25 July 1990 Ministerial Correspondence 59304 F - Credit Unions

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.

Attention: 19(1)

July 25, 1990

Dear Sir:

This is in reply to your letter dated December 19, 1909 with respect to credit unions making payments pursuant to allocations in proportion to borrowing bonus interest payments and payments pursuant to allocations in proportion to patronage.  The underlined phrases have the meaning assigned in paragraphs 137(6)(a), (a.1) and 134(4)(a) of the Income Tax Act (the "Act") respectively.

All references to statute are references to the Act unless otherwise indicated.

By virtue of subsection 137(2), a credit union, as defined in paragraph 137(6)(b), may deduct payments pursuant to allocations in proportion to borrowing and bonus interest payments in computing income for a taxation year.  subject to the requirements of that subsection.

Subsection 135(1) and paragraph 20(1)(u) which provide for the deduction of payments pursuant to allocations in proportion to patronage are available to all taxpayers which would therefore include credit unions.

Whether a credit union has made an allocation in proportion to borrowing, a bonus interest payment or allocation in proportion to patronage is a question of fact which can only be determined after reviewing all the relevant facts.  As a comment it seems to us that the basis for calculating allocations in proportion to patronage, which relates to the quality, quantity or value of business with the customer is quite different than the basis for allocations in proportion to borrowing and bonus interest payments which are determined with respect to the members' borrowing and money investment with the credit union.  In this regard we would also note that subsections 135(7) and 137(5), which may be conflicting, may be viewed as evidence that paragraph 135(4)(a) was not intended to address or deal with amounts described in paragraphs 137(6)(a) and (a.i)

You indicated that subsection 29(1) of the Manitoba Credit Unions and Caisses Populaires Act permits a caisse populaire to provide in its by-laws that the patronage refund may be used to purchase surplus shares of the caisse populaire on behalf of its members. You note that the share conditions may restrict the member's ability to cause the caisse populaire to redeem or purchase the shares until the member ceases his membership or other restrictions are satisfied.  Whether or not the issuance of shares with restrictive covenants constitutes payment for purposes of paragraph 137(2) is a question of fact that must be determined with reference to the particular circumstances. Generally it must be determined whether a member accepts the shares as absolute satisfaction of an allocation in proportion to borrowing or a bonus interest payment or only as evidence of, or form of, security.

Paragraph 137(6)(a) requires that the amount credited be at the same rate to all members of the same class computed in relation to the amount of interest payable by the member on money borrowed or the amount of money borrowed from the credit union.  Similarly paragraph 137(6)(a.i) requires that the amount credited be at the same rate to all members of the same class computed in relation to interest payable in respect of the year by the credit union to the member on money standing to his credit or the amount of money standing to his credit from time to time.

The Act does not provide any guidance as to what constitutes a class of taxpayer. As you indicated the Department provides in paragraph 20 of Interpretation Bulletin IT-483 that such determination may be made on the basis of similarity of risk.

Where a particular class of member is determined it is our view that the credit union may choose not to make any allocations in proportion to borrowing or bonus interest payments to all members of that class without jeopardizing the deductibility by the credit union of the payment of allocations to members of other classes.

We are not prepared to provide a general comment with respect to the waiver by a member of his entitlement to an allocation in proportion to borrowing or a bonus interest payment without the opportunity to consider specific facts.  Should you wish to pursue this concern we suggest that you apply for an advance income tab ruling on behalf of a specific credit union and member at which time all facts, proposed transactions and relevant documentation should be submitted.

Your remaining question concerned a situation where a member closes his account during the year to which the allocation in proportion to borrowing or bonus interest payment relates. Paragraphs 137(6)(a) and (a.1) require that such amounts de credited to all taxpayers who were members of the same class in the year to which the allocation in proportion to borrowing or bonus interest payments relates.  Accordingly, it is our view that paragraphs 137(6)(a) and (a.1) require an allocation to be made to such a member on the same basis as for other members of the same class.

As we are of the view that the provisions of section 137 better address the situation of credit unions and caisse populaires and as your query was in respect of caisse populaires we have confined our written response to such provisions. In this regard we note that your that your hypothetical query dealt with payments which would meet the provisions of both section 137 and 135.  Given your assumption that the payment is deductible under section 137 the simultaneous application of section 135 seems purely academic given subsection 4(4).

While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate