2015-0622991E5 Reasonableness of intercorporate management fees

Principal Issues: Will CRA revisit its position on the reasonableness of management fees paid to Holdcos in light of a recent Tax Court decision?

Position: No.

Reasons: See below.

Author: Kom, Joel
Section: 67

XXXXXXXXXX                                            2015-062299
                                                                    J. Kom

January 5, 2016

Dear XXXXXXXXXX:

Re: Reasonableness of management fees paid to holding companies

We are writing in reply to your email of December 10, 2015, wherein you requested our views on the reasonableness of large inter-corporate management fees paid by an operating company to a holding company that is owned by an individual who is the ultimate operator/manager of the business. Specifically, you asked whether the Canada Revenue Agency (“CRA”) would revisit its position on reserving the right to challenge the reasonableness of such management fees in light of the Tax Court of Canada’s decision in 6051944 Canada Inc. v The Queen, 2015 TCC 180.

As you know, this GST/HST case was heard under the Tax Court’s informal procedure and therefore has limited precedential value. Accordingly, there are no plans to undertake a review of the CRA’s position on the above-noted issue for income tax purposes. The determination of whether any outlay or expense is reasonable under section 67 of the Income Tax Act is primarily a question of fact and can only be determined once all the facts and circumstances are known.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, CPA, CA
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate

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