Consider the position of Lossco and Profitco, each a wholly-owned sub of Parentco, where one has non-capital losses in a year equal to the taxable income of the other in that same year. Between them, they have not earned profits, but the Income Tax Act requires Profitco to pay taxes anyway because the Act does not permit related corporations to file consolidated returns. What to do?
It’s tempting simply to have Lossco charge management fees to Profitco so that the losses in the group can be consolidated. Unfortunately, the CRA, and the Tax Court, will sometimes remind us that a management fee paid by Profitco to a related corporation must meet the same requirements for deduction imposed on all other expenses, viz. they must be paid pursuant to a legal obligation, they must be paid for the purposes of earning income and they must be reasonable.
It seems that in Les Entreprises Réjean Goyette inc. c. La Reine, 2009 CCI 351, there was no legal agreement governing the payment of the intra-group fees, and the taxpayer couldn’t provide evidence that the fees were paid for income-earning purposes. As a result, the Tax Court concluded that Profitco, the appellant, was not entitled to deduct the management fees paid to Lossco.
