While management fees are a legitimate tax planning tool, they must be logical and supported, as the Canada Revenue Agency often challenges them. This is likely due to the number of companies who use them thoughtlessly or dishonestly.
When deducting management fees, there are four requirements.
Supporting Documentation
As mentioned before, the CRA often challenges management fees. As such, it is imperative that your company be able to authenticate these fees with supporting documentation, to be able to claim them as a deduction.
Failing to properly substantiate your management fees could result in the CRA disallowing your deduction.
If the CRA does review your management fees, the following information and documentation will help you substantiate them:
1. Corporate information:2. Recipient Information:
Courts have deemed that journal entries, on their own, are not sufficient enough.
4. Services Provided:
Characteristics of a Successful Claim
Many cases, regarding management fees, have been reviewed by the CRA or brought to court. While the following is not an all-inclusive list, successful claims have had multiple similarities.
The companies, in question, have provided written management fee/service agreements and these documents contained information detailing fees to be paid, services to be performed, and responsibilities. If the fees were intercompany management fees, companies provided documentation outlining the business purpose of the services.
Successful claims also included time tracking records, such as time cards.
In addition to these documents, fees were based on services provided and the company performing the work had the skills and resources needed to perform the service. Also, companies with periodic invoicing, versus year-end invoicing, were often more successful.
If you are looking for more information on this tax planning tool, please feel free to contact us. We would be happy to determine whether or not it will be advantageous for your specific situation and if it should be included in your comprehensive estate plan.