Management Fee Calculator for Related Corporations
A management fee between your own corporations has to be for services actually provided and reasonable in amount. Work out a defensible range, what the HST does, what tax it really shifts, and how the arrangement would look to a reviewer.
tax effect of the fee
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Is the Amount Defensible
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What the Fee Does to the Tax
| Item | Without the Fee | With It |
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HST and the Audit File
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Points That Decide This
What to Do Next
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Disclaimer: An amount is deductible in computing income from a business only to the extent it is incurred for the purpose of earning income, and section 67 of the Income Tax Act limits a deduction to an amount that is reasonable in the circumstances. A management fee between corporations that do not deal at arm’s length is accordingly deductible only where services were genuinely provided and the amount charged is reasonable for those services; where it is not, the deduction may be denied in whole or in part, with interest and potentially penalties, and the amount may nonetheless remain income to the recipient. The defensible range shown on this page is a simplified benchmark derived from the hours and market rate you enter and is not a transfer pricing study, a valuation, or evidence of reasonableness. Management services supplied between corporations are generally taxable supplies for goods and services tax and harmonized sales tax purposes, so tax is charged and is generally recoverable as an input tax credit by a recipient that is a registrant making taxable supplies; where the recipient is not a registrant or makes exempt supplies, the tax is a real cost. An election is available to certain closely related registrants that allows qualifying supplies between them to be treated as made for nil consideration, subject to conditions including that both parties qualify and that the election is made and filed as required. Where an amount is owing to a person not dealing at arm’s length and remains unpaid beyond the period specified in the Act, an income inclusion may arise for the payer. Corporations that are associated share a single business limit for the small business deduction, so moving income between associated corporations does not create a second limit, and where the recipient is taxed at a higher rate than the payer the arrangement increases total tax rather than reducing it. Associated status, related status and the small business deduction rules are technical and fact-specific. The audit risk indicator on this page is an informal signal generated from your answers, not a prediction of whether a review will occur or of its outcome. All rates and limits are editable inputs that should be confirmed for your taxation year. This page is general information, not tax advice.
The Uncomfortable Part First
Most owner-managers who ask about management fees are hoping to move profit from the operating company to a holding company and pay less tax. For an associated group that usually does not work, and frequently makes things worse.
Associated corporations share one small business limit. Moving income across does not create a second one. If the operating company was paying the small business rate on that income and the holding company pays the general rate, the fee has just increased the total tax bill.
Shifting a hundred thousand dollars from a company at the small business rate to one at the general rate costs real money. The calculator shows the figure for your own numbers. It is often the opposite sign from what people expect.
There Are Good Reasons, and They Are Not Rate Arbitrage
Management fees between related corporations are legitimate and common. The genuine reasons are structural rather than about rates: paying for services that are really provided, funding a company that holds shared staff or premises, or moving cash to where it is needed.
Where one company genuinely employs the management team and another uses them, a fee is the correct way to reflect that. The fee follows the services, which is a different exercise from deciding on an amount and looking for a justification afterwards.
Reasonable Means Reasonable for the Services
A deduction is limited to what is reasonable in the circumstances. For a management fee that means the amount has to make sense against what was actually done, and the simplest test is what an outsider would have charged for the same work.
Hours multiplied by a market rate is crude but it is the right shape of argument, and it is considerably better than a round number appearing once a year with nothing behind it. Where the fee is many times that benchmark, the excess is the part at risk.
| What a reviewer looks for | Position |
|---|---|
| Services genuinely provided | The first question, and the one that decides it |
| A written agreement predating the fee | Cheap, and conspicuous by absence |
| Amount proportionate to the work | Hours and a market rate support it |
| A round number entered at year end | The classic pattern |
| Fee that happens to equal the profit | Looks like what it is |
Accruing Without Paying Has Its Own Deadline
Booking the fee and never moving the cash is common, and there is a rule for it. Where an amount owing to a non-arm’s-length party stays unpaid beyond the period in the Act, an income inclusion arises for the payer.
So the deduction taken in year one can be clawed back later if the money never moves. Either pay it or diarise the deadline; leaving it on the balance sheet indefinitely is the thing that creates the problem.
The HST Usually Washes, Until It Does Not
Management services between corporations are taxable supplies. The payee charges tax, the payer claims it back, and where both are registrants making taxable supplies the net effect is nil apart from the cash flow between filing periods.
Where the payer is not registered, or makes exempt supplies, that tax is a real and permanent cost. An election is available to certain closely related registrants that treats qualifying supplies as made for nil consideration, which removes the cash flow entirely, but it has conditions and must actually be filed.
The election is not automatic. Both parties have to qualify and the election has to be made and filed as required. Our intercompany HST election calculator works through whether it fits your structure.
What Makes a File Defensible
- A written agreement signed before the services, describing them
- Some record of the work, even approximate time records
- Invoices issued during the year rather than one at the end
- Payment, or a tracked balance with the deadline diarised
- An amount that bears a relationship to the services
- Consistency between the fee, the agreement and what people actually do
Get the reason right before the amount. Our holding company tax planning service covers whether a fee is the right tool at all, what amount is supportable, and the documentation that makes it hold up rather than merely exist.
Frequently Asked Questions
Common questions on intercompany management fees.
Related Calculators and Guides
More on related-corporation structures.
Decide the Reason Before the Amount
Tell us what each corporation actually does and who provides what to whom. We will tell you whether a management fee is the right tool, what amount is supportable, and whether it saves anything at all given that associated companies share one limit.