22 July 2013 External T.I. 2012-0467231E5 - Patronage dividends and capital gains

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: 1. Whether patronage dividends paid to members totalling the amount of taxable capital gains realized by a co-op will be deductible by the co-op pursuant to subsection 135(1)? 2. Whether the patronage dividends will be taxable to the members?

Position: 1. Yes, provided all requirements of section 135 are met. 2. A patronage dividend that is received by a member of a co-op is included in the member's income for tax purposes under subsection 135(7) except for allocations in respect of "consumer goods or services".

Reasons: 135(1); 135(7)

XXXXXXXXXX
2012-046723
Sylvie Danis
(613) 957-3496

July 22, 2013

Dear XXXXXXXXXX:

Re: Patronage dividends and capital gains

This is in response to your letter dated October 25, 2012 wherein you requested our views with respect to the interpretation of the rules relating to patronage dividends.

In particular, you asked us whether patronage dividends paid to arm's length members in an aggregate amount equal to a taxable capital gain realized by a cooperative corporation on a sale of property are deductible pursuant to subsection 135(1) of the Income Tax Act (the "Act"). You also asked us whether the receipt of these patronage dividends would be taxable to the members. We apologize for the delay in responding.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review should normally be conducted by the applicable Tax Services Office during the course of an income tax audit. However, we can offer the following general comments that may be of assistance.

Subject to subsections 135(1.1) to (2.1) and 135.1(3) of the Act, subsection 135(1) of the Act allows a deduction in computing a taxpayer's income for a taxation year where the taxpayer has made a payment pursuant to allocations in proportion to patronage to its customers within the year or within 12 months thereafter. An "allocation in proportion to patronage" for a taxation year is defined in subsection 135(4) of the Act to mean an amount credited by the taxpayer to a customer of that year, on terms that the customer is entitled to or will receive payment of the amount, computed at a rate in proportion to patronage with appropriate differences in the rate for different types of goods, products or services and for different classes, grades, or qualities of such goods, products, or services.

As stated in paragraph 2 of Interpretation Bulletin IT-362R, Patronage Dividends:

"It is generally required that all customers be credited at the same rate for similar goods or services as described in paragraph 135(4)(a). If they are not and non-member customers are involved who are credited at a different rate than members, or are excluded from the allocation altogether, the amount deductible in the year by the taxpayer under subsection 135(1) may be limited by subsection 135(2). The effect of subsection 135(2) is to limit the amount deductible in respect of members to that proportion of the taxpayer's income from all sources, including taxable capital gains, that the business done with members is of the business done with all customers during the year."

Provided all the conditions in section 135 of the Act are otherwise met, it is our view that patronage dividends in an aggregate amount equal to a taxable capital gain realized by a taxpayer are deductible pursuant to subsection 135(1) and paragraph 20(1)(u) of the Act in computing the income of the taxpayer.

Generally, a patronage dividend that is received by a member of a taxpayer is included in the member's income for tax purposes under subsection 135(7) of the Act. However, there is an exception for allocations in respect of "consumer goods or services". "Consumer goods or services" are defined in subsection 135(4) of the Act as "goods or services the cost of which was not deductible by the taxpayer in computing the income from a business or property." It is a question of fact whether a payment pursuant to an allocation in proportion to patronage relates to consumer goods or services.

We trust the above comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch