Client has activeco and holdco. Both have existed for 20+ years. activeco now not very active. holdco with income mostly passive around $150-175K. Client has been charging mgmt fee from activeco to holdco. Previous desk audit in 2017 and CRA accepted mgmt fees of $34K or so. 2017 invoice was for performance fees on investment mgmt.
For anyone doing this I am wondering the limits on this. Was the client just lucky in 2017 or is this generally accepted by CRA (management fees between related companies effectively turning passive income into active).
I think the term is “a reasonable amount in light of services provided”.
Every situation is different. I had a client face one of those desk audit reviews a couple years back. A good story will help but there is probably no hard evidence you can look at unless someone is tracking their time/activities. I have a very thorough client who had lot’s of info to support the amount claimed.
If Opco is collecting lets say 13% HST from Holdco on the management fees which is likely not claimable as an ITC by Holdco this essentially adds to the tax rate.
An RC4616 may be a possibility but there are some restrictions on that and the election absolutely needs to be filed in order for it to be a possible way out.
Thanks. As the client is winding down active co they have de-registered for HST so amount must be less than 30K which is a valid point.
At 30K the management fee would be ~20%. On the high side but not unheard of as a performance fee. This is a pretty simple way to turn passive income to active so I’m just wondering if there are any precedents. Seems this would be pretty common in real estate.