Handling Management Fees The Right Way
Management fees are a very tricky area of Canadian tax law, and are subject to the vague concepts of how much a specific management service is in fact worth. Charging management fees can be a very effective way to manage an overwhelming tax burden, but can also put you in dangerous water’s if used incorrectly or foolishly.
It may make sense to briefly explain what a management fee is. A management fee is a fee a company charges to another corporation for some variety of service, be it marketing, sales, etc. It is frequently used by companies and individuals to deflect what would be a crippling personal tax debt to a corporation, and therefore suffering a far, far lower taxation rate. This is perfectly legal, if you can prove that you provide a service worth the amount you claim. But as with all things that seem absolutely too good to be true, you must tread water carefully.
So how should you handle management fees? To be perfectly honest, unless you are very knowledgeable about Canadian tax law, the worth of certain services, etc., the best idea is to hire a professional who already does know about such things. This may sound like a cop out, but lets be honest here, do you really want to chance messing something like this up and fighting with the CRA? At that point you are in deep trouble no matter whether you’re right or wrong. A professional will help you avoid any obvious pitfalls, and should give you a good idea of whether you are charging a logical and coherent amount as a management fee.
Don’t get me wrong, management fees can be incredibly useful for individuals who work at a professional level, but are unable to incorporate as a result of their specific chosen field. Lawyers and accountants can simply incorporate as themselves, and as a result end up paying significantly less tax then another professional making a similar amount without incorporation. In this case the other professional could start a management company that handles some degree of marketing or what have you, and the professional could pay that company a management fee, thereby putting the money earned by a professional (for example, a real estate agent) into a corporation where it will only be taxed around 15%, rather than the %46 that a single individuals income can be taxed. But that professional must be exceedingly careful with how much money they dump into the corporation, it must at least seem to match the service being offered by the corporation. Paying your corporation $200,000 a month for marketing management may be seen as exorbitant by the CRA and may result in the professional being investigated for tax evasion, etc.
Management fees can be a good way to save some money on taxes, but you must be very careful. Talk to a professional, find out the details on how such arrangements work. In this case the professional help may save you weeks of anxiety and frustration in the future…as well as a great deal of money.