21 February 2000 Internal T.I. 1999-0015457 - PATRONAGE DIVIDENDS REC. BY INDIAN

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether patronage dividends that are related to exempt business income of Indian are also exempt.

Position: Yes

Reasons: In our view, the patronage dividends form part of the taxpayer's profits from his business and should be treated as tax exempt in accordance with the income tax treatment previously determined for such profits.

		February 21, 2000

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
	Business Files	J. Gibbons
(613) 957-2135
	Attention: XXXXXXXXXX
		1999-001545

XXXXXXXXXX (the "taxpayer)

We are replying to your memorandum of December 17, 1999, in which you requested our views on whether patronage dividends received by the taxpayer are exempt by virtue of paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act.

The facts, as we understand them, are as follows:

1. The taxpayer is an Indian as defined by the Indian Act and lives on a Reserve.

2. The taxpayer is the sole proprietor of a XXXXXXXXXX.

3. The income earned by the taxpayer XXXXXXXXXX is tax exempt.

4. The taxpayer purchased XXXXXXXXXX from a supplier (the "Supplier") located in XXXXXXXXXX. By virtue of a membership agreement between the taxpayer and the Supplier, the taxpayer was a "member" of the supplier.

5. In the years in question, i.e., XXXXXXXXXX, the taxpayer purchased XXXXXXXXXX from the Supplier solely for resale on the Reserve.

6. In accordance with the membership agreement, the Supplier paid the taxpayer patronage dividends in each of the years XXXXXXXXXX based on the purchases of XXXXXXXXXX made by the taxpayer's store in those years.

7. Pursuant to subsection 135(3) of the Income Tax Act, the Supplier withheld and remitted a tax of 15% of the dividends greater than $100 owed to the taxpayer in each of the years XXXXXXXXXX.

Your views

You are of the view that the patronage dividends are taxable in spite of the various factors that you state connect the income to the reserve and the limited degree to which the taxpayer operates in the commercial mainstream. Your conclusion appears to be based on the fact that the Supplier who paid the patronage dividends is located off the Reserve and its business activities are located off the Reserve.

Our views

In our view, the patronage dividends form part of the taxpayer's profits from his business and should be treated as tax exempt in accordance with the income tax treatment previously determined for such profits. We feel that this is the better view since the patronage dividends essentially represent a reduction in the purchase price of the taxpayer's supplies that is relevant in computing the taxpayer's income from the business.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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