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.
Principal Issues:
Whether a subsidiary is entitled to claim a deduction for patronage dividends paid to its sole shareholder/customer under subsection 135(1).
Whether subsection 135(2) will apply to limit the deductibility of patronage dividends under subsection 135(1) where the sole shareholder is the only customer to receive an allocation in proportion to patronage.
Position:
Yes, subject to the limitation in subsection 135(2) and provided the requirements of section 135 are otherwise met.
Probably, it appears that a zero allocation of patronage dividends to non-member customers is not appropriate in the circumstances.
Reasons:
Based on the information provided.
The value of business done with non-member customers would appear to warrant an allocation of patronage greater than zero.
XXXXXXXXXX 2003-002024
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX and subsequent correspondence up to and including XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided during our various telephone conversations in connection with your request.
You advise that to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request:
i. is in an earlier return of the taxpayers or related persons;
ii. is being considered by a tax services office or taxation centre in connection with a previously filed return of the taxpayers or related persons;
iii. is under objection by the taxpayers or related persons;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. is the subject of a ruling previously considered by the Directorate.
Unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
DEFINITIONS
a) "ACO" means XXXXXXXXXX,
b) "BCO" means XXXXXXXXXX, and
c) "Bank" means XXXXXXXXXX.
FACTS
1) ACO is a taxable Canadian corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX. Its office is located in XXXXXXXXXX. Its tax services office is the XXXXXXXXXX TSO. ACO has not yet established its fiscal and taxation year-end.
2) ACO was established by a group of investors: XXXXXXXXXX. The initial equity investment was $XXXXXXXXXX with no single investor, public company or non-resident person controlling ACO.
3) ACO borrowed $XXXXXXXXXX of senior debt from XXXXXXXXXX with terms and conditions that reflect fair market value of such financing arrangements. The loan is structured as XXXXXXXXXX.
4) ACO, using its initial equity investment of $XXXXXXXXXX and its funds from senior debt of $XXXXXXXXXX, acquired XXXXXXXXXX% of the outstanding shares of BCO for total consideration of $XXXXXXXXXX. The acquisition of BCO was closed on XXXXXXXXXX.
5) BCO is a taxable Canadian corporation formed under the XXXXXXXXXX. Prior to its acquisition by ACO, BCO's former name was XXXXXXXXXX. BCO's head office is located in XXXXXXXXXX and it has offices in XXXXXXXXXX. Its tax services office is the XXXXXXXXXX TSO and its fiscal and taxation year-end is XXXXXXXXXX.
6) XXXXXXXXXX.
7) Since XXXXXXXXXX, BCO has provided certain services to ACO. The services provided by BCO are unique and distinct XXXXXXXXXX. These services include, but are not be limited to, XXXXXXXXXX.
8) From time to time, BCO renders an invoice to ACO equal the fair market value fee for the provision of these services. ACO pays all such invoices for services received from BCO in a timely manner.
9) BCO's revenue consists of income from its XXXXXXXXXX provided to ACO.
10) On XXXXXXXXXX, BCO advertised in prescribed form the prospect that allocations would be made in proportion to patronage to its customers for its taxation year ending XXXXXXXXXX. The advertisement further indicated that BCO had no plans to make patronage payments to non-shareholder customers.
PROPOSED TRANSACTIONS
11) On a regular and periodic basis during the XXXXXXXXXX and subsequent taxation years of BCO, BCO will make payments pursuant to allocations in proportion to patronage to its sole member customer, ACO, XXXXXXXXXX . BCO will not be making any allocations in proportion to patronage to its non-member customers.
PURPOSE OF THE PROPOSED TRANSACTIONS
12) The overall purpose of the proposed payment of patronage dividends is to XXXXXXXXXX.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:
A. Provided that for a particular taxation year BCO held out the prospect that amounts would be credited to its customers in accordance with subsection 135(5), BCO will be entitled to deduct pursuant to paragraph 20(1)(u) and subsection 135(1), subject to the limitation in subsection 135(2), in computing its income for the year payments made pursuant to allocations in proportion to patronage by BCO within the year or within 12 months thereafter to ACO as described in 11 above and such payments will be included in computing the income of ACO for the taxation year in which such payments are received pursuant to subsection 135(7).
B. For the purposes of subsection 135(2) and the definition of "income of the taxpayer attributable to business done with members" in subsection 135(4), the income of BCO for the year will include income from all sources determined in accordance with section 3 before making any deduction under subsection 135(1).
C. Section 67 will not apply to limit or restrict the amount of the deduction by BCO of the payments made pursuant to allocations in proportion to patronage to ACO.
D. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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