Reducing corporate tax with inter-corporate management fees.
Allan Madan, CPA, CA
Inter-corporate management fees can be an effective method to reduce overall corporate tax of a corporate group
How to deduct inter-corporate management fees?
Inter-corporate management fees can be used to allocate income from a higher income company in a corporate group to a company with lower income or losses. This will effectively reduce the overall taxes paid by the corporate group.
For example:
Assume Company A has profits of $300,000 and Company B has losses of $100,000. The corporate taxes payable by A and B is approximately $45,000 based on a tax rate of 15 percent. What if Company B were to charge a management fee of $100,000 for the year to Company A? In this case, Company A’s profits would be reduced to $200,000 and Company B’s profits would be zero. The corporate taxes payable by A and B will now be $30,000.
While this may sound attractive, it is important to understand how to utilize inter-corporate management fees since the Canada Revenue Agency is very strict. This means that proper documentation is needed, including a contract between the company paying the fee and the company receiving the fee. The contract should indicate the business relationship between the companies, a description of the management services provided, timesheets and invoices to prove the authenticity of the transaction. In addition, the management fees paid should be reasonable, unreasonably high management fees will be disallowed as a tax deduction.
So here’s the tip, consider inter-corporate management fees as a way to reduce corporate taxes payable by two or more corporation. For more ways on how to reduce corporate taxes, this article on how to reduce taxes in Canada explores a number of different methods.
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
