24(1)
902240
C. Tremblay
613-952-1361
19(1)September 19, 1990
Dear Sirs:
This is in reply to your letter of August 15, 1990, concerning management service corporations and related professional practices, where as a result of GST proposals, you purpose to have the employees working directly for the professional practice while providing services on behalf of the management company without pay.
You ask whether the corporation may charge all other expenses to the professional practice with the 15% mark-up as was previously done.
Our position remains as stated in answer to question 18 of the Thirty-Seventh Canadian Tax Foundation Conference, 1985 Revenue Canada Round Table Questions & Answers (a copy is enclosed for your convenience). The Department may, however, question whether a management service corporation charges a fee to the professional practice and there are no management service company employees to perform the functions in respect of which the purchase of supplies, ordered and handled by the employees of the professional practice, or general and laboratory services that have been performed by employees of the professional practice. A 15% mark-up by the management service corporation in such situations would in our view, be unreasonable.
The issue, in our opinion, is whether or not management services are provided by a bona fide management service corporation to a related professional practice. This is a question of fact to be determined on a case-by-case basis. If such services are in fact provided, the usual test of reasonableness and fair market value on charges claimed by the professional practice will apply. In addition, the services supplies to the professional practice must also be those usually and customarily required by the professional practice.
Finally, we note that in cases where the management company does retain one or more employees, so that it is providing services, but other employees are being paid by the professional practice while providing services without pay to the management company, the wages of those other employees will not be deductible to the professional practice to the extent they have not been laid out to earn income of the professional practice. Neither would such wages be deductible by the management company because they would not have been incurred by the management company.
We trust our comments are of assistance.
Yours truly,
for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch Question # 18
1) What is Revenue Canada's position regarding management service companies and management service fees?
2) Is the public to be informed of Revenue Canada's position, and if so, how and when?
3) Will paragraphs 18(1)(p) and 125(7)(d), "personal services business," be applied to management service corporations?
Department's Position
1) Revenue Canada will accept an arrangement whereby management or administration services are provided to a professional practitioner by related corporation that carries on a bona fide management services business. Management service fees may be deducted by the practitioner to the extent that they are reasonable in the circumstances and are otherwise allowable. The Department considers that such fees are reasonable if , in total, they do to exceed 115 per cent of the costs of providing the management or administration services. These services must be of a type usually or such a practice. The services to be provided and the basis of setting the management services fees must be pursuant to a written agreement.
As mentioned in Interpretation Bulletin IT-189R , dated February 27, 1984, only individuals may practise certain professions, depending on the relevant provincial law or professional regulations. Accordingly, where such a restriction exists, it is not considered reasonable for a management service corporation to provide any services that relate directly to the practice of the profession.
It is therefor not acceptable to take a 15 per cent mark-up in the corporation on expenses in this category, such as the following:
a) professional association fees and dues,
b) continuing professional education costs,
c) malpractice insurance premiums, and
d) salaries of employed professionals.
In the event of a reassessment disallowing a portion of a management service fee, a corresponding adjustment will normally be make to the management service corporation's income to eliminate, in effect, double taxation.
2) It is our intention to issue an information circular setting out Revenue Canada's position on management service fees. This circular will be released early in 1986.
3) The application of the personal services business rules to a management service corporation is a question of fact to be determined on a case-by-case basis. Revenue Canada's position on personal services business is outlined in IT-189R . The personal services business rules will not be applied to management service corporations in taxation years ending before 1984: it was not evident that management service corporations could, in certain circumstances, be included in the definition of "personal services business" until the precise wording of the provision was known on December 7, 1982, when Bill C-139 was introduced.