Related Companies


The Queen v. Parsons, 84 DTC 6447, [1984] C.T.C 354, 84 DTC 6452 (FCA)

It was found by the trial judge that management companies, which two professional engineers ("Parsons" and "Vivian") had incorporated and interposed between themselves and an engineering firm ("Design") of which they had been employees until that time, "(1) had no bona fide business purpose, (2) had, primarily, the purpose of directly reducing their income tax liabilities [and] (3) had, secondarily, an estate planning purpose which ... must be taken to have also been solely motivated by tax and personal, not business, considerations." Nonetheless, it was held that the arrangements were not a sham and were effective for tax purposes because the legal rights and obligations which the parties purported to create, they had succeeded in actually creating.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham no sham as purported legal rights were created 117
Tax Topics - General Concepts - Tax Avoidance no sham as purported legal rights were created 117
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Related Companies 117

The Queen v. Daly, 81 DTC 5197, [1981] CTC 270 (FCA)

The purported interposition between the taxpayer and his employer of a management corporation was legally ineffective, and thus, also ineffective for tax purposes, because (1) he failed to have his existing employment contract cancelled (or effectively assigned to the management corporation) and, in fact, he later entered into a similar employment contract with the same employer, which contract made no reference to the management corporation, and (2) the dealings between the taxpayer and his employer were consistent only with their being in an employer/ employee relationship.

Mendels v. The Queen, 78 DTC 6267, [1978] CTC 404 (FCTD)

A partnership of two dentists determined that the value of administrative services performed by them was $20,000, and "by means of" appropriate journal entries paid that sum to a service company that was equally owned by them. There was no change in the services that they performed after they commenced to make payments to the company, there was no genuine business purpose to the transaction, and the deduction of $20,000 by the partnership accordingly was found to be prohibited. In addition, the bulk of the administrative services were performed by them in their capacities of partners, rather than of employees of the company.

Dominion Bridge Co. Ltd. v. The Queen, 75 DTC 5150, [1975] CTC 263, aff'd 77 DTC 5367, [1977] CTC 554 (FCA)

The amounts paid by a wholly-owned Bermudan subsidiary ("Span") for purchases of steel were found to constitute the taxpayer's cost of that steel, rather than the higher price charged by Span to the taxpayer, because Span was a puppet of the taxpayer, and the business of the taxpayer accordingly included the activities or purported activities of Span. A vice-president of the taxpayer "controlled every step of the operations of Span from the purchase price to the selling price of off-shore steel" and in fact was permitted by the Articles of Association of Span to exercise the powers of its board. [CR: Tax Avoidance]

Holmes v. The Queen, 74 DTC 6143, [1974] CTC 156 (FCTD)

The wives of the partners of a law firm incorporated a company ("Irish") which acquired all the equipment and furniture of the partnership, entered into a lease of the premises to be used by the firm and commenced undertaking all the administrative activities that previously had been performed directly by the firm. A management fee charged by Irish to the firm, equal to 15% of the disbursements made by Irish plus 2.5% per month of the cost of the furniture and equipment acquired by Irish, was deductible given that it was reasonable in amount in relation to the benefits which enured to the firm and the partners, including avoiding personal liability on the lease and greater ease of entry and withdrawal of partners from the firm.

See Also

Trudel-Leblanc v. The Queen, 2004 DTC 3188

Although on the advice of her accountants, the taxpayer, who previously had carried on her pharmacy practice as a sole proprietor, caused a company to be incorporated and began routing all payments and receipts through a company bank account, she otherwise continued to carry on her practice as before. Furthermore, s. 27 of the Pharmacy Act (Quebec) provided that only an individual pharmacist could buy and sell medications. In finding that all the amounts received from the pharmacy practice were includable in the taxpayer's income, Tardif TCJ stated (at p. 3193):

"The creation of a separate legal entity or the creation of a corporation is far more than an accounting process that may have tax advantages. It must be coherent and above all consistent with its real operation."

Harvey v. R., 98 DTC 1089, [1997] 3 C.T.C. 3022 (TCC)

The taxpayer was allowed to deduct fees charged to his dental practice equal to 115% of the eligible costs specified in a May 1985 letter of the Canadian Dental Association summarizing an agreement in this regard with Revenue Canada.

Administrative Policy

25 March 1996 External T.I. 9608245 - MANAGEMENT COMPANY FEES

In response to an inquiry as to what percentage of mark-up on cost Revenue Canada would accept as a reasonable management fee corporate expense deduction, it stated that "with certain exceptions, charges not exceeding 115% of the reasonable costs incurred by a management service corporation are deductible."

21 October 1991 TI 912692 (Tax Window, No. 12, p. 22, 1545)

Management fees paid by a professional practitioner to a related corporation generally will be considered deductible if they do not exceed 115% of the reasonable cost incurred by the corporation. A mark-up on outlays or expenses attributable directly to the practice of the profession would be considered unreasonable.

19 September 1990 TI 902240

Where, in order to avoid GST on services provided by a management services corporation for a professional practice, the employees work directly for the professional practice and provide services to the management company without pay, their salary expenses will not be allowed as a deduction either to the professional practice or the management services company, nor will the 15% mark-up on services provided by the management services corporation be considered to be reasonable.

85 CR - Q.18

RC will regard fees charged by a management services corporation as reasonable if they do not exceed 115% of the cost of providing the management or administrative services (other than expenses relating directly to the practice of the profession.)

84 CR - Q.76

The reasonableness of service fees charged by management companies is determined by RC in light of all the facts and circumstances, and no inflexible guidelines are applied.

IT-189R2 "Corporations Used by Practising Members of Professions"