Management Fees

Definition

A management fee is an amount paid by one corporation or business to another person for management, administrative, or advisory services. In owner-manager planning, it typically flows from an operating corporation (Opco) to a holding corporation (Holdco), to a related services corporation (Servco), to the shareholder personally, or to a family member performing legitimate services. The payment is deductible to the payer if it is an outlay or expense made for the purpose of earning income and the amount is reasonable under ITA s.67. The recipient reports it as business or employment income depending on the structure.

Key rules

• Must reflect actual services. A written services agreement describing scope, deliverables, and rate is baseline evidence.
• Must be reasonable under s.67. CRA compares the fee to what an arm's-length party would charge for the same scope.
• Requires supporting documentation: invoices at the time of service, time records or deliverable logs, board or shareholder resolutions authorizing the arrangement.
• If the recipient is a separate GST/HST registrant, the fee is usually a taxable supply. GST/HST must be charged and remitted. The payer claims a matching input tax credit.
• Closely related corporations can make an election under ETA s.156 to treat intra-group supplies as made for nil consideration (no GST/HST charged), provided both elect on Form RC4616 and both are engaged exclusively in commercial activities.
• Management fees paid to an individual (not a corporation) blur into the employment vs. independent contractor analysis. Getting that wrong can trigger CPP, EI, and source-deduction arrears.
• A management fee paid from a CCPC with small-business-rate income to a Holdco or Servco may produce a tax rate arbitrage depending on jurisdictions and CCPC status; the associated corporations rules (ITA s.256) often eliminate the arbitrage.

Example

Opco (a CCPC) pays Servco (owned by the same shareholder) a $60,000 management fee for 2026 covering bookkeeping, HR support, and strategic advisory. A services agreement is in place, Servco has its own GST number, and it invoices monthly.

Servco invoice (monthly):    $5,000 + GST (5% in BC) = $5,250

Opco treatment:
  Expense                    $60,000 (deductible under s.18)
  ITC claim                   $3,000 (GST paid)
  Net cash out               $60,000

Servco treatment:
  Revenue                    $60,000
  GST collected               $3,000 (remitted to CRA)
  Expenses (salary to owner):$55,000 (salary)
  Servco net income:          $5,000 (taxed at CCPC rate)

The associated-corporations rules would require Opco and Servco to share the $500,000 small business limit, so the expected tax rate arbitrage from "splitting" the SBD is not available without careful planning.

Common mistakes

• Booking a year-end management fee with no invoices, no services agreement, and no GST/HST treatment. CRA routinely denies these.
• Charging management fees between related parties that are not registered for GST/HST (or that fail to file the s.156 election), creating an unremitted tax exposure.
• Paying a management fee to a spouse "for general assistance" without a scope, hours, or deliverable record. This fails the s.67 test.
• Using a management fee to substitute for a dividend when the corporation has insufficient services to support the fee. The excess is reassessed as non-deductible.
• Ignoring the associated corporations rules and assuming two related CCPCs each have a full small business deduction.

Related concepts

Management fees are the classic test case for the s.67 reasonableness test and sit close to the salary versus dividends choice. Where the "service" is a personal expense dressed up as a fee, the arrangement falls into s.15(1) territory. Done properly, they are a building block of broader income-splitting plans.