Recently the Canada Revenue Agency (CRA) has attacked HST/GST input tax credits (ITCs) that relate to, what they believe are, unreasonable management fees. The CRA is trying to use subsection 170(2) of the Excise Tax Act to deny ITC claims of the paying company. Generally, subsection 170(2) of the ETA provides that the consumption or use of services of such quality, nature or cost must be reasonable in the circumstances, having regard to the nature of the commercial activities company, and the amount must be calculated on consideration for the service that is reasonable in the circumstances.
There have been very few court decisions dealing with subsection 170(2) of the ETA, none of which discuss the reasonableness of the consideration paid for the services under paragraph 170(2)(b).
During a recent case on this matter for 6051944 Canada Inc. v HMQ (2015 TCC 180), the taxpayer in question was engaged in the housing construction business. For the month of September 2009, the Minister disallowed certain ITCs claimed by the taxpayer on the basis that those ITCs were on management fees, which the CRA believed to be excessive and unreasonable in amount. In addition, the CRA argued that they were not paid in accordance with any management fee agreement. The recipients of the management fees were also acting as a financing vehicle for the taxpayer, in addition to providing management services which they claimed were essential to both the taxpayer’s continuing success in its business, and to the preservation of its asset base. The taxpayer argued that without these financing and management services, the taxpayer would not have been able to carry on its business. In this case, the Courts ruled on the side of the taxpayer and thus, the fees charged were fully justified and were also reasonable. As a result, the Minister’s assessment had to be vacated, and all of the taxpayer’s ITCs allowed.
I don’t believe this will be the last time we see the CRA try and challenge the reasonableness of an expense from a GST/HST standpoint. This provides further reason to ensure that when management fees are used within your corporate group, ensure all of the property documentation is put in place, such as management services agreements and invoices that substantiate the work that is actually being performed between the companies.
Article written by: Greg Sawatsky, MAcc, CPA, CA