2 April 1993 External T.I. 9235715 F - Management Fees/Bonuses

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Deductibility of Management Fees/Bonuses

This is in reply to your letter of November 27, 1992, requesting a technical interpretation relating to the deductibility of intercorporate management fees and shareholder bonuses in the hypothetical situation described below:

Facts:

1.     Opco is a Canadian controlled private corporation ("CCPC") with a July 31, year end.

2.     Holdco, a CCPC with a January 31 year end, owns all the shares of Opco and provides management services through its principal and only shareholder, Mr. A, who is Holdco's only employee and is very active in the affairs of Opco.

3.     Opco carries on an active business and earned net income of $500,000 in 1992. On July 31, 1992 Opco declared and paid a management fee to Holdco for services provided by Holdco.

4.     In years prior to 1992, Opco paid similar bonuses directly to Mr. A. (We assume that Mr. A was an employee of Opco and that the bonuses were remuneration for services provided as an employee).

5.     In 1992, Opco is entitled to a $200,000 small business deduction limit.

6.     Holdco declares a bonus of $300,000 to Mr. A in its January 31, 1993 Year end. The bonus will be paid to Mr. A and the withholding remittances will be made on or before August 10, 1993.

Questions

A.      Will the $300,000 paid by Opco to Holdco be deductible for income tax purposes, given the fact that the services rendered to Opco by Holdco would be identified as services rendered by Mr. A to Opco? In the event the $300,000 is not deductible, will the fee be considered to be income to Holdco in its 1993 year?

B.      Will the $300,000 bonus paid from Holdco to its shareholder, Mr. A, in Holdco's January 31, 1993 year be deductible for income tax purposes? Will the bonus be considered remuneration to Mr. A in 1993 and taxable in his hands in that year?

C.      Would our position be different, if Holdco's year end was July 31, 1992? In this case, the $300,000 would be accrued and deducted in Opco's July 31,1992 year, included in Holdco's July 31, 1992 year and the payment to Mr. A deducted as a management fee in Holdco's July 31, 1992 year.

Our Comments:

As you are aware the reasonableness of a salary XXXX which can only be determined by a thorough review of the circumstances of each particular situation. This type of review is generally performed by the local District Taxation Office. We will, however, provide general answers to your questions.

A.      Provided the amount paid to Holdco by Opco is reasonable in the light of the services actually rendered by Holdco to Opco through Mr. A, this amount would be deductible to Opco in computing its 1992 income. In any event, the amount paid to Holdco would be taxable, notwithstanding the status of their deductibility to Opco.

B.      Again, subject to reasonableness and provided the amount otherwise meets the guidelines stated by the department on this subject at the 1981 and 1984 Canadian Tax Foundation, the bonus paid to Mr. A by Holdco would be deductible in computing Holdco's 1993 income and will be taxable in Mr. A's hands as income in the calendar year received.

C.      Provided that the above guidelines in A. & B. are met, the fact that Opco and Holdco have the same year end would not effect our positions concerning deductibility reflected above. However, Holdco must pay the bonus to Mr. A within 180 days from its July 31, 1992 year end in order not to offend subsection 78(4) of the Income Tax Act which would cause the unpaid amount to be added back to Holdco's 1992 income. Mr. A would include the bonus in income in the calendar year received.

Nothing in the above comments should be construed as relating to the reasonableness of the amounts in question.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments helpful.

Yours truly,

R. Albert for Director Business and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch