Management Fees From Opco to Holdco: Deductible or a Dividend?

Can my operating company deduct management fees paid to my holding company?

An operating company (opco) can deduct a management fee paid to its holding company (holdco) only if two tests are met: the fee was incurred to earn income from the opco's business, and the amount is reasonable in the circumstances. The Income Tax Act has no separate deduction test for fees between your own companies. The same tests apply as for any expense (section 18(1)(a), section 67).

Each company is its own taxpayer and files its own T2. The opco deducts the fee; the holdco reports it as income, which can qualify for the small business rate if the two companies are associated. If CRA denies the opco's deduction, the same money can be taxed in both companies. The case is not simple when:

• There is no written agreement and no invoices, or the fee has run for years that way.
• The holdco has no employees or contractors doing the work.
• The fee equals whatever profit is left at year-end, or changes with no change in the services.
• The fee has been booked for years but never paid.
• CRA has asked about the fee, or a review or audit letter mentions it.
• One company is outside Canada, or the two companies are not associated (generally, neither controls the other and no one person or group controls both).

Gather the agreement, invoices, a note of who did what, proof of payment, both companies' recent T2 returns and financial statements, and each company's GST/HST status. If several of these fit, or CRA has written about the fee, the fee and both T2 returns need a professional look; see "Different for you?" at the end of this page.

What makes a management fee real and reasonable?

A management fee is real when the holding company actually supplies a service the operating company needs, and reasonable when the amount fits that service. The Act lists no required documents; both points are questions of fact. Every person carrying on business must keep records that let the CRA determine the tax payable (section 230(1)), and those records are how you answer the questions.

If the work being billed is the owner's own work, ask whether the fee pays for a service or moves owner pay through the holding company; see salary or dividends.

Does the holding company get the small business rate on the fee?

Often yes, when the two companies are associated, which is the usual case where the holdco controls the opco. The "specified corporate income" rules leave out of the small business deduction active business income from services to a private corporation in which the provider, one of its shareholders, or a person not dealing at arm's length with either holds an interest (section 125(1)(a)(i)(B), (7)). Three things lift that:

• The two companies are associated. Income from services to an associated corporation is excluded from those rules, unless the paying company deducts the fee against income of its own that is itself shut out of the small business deduction under them, such as income from services to another related private corporation (section 125(10)).
• All or substantially all of the provider's active business income comes from arm's-length customers.
• The paying company assigns part of its own business limit to the provider (section 125(3.2)), which lets that much of the fee qualify; the provider's deduction is still capped by its own business limit. The paying company lists the provider's business number and the amount in the T2 table headed "Specified corporate income and assignment under subsection 125(3.2)" (T2 E 10/2026, small business deduction section), its own limit falls by the amount assigned, and the provider files Schedule 7 (CRA T2 guide).

Income that does not get the small business deduction is taxed at the general rate:

Provincial tax adds to both (CRA rates). A holding company that controls the operating company is associated with it (section 256(1)), and associated companies share one business limit, allocated on Schedule 23.

Whether a fee changes the two companies' combined tax depends on each company's rate, business limit, year-end and losses. If the fee income qualifies, the small business rate applies to both companies' income only up to the one shared limit, which passive investment income can reduce (see holding and investment corporations). If it does not qualify, the fee can move income from the small business rate to the general rate and raise the combined tax, unless business limit is assigned as above.

Can CRA treat the fee as a dividend or a shareholder benefit instead?

The Act has no section that turns a management fee into a dividend by name. CRA's tools are different:

• Deny the deduction. The operating company loses the part of the fee that was not incurred to earn income or was not reasonable (sections 18(1)(a) and 67).
• Shareholder benefit. Where the holding company owns shares of the operating company, a benefit the operating company confers on it is included in the holding company's income (section 15(1)), and section 246(1) reaches benefits conferred indirectly, to the extent not already in income. CRA treats a payment to a shareholder that is not part of a good-faith business transaction as a shareholder benefit the corporation cannot deduct (CRA: shareholder benefits); that page covers shareholders generally and does not mention management fees.
• Other rules. If the owner directed the fee to the holding company in place of pay to themselves, the indirect-payment rule can include it in the owner's income, to the extent it would be if paid to the owner (section 56(2)). For an avoidance transaction that misuses or abuses the Act, the general anti-avoidance rule lets CRA determine the tax consequences as is reasonable in the circumstances to deny the tax benefit (section 245).

A fee for services actually supplied, at a fair price, is less likely to raise these rules; CRA decides that on the facts. For a payment with no service behind it, which rule applies depends on who ended up with the money and why. How the holding company's side is then treated depends on the facts and the years involved. If money reached you personally, see shareholder benefits found in an audit.

What if CRA denies the opco's deduction: is the same money taxed twice?

It can be. If the operating company's deduction is denied, it pays tax on the amount. The holding company has already reported the fee as income and paid tax on it, and nothing in the Act removes that income automatically.

If a payment gave the holding company more value than the services were worth, section 160 can also make it jointly liable for the operating company's tax for that year or earlier years, up to the excess of the value transferred over what the operating company received. CRA can assess that liability at any time. Moving cash up by dividend can raise the same issue when the operating company owes tax.

The normal period for the CRA to reassess is three years for a Canadian-controlled private corporation at the end of the year and four years for any other corporation, counted from the original notice of assessment or notice that no tax is payable (section 152(3.1)); longer periods can apply. Each company's years close on its own dates, so part of a fee billed for several years can end up correctable on one side only. A company that disagrees with a reassessment has 90 days from the day the notice is sent to serve a written notice of objection (section 165(1)).

For the letter, the reassessment periods and the objection steps, see reviews, audits and voluntary disclosure.

Fee or dividend: which way should profit move from opco up to holdco?

