How To Ensure Rental Income Within Your Corporation is Active Business Income
How To Ensure Rental Income Within Your Corporation is Active Business Income May 5, 2023 Tax Question: How do you ensure your rental income within
Home » News » Canadian Tax FAQs » Top 5 Common Tax Audit Issues – Part 5
Tax Question:
Top five common Corporate Income Tax issues faced by clients: Management Fees Handled Poorly
Facts:
Charging management fees is one process of transferring income between commonly related corporations. Although simple in concept we often see it executed poorly.
There are a couple of reasons for moving profits from one corporation to another: the operating corporation is usually exposed to risks such as lawsuits as a consequence of services/products it supplies. Moving the cash to the non-operating corporation helps protect that asset. There may be an opportunity to generate a loss in one corporation to carry back and apply against past profits to obtain a refund. This is especially beneficial if the past profits were in the top tax bracket. The biggest error we see with respect to management fees is the lack of supporting documentation. Often the only support is a journal entry in the accounting records. Simply recording an entry in the corporation’s general ledger is not sufficient. A journal entry is just a record of a transaction it is not proof that the transaction actually took place. Evidence of management fees will include the following:
If any of the above elements are missing it opens up the door for a denial of the transaction by the Canada Revenue Agency which in turn can lead to penalties on taxes owing and a lot of accounting fees to tidy up the mess.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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