16 May 1991 Internal T.I. 911089 F - 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.

Dear Sirs:

Re:  Management Fees

This is in reply to your letter of April 12, 1991 concerning two individuals who each own and control a Canadian corporation.  The two corporations formed a partnership that operates an active business.  The partnership pays a management fee to each corporation proportionate to the profits of the partnership.

In your view the management fee is not a deduction in computing the income of the partnership. It should be treated in the manner set out in paragraphs 10 and 11 of IT-138R for salaries.  Such salaries are considered distributions of partnership profits

You are also of the opinion that the arrangement would not be viewed as a "personal services business as defined in paragraph 125(7)(d) of the Income Tax Act (the "Act").

There is insufficient information to respond specifically to your request. However, the following-general comments may be of use.

It is a matter of fact whether the management fee can be viewed as a distribution of the partnership profits.  The position set out in IT-138R would not automatically extend to management fees paid by a partnership to a corporate partner.  Furthermore, the fact that the management fee is based on partnership profits would not itself rule out the possibility that the expenditure is something other than a distribution of partnership profits.

It is possible that the activities of the two corporations may constitute a "personal service business".  This would be determined by an examination of the specific facts and an analysis of the interrelationship between the individuals, the corporations, and the partnership.

We would be pleased to consider these issues in the form of a request for an advance income tax ruling should a taxpayer propose to enter into such an arrangement.

We trust these comments will be of assistance.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch