Some corporations might try to use inter-corporate management fees to achieve the following objectives:

1. To reduce the taxable income of one company if it is not eligible for active small business tax rate. Canadian-controlled private corporations (CCPCs) are entitled to claim small business deduction on their active business income (ABI) earned in Canada which essentially reduces their effective tax rate. This preferential effective tax rate is not available for any income beyond $500,000. ABI does not include income from specified investment and personal services businesses. Additionally, investment companies cannot benefit from this preferential tax rate.
2. To transfer the income from an income producing corporation to another connected corporation with a loss.

The CRA may deny deductibility of such inter-corporate management fee by referring to the following subsections of the Income Tax Act:

“18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;”
“67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.”

Therefore, if such fees exist, they should be reasonable and properly documented to establish that they are in fact management fees.
It is recommended to take the following precautions before paying any inter-corporate management fees:

• Have a written agreement setting out the terms of the relationship between the recipient and the payer.
• Document management services provided by way of time sheets, time records, or periodic invoicing. Invoicing management fees on an annual basis for a lump sum amount should be avoided, since the CRA could then take the position that the amount was computed after the fact.
• Have an audit trail of payments for management fees; i.e. cheques, bank transfers.
• The corporation receiving the management fees should be able to demonstrate that it possesses all of the resources necessary to provide the management services.

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