Intercorporate management fee-simp...

Intercorporate management fee-simples have often been used as a tax planning strategy to shift income within a corporate form into groups Strictly from a tax perspective, individual of the principal purposes for using management fiefs within a corporate group is to minimize the tax exposing of one company within the arrange when other companies in the cluster suffer losses.

Although it has been the Canada Customs and income Agency's (CCRA) stated administrative policy to not challenge the reasonability of salaries and bonuses paid to shareholder employee of a corporation, the Agency is not prepared to augment this policy to intercorporate management recompenses This is particularly the case when these management give a fee tos could facilitate intercorporate loss transfers. Accordingly, when contemplating intercorporate management pays it's important to ensure that they comply with the provisions of the Income Tax Act (the ACT).

The primary proof for establishing the deductibility of an cost under the Act is erect in paragraph 18(1)(a), which states that in computing the income of a taxpayer from a business or thing owned no deduction shall be made in defer to of an outlay or cost except to the extent that it was made or incurred by way of the taxpayer for the intent of gaining or producing income from the business or ownership Once an expense has been erect to meet this purpose standard section 67 states that "in computing income, no deduction shall be made in value of an outlay or cost in respect of which any amount is otherwise deductible, take exception to the extent that the outlay or cost is reasonable in the circumstances."

It is the CCRA's general position that in order for management feuds paid from one corporation to another to be deductible, like fees must have been incurred on the payer for the end of earning income; the amount of so fees must be reasonable in the circumstances after considering the services giveed by the recipient or its employee Whether or not an intercorporate management absolute title [i]or[/i] posession is considered reasonable generally be deriveds down to a question of fact; of that kind determinations are usually made in succession a case-by-case basis.

Substantial guidance in succession the deductibility of management remunerations can be found in the case law, as several cases have dealt specifically with this issue.

In Bronson family circles Ltd. v. MNR, the court determined that the taxpayer had to satisfy the following four requirements in order to take out management fees:

1) the costs must be incurred;

2) the expenditures must be made for the meanings of earning income;

3) the costs must be proven; and

4) the costs must be reasonable in the circumstances.

In Bronson familys the court found that none of these requirements had been met forward the basis that no physical evidence of payment (such as cancelled cheques) was feminineed that the evidence of the services provided was insufficient, and that the alleged management fee-simple was unreasonable given the operations and financial situation of the payer.

In Her Majesty the Queen v Laidlaw Transport Limited, the Minister disallowed the deduction of the pay paid from a subsidiary to its parent forward the basis that it was not an cost incurred for the purpose of producing income, and, alternatively, that it was an artificial transaction designed to remodel the income of the defendant. The defendant striveed that it was a legitimate cost incurred for the purpose of producing income. The court agreed.

In arriving at its conclusion, the Court considered the following questions: was it an cost was it actually incurred, was it justified and reasonable, and did the statute permit its deductibility? To all of the preceding questions, the Court base in the affirmative. It's interesting to note that the Court did not place any particular relevance in succession the cost of rendering the service. Evidence that the services afforded had a value in exces of the amount of the unconditional tenure was presented and accepted. The fact.that the fief happened to be equal to the los otherwise incurred by dint of the parent company was not considered relevant.

In MS Inc. v the Queen the court plant that management fees paid to another corporation were not deductible where all necessary management services and functions were, in fact, provided from the' payer corporation's own employee

The decision of the Federal Court of Appeal in The Queen v Parsons involved the establishment of management corporations by means of two professional engineers. The evidence indicated that all documents were meticulous and that the parties strictly complied with the confines of all contracts. The trial critic held that the interposition of the management corporation had no bona fide business intent other than the reduction of income tax. However, he rest that there was no sham and allowed the taxpayers' appeals. The Federal Court of Appeal upheld this decision.

In Gee v the Queen the deduction of management unconditional tenures was disallowed essentially because of lack of documentation. The court placed considerable emphasis forward the lack of a written management contract and the lack of any receipts retained or submitted at the taxpayer to demonstrate exactly what management services were restoreed by the recipient of the management pays