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Management Fees May Not Be Deductible
A common tax planning technique is to pay management fees between taxpayers in
order to optimize income splitting. Click
HERE for more on income splitting.
CRA is always concerned with the reasonability of management fees, especially in
cases where the parties involved are related in some way. Individuals as well as
corporations are affected are affected by CRA's scrutiny.
CRA has issued a Technical Interpretation on management fees. The facts are a
company owned by a husband provides some services to his wife and the company
charged management fees as compensation. CRA denied the expense to the wife on
the basis that no contemporaneous record was kept of services allegedly
performed, no note was made of the time the corporation spent nor of the nature
of the duties performed, and the fee was determined on a global basis at the end
of the year based on the accountant's suggestion of what a reasonable figure
might be without the accountant providing evidence of the rationale underlying
the accountant's conclusion. The result is the wife as a denial of the deduction
of the management fee expense and the company technically still has the
management fee in its income - double taxation.
To avoid this situation, certain steps should be undertaken as follows:
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Have a contract between the parties outlining the services to be performed.
Ensure invoices are issued and GST considerations have been made.
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Have each party keep track of the services performed including the nature of
the services and the amount of time spent.
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Compare the nature of the services and the time spent to what a reasonable
party would pay an unrelated third party for the same services. Make sure
that the fee does not exceed this amount.
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