A fee pays for services; a dividend is the form for distributing profit. A dividend an operating company pays to its Canadian holding company is generally deductible in computing the holding company's taxable income, so it is not ordinarily taxed there; Part IV tax can still apply. On a dividend from a connected company, Part IV tax applies only in proportion to the paying company's dividend refund, and a holding company is connected with a company it controls or in which it owns more than 10% of the votes and of the value (section 186).

Whether to have a holding company, and when a dividend between the two is tax-free, is in holding and investment corporations. To declare one, see declaring and paying a dividend.

Do the two companies charge GST/HST on the fee?

A fee for services is generally a taxable supply, meaning a supply made in the course of a commercial activity (section 123(1)), and a person who makes a taxable supply must collect the tax (section 221(1)), unless it is a small supplier that is not registered (section 166), which does not have to register (CRA). The holding company is a small supplier only while taxable sales of it and its associates do not exceed $30,000 in any single calendar quarter or over the previous four quarters together (section 148). Corporations associated for income tax are associated for GST/HST (section 127), so the operating company's sales count.

The operating company's input tax credit on the fee depends on how much it uses the service in commercial activities (section 169).

Two closely related registrants may be able to elect jointly so that taxable supplies between them are treated as made for no consideration; the election does not cover a service the recipient does not acquire exclusively for use in its commercial activities (section 156). Who qualifies, what the election covers, how to file it, and GST/HST on rent between the companies are in GST/HST between related companies.

How do I book the fee and the balance between the two companies?

The two sets of books agree when both companies show the same amount on the same date, with GST/HST on its own line, and the balance is either paid or still shown as owing. The CRA's general index of financial information has codes for each side (GIFI):

1. An agreement signed before the first invoice, with billing on a regular schedule, is stronger evidence than one signed later.
2. Payment by transfer between the companies' own accounts leaves a record.
3. A deductible expense still owed to a person you do not deal with at arm's length at the end of the second tax year after the expense year is added to the payer's income for the following tax year, unless both parties file an agreement by that year's return due date that treats the amount as paid and lent back (section 78). Related companies are treated as not dealing at arm's length (section 251).
4. Each company lists the other on Schedule 9, related and associated corporations (CRA).
5. The operating company generally also reports fees it paid the holding company on a T4A, box 048, when the year's payments exceed $500, excluding GST/HST; slips are due the last day of February after the payment year. See reporting subcontractor payments for the exceptions and CRA's current penalty policy.

What each company owes the other, and what each owes you, is in the shareholder loan account.

Does my province change the answer?

The federal tests (deductibility, specified corporate income) apply wherever the companies are. The gap between the small business rate and the general rate also applies in your province; the provincial rates are in how corporations are taxed. Outside Quebec and Alberta, the T2 is also the provincial return. Quebec and Alberta have no corporation tax collection agreement with the CRA (CRA rates), so a corporation located in either province files a separate provincial return (CRA: T2). Alberta requires an AT1 return from a corporation with a permanent establishment in Alberta, filed with Tax and Revenue Administration (Alberta).

This page does not cover how Quebec or Alberta treats income from services to a related company, so confirm that with the province before relying on the federal result.

Example

Illustrative only; all amounts are Canadian dollars.

A holding company with staff and an agreement

Assume both companies are Canadian-controlled private corporations with the same year-end, no other income, and the full federal business limit shared between them with no reduction. An operating company earns C$600,000 before fees. Its holding company employs two people who run payroll and administration under a written agreement, bills C$120,000 a year, and pays C$100,000 of salary and related costs. If the fee is reasonable, the operating company deducts it and reports C$480,000. The holding company reports C$120,000 of fee income and C$20,000 net. The companies are associated and the operating company deducts the fee against its own ordinary business income, so section 125(10) applies. On Schedule 23 they allocate C$480,000 of the limit to the operating company and C$20,000 to the holding company, so all C$500,000 is taxed at the small business rate. If the exception did not apply (for example, the companies were not associated), the holding company's C$20,000 would be taxed at the general rate unless the operating company assigned limit under section 125(3.2).

A holding company with no staff, no agreement and no invoices

A holding company with no staff bills the operating company C$200,000 with no agreement or invoices. The operating company's deduction is at risk because nothing shows what the fee bought. The holding company has already reported C$200,000 as income. If the deduction is denied, the same C$200,000 can be taxed in both companies.

Spare cash, moved without a fee

The operating company has C$300,000 of spare cash and the owner wants it in the holding company. A dividend moves it with no services needed. The operating company deducts nothing. The holding company's tax effect depends on whether it is connected with the operating company and whether the operating company gets a dividend refund (Part IV tax).

Different for you?

• A fee has run for years without an agreement, invoices or a clear service, or CRA has asked about it: whether the fee can be supported or the money moved as a dividend instead, how each T2 reports it, and the GST/HST treatment are judgment calls on your facts. Start with corporate tax help and the audit letter guide.
• You own both companies directly, side by side, and neither owns the other: the shareholder-benefit rule (section 15(1)) looks to a shareholder of the paying company, which here is you, not the other company, and the GST/HST election generally needs one company to own at least 90% of the other (section 128). Start with corporate tax help.
• The two companies' books do not agree, the fee was booked in only one company, or the balance between them has not been settled: bookkeeping help and catching up on overdue books cover rebuilding the records.
• Returns are missing for either company: see catching up on unfiled corporate returns.
• The holding company bills for your own work and is not associated with the payer: see personal services businesses.
• CRA says some expenses were personal: see shareholder benefits found in an audit.
• One company is outside Canada: transfer pricing (section 247) and, on a fee paid to a non-resident, withholding tax (section 212) can apply; for a Canadian and a US company, see pricing between your Canadian and US companies and cross-border tax help.
• The companies work in more than one province: see operating in more than one province.