Subsection 170(2) - Further Restriction
Will CRA revisit its position on the reasonableness of management fees paid by an operating company to a holding company that is owned by an individual who is the ultimate operator/manager of the business in light of the 6051944 Canada Inc. decision? CRA responded:
…[T]his GST/HST case was heard under the…informal procedure and therefore has limited precedential value. Accordingly, there are no plans to undertake a review of the CRA’s position on the above-noted issue for income tax purposes. The determination of whether any outlay or expense is reasonable under section 67 of the Income Tax Act is primarily a question of fact and can only be determined once all the facts and circumstances are known.
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6051944 Canada Inc. The Queen, 2015 CCI 180, 2015 TTC 180
The appellant, which engaged in a home construction business, paid management fees to its two shareholders, which were companies whose sole respective shareholders were the founder of its business (Germain) and his son (Eric). Germain managed the office including personnel management, financing and overseeing land purchases and house sales. Eric focused on home design and construction. The management fees were allocated between the two shareholder companies on a 50-50 basis for 2009 and were $1,250,000, $1,770,000 and $950,000 for the appellant's 2008, 2009 and 2010 fiscal years (each ending on July 31). The Minister applied s. 170(2)(b) to allow input tax credits ("ITCs") only on the first $950,000 of the management fees for the 2009 year. In allowing the appeal, Favreau J stated (22-25, 28, 30, TaxInterpretations translation):
[T]he Minister alleges that the management fee was a mere year end accrual, that there was no management agreement and that there were no objective criteria for determining the amount… . The management fee was merely a profit distribution mechanism as it varied from year to year, without any real change in the qualify or level of services rendered… .
The jurisprudence addressing section 67 of the [ITA] is not relevant…because the text of section 67 is different… .
The evidence reveals that we have here a very profitable business which was very well managed by very experienced managers… . The annual revenues…for…2007, 2008, 2009 and 2010 were $16,045,841, $12,883,743, $13,180,230 and $11,970,088, respectively.
The services rendered by the management companies and their shareholders were not limited to customary management services as they encompassed financing and access to a bank of serviced lots ready for development, which were held by corporations controlled by …Germain and his children, Lyne and Eric.
…The payment of the management expenses by the appellant was essential to protecting its assets from the risks associated with carrying on its construction business. …That which was deductible at the appellant's level was subject to taxation at the level of the management companies at the same rate of federal [income] tax.
…[T]he management fees paid…[for] 2009 were clearly justified for the level of services received and were reasonable in the circumstances.