13 March 1992 Income Tax Severed Letter 9200295 - Credit Unions and Patronage Dividends

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.

Subject: CREDIT UNIONS AND PATRONAGE DIVIDENDS Section(s): 135, 137]

XXX 5-920029 N. Goldstein (613) 957-3499

Attention: XXX

March 13, 1992

Dear Sir:

Re: Section 137 of the Income Tax Act (the “Act”) and Payments to Non-Members of Credit Unions

We are responding to your letter of October 30, 1991 in which you requested our opinion as to the deductibility by a “credit union”, as defined in paragraph 137(6)(b) of the Act, of payments made to nonmembers (the “payments to non-members”) which are similar in nature to “allocations in proportion to borrowing” and “bonus interest payments” paid to members, within the meaning of paragraphs 137(6)(a) and (a.1) of the Act, respectively.

You suggested that the payments to non-members were not deductible by the credit union under subsection 137(2) of the Act as that subsection expressly requires that payments, in order to be deductible, must be paid to “members” as that term is defined in paragraph 137(6)(d) of the Act. We concur in this view.

It was also suggested that the payments would be deductible by the credit union under the basic rules regarding the determination of income from a business in a manner similar to an interest rate adjustment or a volume discount. At this time, we are not prepared to confirm this position as we have some doubts as to whether a payment, in essence, paid after the determination of net income, is an outlay or expense made or incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act.

Your final question was whether the payments to non-members could qualify as an “allocation in proportion to patronage” as that term is defined in paragraph 135(4)(a) of the Act and, thereby be deductible pursuant to subsection 135(1) of the Act. Providing that all the requirements of paragraph 135(4)(a) are satisfied, including the requirement that the credit union held forth the prospect of allocations, we are of the view that the payments to non-members may be deductible by the credit union pursuant to subsection 135(1) of the Act. In this regard, we would note that:

• 1. The application of subsection 4(4) of the Act would prevent the deduction by the credit union of payments to members under both subsections 137(2) and 135(1) of the Act. 2. It is necessary that the payments to non-members meet the requirements of paragraph 135(4)(a) of the Act, specifically, that the allocations in proportion to patronage are computed at a rate in relation to the quantity, quality or value of the goods or products acquired, marketed, handled, dealt in or sold, or services rendered by the credit union with appropriate differences in the rate for different classes, grades or qualities, which difference cannot be based solely on the difference of class of customer (eg. members and non-members).
• 3. It is possible to allocate or credit an amount of nil to either all of the members or all of the customers who are not members and still have such amount considered to be an “allocation in proportion to patronage” within the meaning of paragraph 135(4)(a) of the Act.

We trust the foregoing comments are of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate