18 January 2002 Ruling 2001-0114993 - INTER CORPORATE MANAGEMENT FEES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether an arrangement whereby inter-corporate management fees are paid from Opcos to Holdcos, and then paid to shareholders, is within the CCRA's policy on not challenging the reasonableness of salaries to shareholder-managers.

Position: No.

REASON: In accordance with our most recent announcement on the issue at the 2001 CTF conference, the CCRA reserves the right to challenge the reasonableness of inter-corporate management fees. Where an individual is an active participant in a business and has ownership indirectly through a holding company, the arrangement between the individual and the operating company must be such that the salaries are paid directly to the individual.

XXXXXXXXXX Randy Hewlett, B.Comm
2001-011499
January 18, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request - Management Fees To Holding Companies

This is in reply to your letter of December 12, 2001, wherein you requested an advance income tax ruling on an arrangement that relates to the reasonableness of certain

inter-corporate management fees and ultimately their payment to certain individuals. You request that we rule that the fees are reasonable under section 67 of the Income Tax Act (the Act) since, in your view, the facts surrounding the arrangement fit within the Canada Customs and Revenue Agency's (CCRA) position on certain situations in which it would not challenge the reasonableness of salaries to shareholder-managers.

As you discussed with Marc Vanasse on January 16, 2002, we cannot provide an advance income tax ruling on the arrangement described in your letter. As noted in paragraph 15(j) of Information Circular IC 70-6R4, Advance Income Tax Rulings, dated

January 29, 2001, when a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the ruling, the CCRA will not provide an advance income tax ruling. The determination of whether an outlay or expense was reasonable in the circumstances under section 67 of the Act, involves such a finding.

The CCRA's recent pronouncement at the 2001 Canadian Tax Foundation relative to the ownership and management structure of a Canadian controlled private corporation (CCPC), described specific situations where we would not challenge the reasonableness of the amount of shareholder-manager remuneration under section 67 of the Act. In general terms, this position is limited to situations in which salaries and bonuses are paid directly to individuals resident in Canada who are active shareholder-managers of a CCPC.

In view of the foregoing, we are closing our file on the matter and will refund your deposit under separate cover.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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