Can an opco deduct management fees it pays to its related holdco, and what does the CRA check?
As of October 2026, an opco can deduct management fees paid to a related holdco only for services actually rendered to earn its income (s.18(1)(a)) and only to the extent the amount is reasonable (s.67). A denied fee stays taxable in the holdco, and the HST on the unreasonable part can lose its input tax credit.
Which tests does a management fee to a related holdco have to pass?
Two provisions decide the deduction. Paragraph 18(1)(a) allows an outlay only to the extent it was made or incurred to gain or produce income from the business laws-lois.justice.gc.ca. Section 67 then allows no deduction for an outlay or expense except to the extent it was reasonable in the circumstances
laws-lois.justice.gc.ca. A fee between related companies has to clear both, and the CRA tests them on facts, not on the label on the invoice.
| Test | Provision | What it means for the fee | Evidence that answers it |
|---|---|---|---|
| Earning income | s.18(1)(a) | HoldCo actually performed services that OpCo's business used | Description of the work, who did it, deliverables |
| Reasonable amount | s.67 | The fee matches what the services were worth | Hours, rates an outside provider would charge, HoldCo's own costs |
| Not capital | s.18(1)(b) | Work that buys or builds a lasting asset is a capital outlay, not a current expense | Split out fees tied to an acquisition or reorganization |
| Paid in time | s.78(1) | A fee owed to a non arm's length creditor and unpaid at the end of the second year after it was incurred goes back into income | Payment records, or a filed T2047 |
| Records kept | s.230 | Books and vouchers detailed enough to verify the deduction, kept six years after the last year they relate to | Agreement, invoices, time records, board resolution |
Paragraph 18(1)(b) is the one people forget: it denies an outlay or payment on account of capital unless Part I expressly permits it laws-lois.justice.gc.ca. A single large fee charged in the year OpCo bought a competitor invites the question of how much of it was for the purchase. The records rule is subsection 230(4): six years from the end of the last taxation year the records relate to
laws-lois.justice.gc.ca. Retention details are on our CRA record retention page.
What does a denied $150,000 of fees cost an Ontario group?
Worked example: HoldCo owns all the shares of OpCo, both in Ontario with December 31 year ends. In 2026 OpCo earns $400,000 of active business income before a $240,000 management fee ($20,000 a month) to HoldCo. HoldCo's only staff member is the owner, and its own costs are $40,000. The CRA reviews the year, concludes the services were worth $90,000, and denies $150,000 under s.67.
| Step | As filed | After the CRA denies $150,000 |
|---|---|---|
| OpCo taxable income | $400,000 minus $240,000 = $160,000 | $400,000 minus $90,000 = $310,000 |
| HoldCo taxable income | $240,000 minus $40,000 = $200,000 | $200,000 (unchanged) |
| Group taxable income | $360,000 | $510,000 |
| Shared small business limit | $500,000 | $500,000 |
| Tax at 12.2% (9% federal + 3.2% Ontario) | $360,000 × 12.2% = $43,920 | $500,000 × 12.2% = $61,000 |
| Tax at 26.5% (15% federal + 11.5% Ontario) | none | $10,000 × 26.5% = $2,650 |
| Group income tax | $43,920 | $63,650 |
The reassessment adds $19,730 of corporate tax before arrears interest. The group's income went up by the full $150,000 even though no new money came in, because section 67 only limits the payer's deduction laws-lois.justice.gc.ca. Nothing in it reduces HoldCo's revenue, so the same $150,000 is taxed in HoldCo as a fee and again in OpCo as a lost deduction. The rates are the CRA's federal 9% and 15% and Ontario's 3.2% and 11.5%
canada.ca.
The sales tax side can follow. HoldCo charged 13% HST on the full $240,000 canada.ca, and OpCo claimed $31,200 of input tax credits. Paragraph 170(2)(b) of the Excise Tax Act limits an ITC to tax calculated on consideration that is reasonable in the circumstances
laws-lois.justice.gc.ca, so the HST on the denied $150,000, $19,500, is also exposed. That brings the group's exposure to $39,230 before interest and penalties.
Does the fee affect the small business deduction or trigger the PSB rules?
