Tax Tip
It is important to remember that management fees and salaries paid by taxpayers, usually corporations, must be reasonable to be deductible.
Companies will often “bonus down” profits to the limit of the Small Business Deduction, $500,000, to avoid paying higher rate tax on excess profits.
The Canada Revenue Agency can challenge such bonuses or management fees if in their opinion, the fees are not reasonable. It has been CRA’s assessing practice to allow bonuses or management fees where it is a corporations general practice to distribute profits in this manner AND the recipient of the income is active in the business and has special knowledge, skills etc that helped to earn the income.
In the Neilson Development Company case decision, the Court provided the criteria required to successfully bonus down and the fees to be considered reasonable. In this case, management fees of $300,000 per year were disallowed when paid to a corporation controlled by a spouse. The taxpayer successfully appealed but only because they could prove that the taxpayer met the criteria. The facts won the case, not legal arguments. The circumstances included:
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The management fees included services for budgeting, planning, marketing and being involved in the "hands on" operation
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Management was on site
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How the company operations compared to similar companies
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The effort to earn the fees
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The profitability of the company
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The presence or absence of a contract
It is important that when declaring material or substantial bonuses or management fees, that the facts be documented, there is a contract and the decision is recorded in the corporate Minutes.