, provides management services to Opco?
In a technical interpretation dated December 31, 1990, the Business and General Division noted that the above practice would not extend to intercorporate management fees. In order to be fully deductible by Opco, such fees must be reasonable in light of the services actually rendered by Holdco through its employees.
Assuming it is the practice of Holdco to distribute corporate profits of its shareholders, would a management fee from Opco to Holdco be deductible should it be determined that the fee was not "reasonable in light of the services rendered"?
DEPARTMENT'S POSITION
The Department's 1984 Round Table administrative position would not appear to apply to Opco in a situation such as you have described above.
Any fees and/or bonuses paid to corporate shareholder managers by Opco must be reasonable in the light of the services actually rendered by Holdco through its employees to be fully deductible.
The resulting profits of Holdco may be distributed to the shareholder- employees of Holdco where the general practice of the corporation is to distribute profits of the company to shareholder- employees in the form of bonuses or additional salary. If the management fee from Opco to Holdco was not reasonable in light of the services rendered then the portion that is unreasonable would not be deductible by Opco.
Canadian Tax FoundationSeptember 1991Claude TremblaySection 23