18 March 1992 External T.I. 9203575 F - Deductibility Of 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.

                    920357

24(1)               C. Tremblay

                    (613) 952-1361

Attention:  19(1)

March 18, 1992

Dear Sirs:

Re:  Deductibility of Management Fees

This is in reply to your letter dated January 29, 1992, requesting our comments with respect to the deductibility of management fees paid by a corporation to a corporation whose business is a personal service business, the "incorporated employee"  being a shareholder of the corporation paying the management fees.

It is your understanding that the Department would not generally challenge the deductibility of bonuses paid directly to a shareholder-employee.

Our Comments

The situations described in your letter appear to involve a series of actual proposed transactions.  It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2.  Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed.  Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Fees paid by a corporation to any corporation, whether a corporate shareholder or otherwise, would be subject to the tests of reasonableness.  The reasonableness of any management fee paid is a question of fact that can only be determined in light of the services actually rendered.  In determining the reasonableness of a fee the following should be considered:

a)     the nature of the services rendered and time expended in performing those services; and

b)     the fees which would be paid to obtain similar services from other sources.

Whether a particular management fee would be reasonable in the circumstances is a matter which is best determined by your local District Taxation Office.

Our position with respect to the payment of salaries or bonuses to an employee-shareholder remains as stated in previous Canadian Tax Foundation Conference reports.  Generally, the Department would not challenge the reasonableness of bonuses paid to individual shareholders active in the corporation's business where the corporation has established either a practice of distributing profits to such employee-shareholders in this manner or a policy of declaring bonuses to shareholders to remunerate them for the profits the corporation has earned that in fact are attributable to special know-how or skills of the shareholder.  This policy cannot however be extended to management fees paid to corporate shareholders or to a corporation which carries on a personal services business.  As stated above, in order to be deductible, any fees paid to a corporation must be reasonable in light of the circumstances and such fees must be reasonable in light of the services actually rendered by the corporation through its employees.

The resulting profits of the management corporation may be distributed to its shareholder-employees where the general practice of the corporation is to distribute profits of the company to shareholder-employees in the form of bonuses or additional salary.  If a management fee paid to a management corporation was not reasonable in light of the services rendered then the portion that is unreasonable would not be deductible by the payor.   However, the Department's administrative policy would be applicable to bonuses paid by the management corporation to its qualifying shareholder-employees.

We trust our comments are of assistance.

Yours truly,

E. Wheelerfor DirectorBusiness and General DivisionRulings Directorate Legislative and Intergovernmental  Affairs Branch