3 February 2006 External T.I. 2005-0156441E5 - Management Fee Paid To Shareholders

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.

Principal Issues: Whether a management fee that is paid to all the shareholders of a corporation on the basis of the number of shares they own, is a deductible expense of the corporation.

Position: No

Reasons: Generally, if the criteria upon which an amount is paid to shareholders is solely on the basis of their shareholdings, the amount is not considered incurred by the corporation of the purpose of earning business income. Notwithstanding that the amount is not deductible to the corporation, the shareholders must include the amount in income.

							Randy Hewlett
XXXXXXXXXX 						613-957-2049
							2005-015644
February 3, 2006

Dear XXXXXXXXXX:

Re: Shareholder Management Fee

We are writing in response to your letter of October 24, 2005, wherein you requested that we provide you with our opinion on whether a management fee that is paid to all the shareholders of a corporation on the basis of the number of shares they own, is a deductible expense of the corporation. You also inquired on the taxable status of the amount in the hands of the shareholders for CPP, EI and RRSP purposes.

One of the requirements under the Income Tax Act (the "Act") for an expense to be deductible in computing business income is that it be "made or incurred by the taxpayer for the purpose of gaining or producing income from the business" [paragraph 18(1)(a)]. In general terms, if the criteria upon which an amount is paid to shareholders is solely on the basis of their shareholdings, the amount is not considered incurred by the corporation for the purpose of earning business income and therefore, not deductible to the corporation.

Notwithstanding the fact such an amount is not deductible to the corporation, the shareholders must individually include the amount received in their respective incomes pursuant to subsection 15(1) of the Act. An amount included in a shareholder's income under subsection 15(1) of the Act is not subject to withholdings for CPP and EI, and is not considered "earned income" for RRSP purposes.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch