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:
This is in reply to your letter of August 15, 1990, concerning management service corporations and related professional practices, where as a result of GST proposals, you propose to have the employees working directly for the professional practice while providing services on behalf of the management company without pay. You ask whether the corporation may charge all other expenses to the professional practice with the 15% markup as was previously done.
Our position remains as stated in answer to question 18 of the Thirty- Seventh Canadian Tax Foundation Conference, 1985 Revenue Canada Round Table Questions & Answers (a copy is enclosed for your convenience). The Department may, however, question whether a management service corporation, in the situation you describe, is in fact carrying on a business. This will be the case where the management service corporation charges a fee to the professional practice and there are no management service company employees to perform the functions in respect of which the professional practice is being billed. Examples would include the purchase of supplies, ordered and handled by the employees of the professional practice, or general and laboratory services that have been performed by employees of the professional practice. A 15% markup by the management service corporation in such situations would in our view, be unreasonable.
The issue, in our opinion, is whether or not management services are provided by a bona fide management service corporation to a related professional practice. This is a question of fact to be determined on a case-by-case basis. If such services are in fact provided, the usual test of reasonableness and fair market value on charges claimed by the professional practice will apply. In addition, the services supplied to the professional practice must also be those usually and customarily required by the professional practice.
Finally, we note that in cases where the management company does retain one or more employees, so that it is providing services, but other employees are being paid by the professional practice while providing services without pay to the management company, the wages of those other employees will not be deductible to the professional practice to the extent they have not been laid out to earn income of the professional practice. Neither would such wages be deductible by the management company because they would not have been incurred by the management company.
We trust our comments are of assistance.
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