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It is not surprising these days that many businesses use a multi-company structure to conduct business. Be it for estate planning, risk management, cross border ventures, etc. etc., there is, in many instances, times where one company has profits and one has losses that cannot be utilized in the current or previous years. It is not uncommon for business owners to say “just pay a management fee equal to the loss”. This sounds easy enough to do; just write a cheque and make a journal entry. All done.
Unfortunately, this rarely is within the scope of the tax laws. Should the CRA come knocking, it would likely not pass muster and the paying company will be denied the deduction. The worst part is that the receiving company will still have to include the income and pay tax on it.
Management fees continue to be an area of scrutiny by the taxing authorities. The courts have in many cases ruled in favour of the CRA where companies have paid arbitrary management fees to related companies. Why is this?
The simple answer is that the management fee did not pass the three tests making it deductible. However, the more in-depth answer is:
The good news is that there are two steps you can take to ensure that management fees that are paid will remain deductible.
If you follow these steps, you will reduce the chance of having your fees denied their deduction for income tax purposes. If you have any questions about management fees and your business, feel free to contact your local MNP advisor.
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