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. This guide covers how the fees work, CRA’s reasonableness test and when CRA reassesses them; it is part of the corporate, trust and estate tax guides.
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 | ~$110,200 |
| After-tax family income | ~$189,800 |
With management company: $120,000 paid to management co.; spouse receives $100,000 salary:
| Item | Amount |
|---|---|
| Primary owner receives | $180,000 |
| Primary owner tax | ~$52,900 |
| Management co. fees received | $120,000 |
| Corporate tax on $20K retained (11.2% Ontario small business rate) | ~$2,240 |
| Spouse salary from mgt co. | $100,000 |
| Spouse personal tax | ~$20,800 |
| Total family tax | ~$75,940 |
| Tax saved vs single-owner | ~$34,300/year |
The small business rate used here is explained in the CCPC tax planning guide. 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 CRA Looks For
- 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, unless an exclusion applies |
T4 salary is generally the cleanest 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.
Dividends to Family and the Tax on Split Income
Dividends from the management company to family members are where the tax on split income comes in: Since 2018, the tax on split income (TOSI) also applies to adults: dividends or interest (not salary) and certain capital gains that a family member gets from a private corporation's related business are taxed at the top marginal rate unless an exclusion applies. The main exclusions: the person is actively engaged in the business (on average at least 20 hours a week in the year or any five earlier years); at 25 or older, they own excluded shares or get a reasonable return for their work, property and risk; from 18 to 24, the amount is a safe harbour capital return or a reasonable return on arm's-length capital they contributed; or the amount would be excluded for their spouse or common-law partner aged 65 or older. If TOSI applies, the tax saving disappears; the exclusions are set out in full in the family trust guide. A reasonable T4 salary for work actually done isn’t split income.
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; the excess is 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
A management company earns deductible fees for services it provides to the operating company, while a holding company owns the operating company’s shares and receives its dividends, which the operating company can’t deduct. The holding company guide covers that structure; some owner-managers use both, a holdco for retained earnings and a management company for service income.
Related Articles
Sources
The figures and rules on this page come from these sources, last checked against them on October 1, 2026. How we check facts.
- Canada Revenue Agency: Guidance on the application of the split income rules for adults
- Canada Revenue Agency: Line 40424: Federal tax on split income