Papering the Money Trail Between Two Family Companies

The situation

Fernanda took over the family business from her mother eight years ago. It was a modest operation by then — a services company doing a few hundred thousand dollars a year, employing Fernanda as a security guard supervisor turned manager and a small crew that included Amalia, a hairdresser who had cross-trained into the company's growing personal-services side. Somewhere along the way, Fernanda's mother had set up a second, smaller corporation to hold a piece of equipment and a modest investment portfolio the family had built up. The two companies had been run, informally, as one family enterprise ever since.

Money moved between the two companies regularly. The operating company paid a management fee to the holding company for what was described, loosely, as administrative support. The holding company occasionally declared a dividend back to the operating company's owner. None of it was unusual as a business matter — related companies pay each other for services and distribute profits between corporate layers all the time. What was unusual, once Fernanda asked our team to look at the group's structure ahead of possibly bringing in an outside investor, was how little of it had ever been written down.

Fernanda had never thought of the two companies as separate legal persons in any meaningful sense. To her they were one business that happened to have two names on the corporate registry, and the money moving between them felt like moving money between her own pockets rather than a transaction between two distinct entities each with their own obligations to creditors, tax authorities and, as it turned out, other shareholders. That instinct is common among family businesses that grow organically rather than by deliberate design, and it is exactly the instinct that creates the kind of gap our team was asked to close.

What the review found

Our review turned up years of inter-company transfers with no agreements behind them. The management fee that had moved from the operating company to the holding company for the better part of six years had never been the subject of a written management services agreement — no description of what services were actually being provided, no fee-setting methodology, nothing showing the amount had been negotiated at arm's length rather than picked to move money for convenience. The dividends flowing the other way had been declared, in most years, without board resolutions authorizing them and without confirming that the holding company was solvent enough after payment to meet its own obligations, a requirement under Ontario's corporate law for any company declaring a dividend.

None of this had caused a problem yet. No one had questioned the arrangement, and the two companies' bookkeeper had simply recorded the transfers as they happened. But the absence of paper created two separate risks. First, if the Canada Revenue Agency ever reviewed the group, an unsupported management fee is exactly the kind of payment that gets recharacterized — if the tax authority decides a fee wasn't paid for genuine services at a reasonable amount, it can deny the deduction to the paying company, creating a tax bill on income that had already been taxed once. Second, and more immediately relevant given the investor conversation, a prospective investor's own due diligence would almost certainly flag the same gap, and an outside investor is far less forgiving of a family group's informal habits than family members are of each other.

There was also a structural question sitting underneath the paperwork problem. The two companies had overlapping but not identical ownership — Fernanda held all of the operating company and most, but not all, of the holding company, with a small remaining interest belonging to Shirin, a cousin who was not active in the business. That meant the dividend and fee flows were not simply moving money between pockets of the same person; they had real effects on someone with a minority stake who had never been consulted about how or when payments moved.

The size of the exposure was modest relative to the group's overall value, but it was not trivial. Roughly $180,000 in cumulative management fees had moved over the six years in question, and the dividends declared without proper authorization totalled somewhere in the neighbourhood of $95,000. Neither figure was large enough to threaten either company's solvency on its own, but together they represented the entire paper trail an outside reviewer, whether from the tax authority or a prospective investor, would examine first.

What we did

1. Documented the management services actually being provided. We worked with Fernanda to identify, specifically, what the holding company did for the operating company — bookkeeping oversight, use of the equipment it owned, and administrative time from Fernanda herself — and drafted a management services agreement that described those services, set a fee tied to a defensible methodology, and put a term and renewal process around it going forward.
2. Put board resolutions behind past and future dividends. For the dividends already paid, we prepared resolutions confirming the board's authorization retroactively, supported by a solvency review confirming the holding company could meet its liabilities at the time each dividend was declared. Where the historical record could not fully support that confirmation for one smaller payment, we flagged it honestly rather than paper over the gap, and recommended it be treated as a shareholder loan repayment instead, which fit the facts better and did not require the same declaration.
3. Addressed the minority shareholder's position. Because Shirin, with a minority stake in the holding company, had never approved the fee arrangement or been told how dividend timing was decided, we recommended a simple shareholders' agreement provision setting out how future inter-company fees and distributions would be decided, so the arrangement no longer rested on informal trust alone.
4. Built a going-forward process. We set up a straightforward annual routine — a board meeting each year to review and reauthorize the management fee, a written solvency check before any dividend, and a shared file where the resolutions and agreements live so the next bookkeeper, or the next generation, does not have to reconstruct years of family history from memory.

The outcome

The regularization work took about two months from the first meeting to a completed set of agreements and resolutions, done well before any investor conversation reached the due diligence stage. No tax authority ever reviewed the arrangement, no dispute arose with Shirin, and when a prospective investor did eventually ask to see the group's corporate records, Fernanda's team was able to produce a management services agreement, several years of properly authorized dividend resolutions, and a clean structure chart within a day, rather than scrambling to reconstruct history under time pressure.

The cost of getting there was mostly Fernanda's time — reviewing years of transaction records with our team to identify what each payment had actually been for, and having a candid conversation about the one dividend that could not be fully supported after the fact. Recharacterizing it as a loan repayment instead meant a modest adjustment to the holding company's books, but it avoided leaving an undocumented dividend on the record that a future reviewer might question.

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