CRA tried to clarify its position on management fees in Technical News No. 22.
There are three main conditions for a bonus to be deductible:
Bonus payments must be to shareholders of a CCPC. The shareholders can be either direct or indirect shareholders
The shareholders/managers must be Canadian residents.
The shareholder/manager must be actively involved in the day-to-day operations.
The CRA has not given any specific determination as to what "actively involved" means. However, careful consideration should be given when paying out management bonuses to those shareholders who are inactive in the company.
The CRA has made it very clear that they will not treat inter-corporate management fees with the same leniency. Instead, inter-corporate management fees will be examined on a case-by-case basis to determine their reasonableness.
The CRA has also stated that certain kinds of situations will not be included in the bonus payment criteria noted above. If a company sells its assets and has a goodwill gain, the CRA has stated that a management bonus will not automatically be allowed in that situation. The CRA has stated that they will look at each situation separately to determine if a management bonus is acceptable when the assets of a company are sold. Moreover, the CRA has stated that they would be willing to consider an advance tax ruling in those situations.
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