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 the U.S. patronage dividend would be considered to be foreign business income, foreign non-business income or income from an active business carried on in Canada to a Canadian co-operative corporation?
Position: It is a question of fact to be determined after all the relevant facts and circumstances of the situation have been examined.
Reasons: It could be either of the above depending on the facts of the situation.
February 28, 2002
Re: Patronage Dividend and Foreign Income Tax
This is in reply to your letter of December 3, 2001, in which you requested our view on the income characterization of the patronage allocation received by a taxpayer from a U.S. co-operative and the Canadian tax treatment of the U.S. tax paid on such patronage allocation.
The situation outlined in your letter is as follows:
1. A taxpayer who is a co-operative corporation within the meaning assigned by subsection 136(2) of the Income Tax Act (the "Act") is a resident of Ontario and carries on business in Ontario.
2. The taxpayer receives a patronage allocation from a co-operative based in the U.S., which has an administrative office in Canada.
3. The patronage allocation received by the taxpayer was based on purchases placed by the taxpayer through the U.S. co-operative.
4. The U.S. patronage allocation was paid in U.S. funds, and U.S. tax equal to 15% of the gross amount of the patronage allocation was withheld and remitted to the Internal Revenue Services of the U.S. The amount of U.S. tax withheld was identified as "Dividends paid by U.S. corporations - general" on the information slip issued to the taxpayer.
5. The payer also withheld and remitted Canadian income tax equal to 15% of the gross amount of the patronage dividend under subsection 135(3) of the Act.
You requested our opinion on the following:
(i) Whether the U.S. patronage allocation should be considered foreign business income, foreign non-business income or active business income earned in Canada;
(ii) Whether a foreign tax credit is available if the patronage allocation is considered to be active business income earned in Canada; and
(iii) Whether subsection 20(12) of the Act is available if the foreign tax withheld is not eligible for foreign tax credits under section 126 of the Act.
The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.
For purposes of the Act, it is a question of fact whether the nature of the U.S. patronage allocation is foreign business income, foreign non-business income or income from an active business carried on in Canada. As you may be aware, subsection 135(7) of the Act merely provides that the amount of the patronage allocation is to be included in computing the income of the taxpayer without specifying the nature of such income. Therefore, all the facts and circumstances of a particular situation must be ascertained and reviewed thoroughly before a determination of the nature of the income can be made. Factors including the following should be considered:
(a) the activities carried out in the U.S. by the taxpayer besides the purchase of goods and services from the U.S. co-operative;
(b) the volume of purchases from the U.S. co-operative as compared to the volume of all the purchases from other suppliers of the taxpayer;
(c) the nature of the patronage allocation (i.e., whether it is essentially a reduction of the purchase price of goods and services purchased by the taxpayer, a distribution of net profits derived from other businesses of the U.S. co-operative not related to the business of the sale of goods and services to the taxpayer; or something else); and
(d) the tax status of the U.S. co-operative and tax treatment of the patronage allocation in the U.S. (i.e., whether such allocation is a dividend for U.S. tax purposes and whether it is deductible by the U.S. co-operative in computing its income in the U.S.).
However, where the U.S. considers the patronage allocation as a dividend within the meaning of paragraph 3 of Article X of the Canada-United States Income Tax Convention ("Convention") and it imposes taxes under that Article (i.e., paragraph 4 of Article X does not apply), the U.S. tax withheld may be considered to be either a "business income tax" or a "non-business income tax" as those terms are defined under subsection 126(7) of the Act. That is, pursuant to subparagraph 3(a) of Article XXIV of the Convention, the patronage allocation would be deemed to arise in the U.S. and Canada shall, subject to our foreign tax credit rules in the Act, deduct the U.S. withholding tax from Canadian tax payable.
To illustrate the foreign tax credit relief in the situation described above (i.e., the U.S. taxes the patronage allocation under Article X as a dividend), we have described three scenarios:
(i) If, for purposes of the Act, the patronage allocation would otherwise be considered active business income from a business carried on in Canada, then the 15% U.S. withholding tax should be viewed as a "non-business income tax" for purposes of subsection 126(1) and subsection 20(12) of the Act. In this regard, even though Article XXIV re-sources the income to the U.S., it does not deem the taxpayer to be carrying on business in the U.S., which is a requirement for subsection 126(2).
(ii) If, for purposes of the Act, the patronage allocation would otherwise be considered income from a property, whether Canadian source or foreign source, then the 15% U.S. withholding tax should be viewed as a "non-business income tax" for purposes of subsection 126(1) of the Act or subsection 20(12) of the Act. In this case, however, the taxpayer is only eligible to claim a foreign tax credit for such tax under subsection 126(1) of the Act or a deduction under subsection 20(12) of the Act where the U.S. co-operative is not a foreign affiliate (within the meaning assigned by subsection 95(1) of the Act) of the taxpayer.
(iii) If, for purposes of the Act, the patronage allocation would otherwise be considered business income from a business carried on in the U.S. (again, in a scenario where paragraph 4 of Article X did not apply), then the 15% U.S. withholding tax should be viewed as a "business income tax" for purposes of subsection 126(2) of the Act.
As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency. Also, the above comments are not to be construed as though the Agency has accepted that the patronage allocations paid to the taxpayer are treated as dividends for purposes of U.S. tax law. This is an issue, together with the application of paragraph 4 of Article X of the Convention, that you would need to raise with the U.S. tax authorities.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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