Morin – Court of Quebec finds that management fees paid to a related company that performed its functions through the agency of the fee payer were non-deductible

A pharmacist (“Morin”), who previously had operated six pharmacies as proprietorships, agreed with her management company (“377”) that she would incur various of the expenses of the pharmacies as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the pharmacies would be split on a 30/70 basis between 377 and her. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.

Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the years at issue under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose. Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts. Tremblay JCQ stated):

… Ms. Morin had no expectation of receiving any income from the management fees she paid to 377. …

It seems obvious that a reasonable businesswoman, considering only her commercial interests, would not have committed herself to such an expense.

However, the ARQ reassessments to deny her deductions, which were made beyond the normal reassessment period, were statute-barred, given that the general plan had been proposed by Morin’s tax advisors and she “could reasonably expect that the structure proposed to her could produce the legal and tax effects envisaged by her professionals.”

Neal Armstrong. Summaries of Morin v. Agence du revenu du Québec, 2023 QCCQ 2406 under ITA s. 18(1)(a) – income-producing purpose, and s. 152(4)(a)(i).