4 October 1993 External T.I. 9327245 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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

This is in reply to your letter dated September 16, 1993 with respect to management fees paid to corporate shareholders.

The situation described in your letter appears to involve a series of actual proposed transactions and accordingly, should be the subject of an advance income tax ruling.

Should you wish to request an advance income tax ruling on these or other proposed transactions, please refer to the procedures outlined in Information Circular 70-6R. Although we are unable to provide you with any opinion with respect to the specific transactions described in your letter, we can provide you with the following general comments.

Management fees paid by any corporation to another corporation, whether a corporate shareholder or otherwise, would be subject to the tests of reasonableness. The reasonableness of any management fee is a question of fact which can only be determined in light of the actual services rendered and not on the basis of ownership of shares. In determining the reasonableness of a management fee the following would be taken into consideration:

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

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

Whether a particular management fee would be reasonable in any given situation is a matter that is best determined by your local District Taxation Office.

Whether a Canadian-controlled private corporation ("CCPC"), as defined in paragraph 125(7)(b) of the Income Tax Act, carries on an "active business" is a question of fact which can only be determined after an examination of all the relevant facts in a particular situation on a retrospective basis. The Department's general views on the topic of income from an active business are set out in Interpretation Bulletin IT-73R4.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch