Q.10 Reciprocal adjustment of intercompany management fees
Principal Issues: 1. What are CRA views in respect of a company which has received management fees from a related company when the related company is denied the deduction of such fees following an audit?
Position: 1. If the company which received the management fees reimbursed the equivalent of the amount of fees that the related company was disallowed and if certain conditions are met, CRA will generally accept to reduce the income of the company which received the fees by the amount repaid.
Reasons: Validation of a position enunciated in response of the question No. 39 at the Canadian Tax Foundation Annual Conference.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 10 Management fees and intercompany charges
The CRA is increasingly denying management fees or intercompany charges billed between related Canadian affiliates of the same group for various reasons.
For example, management fees may not be perceived to be reasonable under section 67 of the Act. It may happen that a corporation has paid a fee to another related corporation. The lack of proper documentation may be argued by the CRA to be the basis for denial of a management fee or intercompany charge. In many cases, the corporations concerned are fully taxable in Canada and the government's tax base is in no way affected. On the other hand, this may result in a form of double taxation for the group, since despite the denial of the expenditure, the income is still taxed to the other corporation.
Questions to the CRA
(a) What is the CRA's position respecting a corporation which has included management fees or intercompany charges when a related corporation is denied a deduction for such management fees or intercompany charges?
(b) Is it possible to avoid double taxation, if applicable, for the affiliated corporations in the event that the CRA has denied the deduction of management fees or intercompany charges?
CRA Response
When the deduction of intercompany management fees is denied following an audit of the returns of a given corporation, the CRA generally will accept an adjustment to the revenues of the recipient corporation so as to reduce such revenue if the recipient corporation reimburses the denied amount to the given corporation and its taxation year is not statute-barred. However, in order to effect such an adjustment, the recipient corporation must send a written request to the CRA and demonstrate that it has reimbursed, or committed to reimburse, a sum equivalent to that whose deductibility was denied. Furthermore, it is possible that supplementary adjustments will be necessary given the reduced income of the recipient corporation.
Nonetheless, the CRA may not apply such general position in certain situations. For example, this would be the case if there is abuse or a deliberate overstatement of the fees.
Furthermore, a given corporation generally has no right to deduct an expense for a business of another taxpayer which is paid by it if it does not receive any compensation for such expense. In order to avoid a type of double taxation in such a case, the given corporation would invoice the other taxpayer for the disbursement and the other taxpayer would pay such amount to the given corporation. Thus, the other taxpayer could deduct the amount of the invoice if it was an expense incurred for its business provided it was reasonable and complied with the other provisions of the Income Tax Act in light of the relevant facts respecting the situation of the taxpayer in question.
Nancy Deslandes
613-670-9023
October 9, 2015
2015-059567