It depends on whether HoldCo and OpCo are associated. Under paragraphs 256(1)(a) and (b), two corporations are associated if one controls the other or the same person or group controls both at any time in the year laws-lois.justice.gc.ca. Associated CCPCs share one $500,000 business limit and split it on Schedule 23
canada.ca, so a fee between them moves income from one pocket to the other without creating a second limit.
| Who receives the fee | Associated with OpCo? | Small business deduction on the fee | Personal services business risk |
|---|---|---|---|
| HoldCo that controls OpCo | Yes, s.256(1)(a) | Shares OpCo's $500,000 limit; s.125(10) keeps the fee out of specified corporate income | None: fees from an associated corporation are excluded by s.125(7)(d) |
| Sister company controlled by the same owner | Yes, s.256(1)(b) | Same shared limit | None, same exclusion |
| Spouse's company with no cross ownership | Usually not | Specified corporate income: the 9% rate applies only to limit OpCo assigns | Possible if the spouse would otherwise be OpCo's employee |
| Holding company of a minority shareholder or key employee | Usually not | Specified corporate income, same assignment rule | Real: the individual may be an incorporated employee of OpCo |
The associated row is the common owner managed structure, and it's the safe one on both fronts: subsection 125(10) excludes income from an associated corporation from specified corporate income in most cases, and paragraph 125(7)(d) says income received from an associated corporation isn't personal services business income laws-lois.justice.gc.ca. The other rows are where fees cost real money. The assignment mechanics are on our specified corporate income page, the five PSB conditions and the 33% federal rate on our personal services business page, and the control tests on associated corporations.
Does HoldCo have to charge GST/HST on the fee?
Usually, yes. A management fee is a taxable supply of services, and HoldCo can only skip registration as a small supplier with $30,000 or less of taxable revenue in a calendar quarter or over four consecutive quarters. That count includes the revenue of its associates canada.ca, so a HoldCo associated with an operating company almost never qualifies. It registers and charges 13% in Ontario
canada.ca. The threshold rules are on our GST registration threshold page.
OpCo then claims the HST back as an input tax credit, so the group nets to zero, but HoldCo has to remit before OpCo recovers it, and every invoice has to carry the ITC details. When HoldCo owns 90% or more of OpCo's votes and value and both are registered and fully commercial, a section 156 election on Form RC4616 removes the HST from the invoices altogether. That page has the eligibility table, the filing deadline and the joint liability that comes with it. The invoice requirements are on our ITC documentation page.
What paperwork makes a related company management fee hold up?
The fee survives a review when the file shows the work, the price and the payment. Subsection 230(1) requires books detailed enough to determine the tax payable laws-lois.justice.gc.ca, and for a related party fee that means more than a year end journal entry.
| Document | When to create it | Which test it supports |
|---|---|---|
| Written management services agreement listing the services and how the fee is set | Before the services start | Earning income, reasonable amount |
| Invoices issued through the year, with HST where it applies | Monthly or quarterly as services are delivered | Earning income, ITCs |
| Time records or a log of who did what | Ongoing | Reasonable amount |
| Comparison to what an outside provider would charge | When the fee is set or changed | Reasonable amount |
| Board resolution of OpCo approving the fee | When the agreement is signed | Earning income |
| Proof of payment, or a T2047 if the fee is still owed after two years | Within the s.78 window | Paid in time |
On the T2, OpCo reports the expense at GIFI item 8871, Management and administration fees. HoldCo reports the revenue at item 8239 if it's a secondary source, or at item 8000, Trade sales of goods and services, if management fees are its main income canada.ca. The rest of the codes are on our GIFI codes page.
Accrued fees that sit unpaid are the quiet problem. If the fee is still owed to HoldCo at the end of the second taxation year after OpCo deducted it, the unpaid amount goes into OpCo's income for the third year, unless both companies file a T2047 by OpCo's filing due date for that third year; a late agreement still adds 25% of the amount laws-lois.justice.gc.ca. The deadline table is on our T2047 and section 78 page.
Sources
Is it better to move the money to HoldCo as a dividend instead?
Often, if the goal is only to move cash. Subsection 112(1) lets HoldCo deduct a taxable dividend from a taxable Canadian corporation laws-lois.justice.gc.ca, so there is no reasonableness test and no HST. A fee only makes sense when HoldCo really provides services. Part IV tax and s.55(2) can still apply to the dividend; see our intercorporate dividends page.
Does a management fee paid to a related non resident company need withholding?
Yes. Paragraph 212(1)(a) imposes 25% tax on a management or administration fee paid to a non resident, and the exclusion in s.212(4)(a) for services performed in the ordinary course of the non resident's business only applies when the parties deal at arm's length laws-lois.justice.gc.ca. A treaty's business profits article can exempt it; the NR4 uses income code 21 and exemption code P
canada.ca. The related party pricing side is on our transfer pricing documentation page.
Can HoldCo stay under the $30,000 small supplier limit and skip HST?
Rarely. The $30,000 test counts the taxable revenue of HoldCo's associates as well as its own canada.ca, so if OpCo's sales pass $30,000, HoldCo can't be a small supplier.
Can OpCo accrue the fee at year end and pay it later?
Yes, but the clock runs. A fee still owed to HoldCo at the end of the second taxation year after the year OpCo deducted it goes back into OpCo's income for the third year unless a T2047 is filed in time laws-lois.justice.gc.ca. The timing is on our T2047 page.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.