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Our Canadian corporation is a CFC for U.S. tax purposes(2 shareholders each 50% both are resident of US), and we are required to file Form 5471 each year for U.S. compliance.
Can the professional fees paid for preparing Form 5471 be deducted as a business expense for Canadian corporate tax purposes?
Hi Peace,
Generally, I would be cautious about deducting Form 5471 preparation fees in the Canadian corporation.
The main issue is that Form 5471 is typically a U.S. information return filing requirement imposed on the U.S. shareholders, not on the Canadian corporation itself. The IRS states that Form 5471 filing requirements apply to certain U.S. persons who are officers, directors, or shareholders of certain foreign corporations.
For Canadian tax purposes, a corporation can generally deduct reasonable professional fees incurred to earn business income, keep records, and prepare and file its own income tax and GST/HST returns.
However, if the fee is specifically for preparing the shareholders’ U.S. Form 5471 filings, the safer view is that this is not the Canadian corporation’s own tax compliance cost. In that case, CRA could take the position that the expense is not deductible to the corporation and may even represent a shareholder benefit, depending on how the engagement and billing are structured.
A more supportable position may exist where the corporation pays for preparation of its own corporate financial information, working papers, and other internal accounting support, and that same information is later used by the shareholders’ U.S. advisors for Form 5471 purposes. But the portion that directly relates to the shareholders’ personal U.S. compliance should ideally be billed separately.
Thank You,
in Accounting & Taxation Services
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