What is a management company in Canada?

A management company (or management corporation) is a separate corporation that provides management, administrative, or consulting services to an operating company. The operating company pays management fees to the management company, which then distributes income to its shareholders — often a spouse or adult children. This structure is used to split income and reduce combined family tax.

Are management fees tax deductible?

Yes, if they are reasonable and for services actually rendered. The operating company deducts the management fees as a business expense under ITA section 18. The management company includes the fees as business income. CRA will reassess if fees are not reasonable for the services actually provided — paying $200,000 in management fees for secretarial work would be denied.

What is the CRA reasonableness test for management fees?

CRA requires that management fees between related parties be comparable to what arm's-length parties would pay for the same services. Relevant factors include: actual services performed, qualifications of the service provider, time spent, market rates for similar services, and written documentation. If fees appear to be simply income-shifting with no genuine services, CRA will deny the deduction.

Can I just pay my spouse through a management company without them doing any work?

No. Attribution rules and the reasonableness test mean that without genuine services, management fees will be reassessed. The spouse (or family member) must actually perform identifiable services of real value. Common legitimate services include: administration, bookkeeping, IT support, HR, marketing, and consulting. Compensation must match market rates.

Does TOSI (Tax on Split Income) affect management companies?

TOSI can apply to dividends paid from a management company to family members who don't meet the exclusion criteria. Adult family members who work in the business for at least 20 hours/week (or meet other active participation tests) are generally exempt from TOSI. Minor children and non-participating family members cannot receive tax-advantaged dividends from private corporations since 2018.

Management Company in Canada: Income Splitting, Management Fees, and CRA Rules (2026)

What Is a Management Company?

A management company is a separate corporation — usually owned by an owner-manager’s spouse, family trust, or adult family members — that provides services to the main operating business and receives management fees in return.

The structure is legitimate when:

Services are genuinely rendered
Fees are reasonable for the services
Proper documentation exists
The recipients are actual workers in the business

The goal is to move income from the operating company (where only the primary owner benefits) to the management company (where multiple family members can benefit), reducing the family’s combined tax bill.

Basic Structure

[Operating Company]
       |
  Pays management fees
       |
       ▼
[Management Company] — owned by spouse / family / trust
       |
  Pays salary / dividends to shareholders
       ▼
[Spouse, Adult Children — individual T1 returns]

The operating company gets a deduction for the management fee. The management company receives revenue and can pay its shareholders in whatever mix of salary, dividends, or benefits makes sense.

Tax Benefit: Income Splitting Math (Ontario 2026)

Without management company — all $300,000 flows to the primary owner:

Item	Amount
Primary owner personal income	$300,000
Ontario federal+provincial tax	~$135,000
After-tax family income	~$165,000

With management company — $120,000 paid to management co.; spouse receives $100,000 salary:

Item	Amount
Primary owner receives	$180,000
Primary owner tax	~$69,000
Management co. fees received	$120,000
Corporate tax on $20K retained	~$2,440
Spouse salary from mgt co.	$100,000
Spouse personal tax	~$28,000
Total family tax	~$99,440
Tax saved vs single-owner	~$35,500/year

Income splitting is legal — shifting income to a genuinely lower-income family member who provides real value is a recognized tax planning tool.

The Reasonableness Test

Under ITA Section 67, any expense must be reasonable in the circumstances to be deductible. For management fees between related parties, CRA scrutinizes:

Factor	What CRA Examines
Services actually provided	Is there a written agreement specifying what the management company does?
Qualifications of provider	Does the spouse/family member have relevant skills or experience?
Time and effort	Hours worked, documented activities
Market comparables	Would an arm’s-length company pay this for these services?
Timing	Were fees paid, or just accrued indefinitely at year-end?

Red Flags That Invite CRA Scrutiny

Large round-number fees paid only at year-end
No written management services agreement
The service provider (management company) did nothing demonstrable
Fees that perfectly offset the operating company’s profit at year-end
Fees to a dormant company with no activity

Documentation Best Practices

Written management services agreement between the two companies (specifying scope, rates, and hours)
Time logs or activity records kept by the service provider
Invoices from the management company to the operating company
Bank records showing actual payment (not just journal entry)

Family Employment Through the Management Company

The management company can also employ family members directly, paying T4 employment income. This is often cleaner than dividends from a tax and documentation standpoint:

Method	Advantage	TOSI Risk
Management company T4 salary to spouse	Clean documentation; creates RRSP room for spouse	None if fair market value salary
Management company dividends to spouse	No CPP; lower compliance	Possible if TOSI applies
Management company dividends to adult children	Income splitting	Possible — must meet active participation test

T4 salary is generally the safest route — it’s clearly evidenced by the payroll slip, creates RRSP room, and the reasonableness test is easier to meet when wages are tied to hours worked.

TOSI (Tax on Split Income) Post-2018

After 2017, TOSI rules dramatically changed income splitting via private corporations. Dividends to family members are taxed at the highest marginal rate (TOSI rate) unless an exclusion applies.

Key TOSI exclusions for management company dividends:

Exclusion	Condition
Active business participation	Family member worked 20+ hours/week in business
Age 65+ (reasonable return)	Family member is 65+ — spousal pension splitting-like exception
Safe income (reasonable return)	Dividends don’t exceed a “reasonable return” based on capital/labour contributed

If the family member pays TOSI, the tax savings evaporate. Ensure your tax advisor confirms TOSI exclusion eligibility before setting up the structure.

When CRA Reassesses Management Fees

Common Reassessment Triggers

No genuine services: The management company is simply a conduit; fees are denied entirely
Unreasonable amount: Fees are above market for actual services rendered — excess disallowed
Fees paid to non-resident company: May trigger withholding tax and transfer pricing rules
Circular arrangements: Fees that flow back to the original operating company or owner without economic substance

Consequences of Reassessment

Management fee deduction denied at the operating company level
Potential interest and penalties
If the arrangement is considered a sham, GAAR (General Anti-Avoidance Rule) could apply
Prior years may be reviewed

Management Company vs Holding Company

These terms are sometimes confused:

	Management Company	Holding Company
Purpose	Provide services; split income	Hold shares, invest, estate planning
Revenue source	Management fees from operating co.	Dividends from operating co.
Deduction to operating co.	Yes (management fees)	No (inter-corporate dividends aren’t deducted)
TOSI risk	Yes, for dividends to family	Yes, for dividends to family
Common use	Income splitting via services	Asset protection, passive investment

Many sophisticated owner-managers use both — a holding company structure for retained earnings, and a management company for active service-based income splitting.