26 June 1990 Ministerial Correspondence 59524 F - Management Fees Paid to a Corporate Partner

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.

Attention: 19(1)

June 26, 1990

Dear Sirs:

Re:  Management Fees Paid to a Corporate Partner

We are writing in reply to your letter of December 29, 1989, wherein you requested our opinion as to whether management fees paid by a general partnership to one of its corporate partners will be treated in the same manner as salaries are in paragraph 10 Interpretation Bulletin IT-138R.  We apologize for the delay in responding to your letter.

Our understanding of the facts, as discussed in a telephone conversation, given to illustrate the issue is as follows:

At the time of creating a general partnership consisting of three corporate partners (one of whom owns the majority interest), the partnership agreement provided that the  majority interest partner is t receive form the partnership a reasonable management fee for management services provided to the partnership.

Your Question

Will the position in paragraph 10 of IT-138R, which indicates that "salaries paid by a partnership to its members do not constitute a business expense but are a method of distributing partnership income among members", also be applicable to a reasonable management fee paid by a general partnership to a corporate partner?

Our Comment

While we are unable to provide comments on the income tax effects of the income tax effects of the situation described above, we can offer general comment concerning the treatment of a management fee paid by a general partnership to a corporate partner.  It is our opinion that where the partnership agreement for a general partnership provides that one of the corporate partners is to receive a reasonable management fee form the partnership for management services provided, generally such a fee will not constitute a business expense for income tax purposes to the partnership, but instead will be considered to be a method of distributing partnership income to that partner.

This comment represents our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We trust this comment will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch