When is it reasonable to charge management fees/consulting fees between corporations?
In order to charge intercompany management fees between corporations, two tests have to be satisfied:
- There is a reason for the fees.
- The fees are reasonable.
To meet CRA’s first test on intercompany management fees, ensure that there is a reason that Company A is providing services for Company B. One common reason is that management is employed by Company A and then engaged by Company B to run that company. Company A can then charge Company B a fee for using management’s time. Company A in turn will pay management a salary or dividend. For example, “Aim” Corporation hires “Kim” to provide management services to “Bust” Corporation. Aim Corporation then charges Bust Corporation a fee for using Kim’s time. Aim corporation pays Kim a salary.
CRA’s second test on intercompany management fees is more judgmental. The amount charged between corporations should be in line with the value of service that Company A is providing Company B. The easiest approach is to have the management fees equate to the amount management is being paid in salary from Company A.
In addition, CRA is now looking at management contracts formalizing management fees. We recommend that management put in writing what you have verbally agreed between the corporations. This agreement should cover what Company B has contracted Company A to be responsible for, when and where. This would involve things like providing management and supervision, liaising with customers, trouble shooting and quality control. The aim is to demonstrate that management had active involvement in Company B and that the profitability of Company B resulted from Company A’s management abilities and experience.
When dealing with formal agreements, we always recommend that the corporation get a lawyer to draft the document as they will be more familiar with the wording and what clauses should be included.
For more information on whether management fees are appropriate for your business structure, please contact us.Download a copy of this issue