6051944 Canada Inc. – Tax Court of Canada rejects CRA GST position that a management fee was a profits distribution

A private company with a new home construction business with revenues in the $12M to $16M range had a good 2009 fiscal year and when the 2009 accounts were prepared, accrued and paid management fees to its two shareholder-management companies of $1.8M rather than the fees in the $1M to $1.2M range, as had been accrued and paid for nearby years. A GST auditor was offended, claiming that the enhanced fee was "merely a profit distribution mechanism," and denied input tax credits on the portion of the fees in excess of $1M under ETA s. 170(2) (an analogue of ITA s. 67, although Favreau J perceived significant wording differences).

In allowing the appeal, Favreau J referred to the value of the services provided and the resulting profitability of the business. He did not seem troubled by the fact that the fees varied significantly from year to year notwithstanding that essentially the same services were provided each year. He also noted that for income tax purposes, what was deductible to the company was includible in the income of the management companies at the same federal rate of income taxation.

Neal Armstrong. Summary of 6051944 Canada Inc. The Queen, 2015 CCI 180 under ETA, s. 170(2).