31 March 2006 External T.I. 2005-0161981E5 - Deduction of Payments by Credit Union

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 "patronage allocations based on the equity account balance of a credit union member" would be deductible by the credit union in computing its income under either section 137 or 135 of the Income Tax Act.

Position: None. General comments only.

Reasons: Questions of fact.

XXXXXXXXXX  							2005-016198
									Alison Campbell
March 31, 2006

Dear XXXXXXXXXX:

We are writing in reply to your letter of December 2, 2005, wherein you requested our views on the availability of deductions to a credit union under sections 137 and 135 of the Income Tax Act (the "Act") in respect of "patronage allocations based on the member's equity account balance". Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Questions concerning completed transactions should be addressed to the local taxation service office. We are however, prepared to provide the following comments which may be of assistance.

The first question you posed was whether a patronage allocation based on the member's equity account balance would be deductible in computing the income of a credit union where the equity balance is in the form of a balance due to the member consisting of cumulative amounts credited to a member on interest rebates and bonus interest payments in excess of general payouts and redemptions on closed accounts. It is your view that that the equity account based allocation would be deductible on the basis that the allocation is a "bonus interest payment", or that the allocation would qualify as a patronage dividend allocation under section 135 of the Act.

Subsection 137(2) provides that "bonus interest payments" made by a credit union are deductible in computing the income of the credit union. The phrase "bonus interest payment" is defined in subsection 137(6) as follows:

"an amount credited by a credit union to a person who was a member of the credit union in the year on terms that the member is entitled to or will receive payment thereof, computed at a rate in relation to

(a) the amount of interest payable in respect of the year by the credit union to the member on money standing to the member's credit from time to time in the records or books of account of the credit union, or

(b) the amount of money standing to the member's credit from time to time in the year in the records or books of account of the credit union,

if the amount was credited at the same rate in relation to the amount of interest or money, as the case may be, as the rate at which amounts were similarly credited in the year to all other members of the credit union of the same class"

Whether the allocation based on member's equity account balances, which consist of cumulative amounts credited to a member on interest rebates and bonus interest payments in excess of general payouts and redemptions on closed accounts, would satisfy the above definition of "bonus interest payment" is a question of fact that could only be addressed by this Directorate in the context of an advance income tax ruling request where such allocation is a proposed transaction. Similarly, all the relevant facts and circumstances would need to be provided in the context of an advance income tax ruling request before the potential application of section 135 of the Act to the allocation could be considered.

Your second question related to the ability of a credit union to claim a deduction in computing its income if it has made an allocation based on the member's equity account balance where that equity account balance consists of a share investment in the credit union. Subsection 137(4.1) of the Act applies, notwithstanding any other provision of the Act, where an amount is paid or payable by a credit union to a member thereof in respect of a share of a class of the capital stock of the credit union that is not listed on a prescribed exchange (other than any such amount paid or payable as or on account of a reduction of the paid-up capital, redemption, acquisition or cancellation of the share by the credit union to the extent of the paid-up capital of the share). When subsection 137(4.1) applies it deems the amount to have been paid or payable by the credit union as interest and to have been received or to have been receivable by the member as interest. As stated in paragraph 27 of Interpretation Bulletin IT-483 "Credit Unions" it is our general view that a dividend deemed to be interest by subsection 137(4.1) of the Act is deductible by the credit union in computing its income. The dividend is deductible when paid or payable, depending on the method followed by the credit union, and, if the payable method is followed, may be deducted in computing income of the immediately preceding taxation year where the dividend declared is in respect of the preceding year's business.

It is our general view that where amounts are paid or payable by a credit union to its members, based upon the members' equity account balances, where the equity account balances are in the form of share investments in the credit union, the amounts so paid or payable would be "in respect of a share of a class of the capital stock of a credit union" for the purposes of subsection 137(4.1) of the Act.

While the above comments are of a general nature and not binding on the Agency in respect of any particular fact situation, we do hope that the comments are of assistance.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch