27 March 1995 External T.I. 9431975 - 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.

Principal Issues:

General interpretation of "patronage dividends"

Position TAKEN:

Routine

Reasons FOR POSITION TAKEN:

Routine

								5-943197
XXXXXXXXXX		A. St-Amour

Attention: XXXXXXXXXX

March 27, 1995

Dear Sirs:

Re: Patronage Dividends
Section 135 of the Income Tax Act ("the Act")

This is in reply to your letter of December 8, 1994 requesting an interpretation on the above matter. We apologize for the delay in responding to your letter.

For a deduction to be allowed in computing a taxpayer's income for a taxation year under paragraph 135(1)(a) of the Act, the following conditions must be met:

-"Payments" must be made. This word is defined in subsection 135(4).

-The payments must be made pursuant to "allocations in proportion to patronage" as this term is defined in subsection 135(4) of the Act.

-The payments must be made to customers in the year or within 12 months thereafter.

In order for a payment to fall within the definition of "allocation in proportion to patronage" for a taxation year, the following elements must be present:

-An amount must be credited by a taxpayer to a customer of that year. Since the word "credited" is not defined in the Act, its interpretation is determined in accordance with the usual meaning of the word. The Concise Oxford Dictionary defines the word credit as follows: "to enter on credit side of account". We agree, that in certain circumstances, "credited" may be interpreted as the setting up of a liability in the accounting records as a payable to the recipients of the patronage dividends declared.

-The allocation must be made at a rate in proportion to patronage (that is the amount of business done) 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.

-The amount must be credited in the year or within 12 months thereafter.

-All customers must be credited at the same rate. 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) will be limited by subsection 135(2).

-The taxpayer must have held forth the prospect, in advance, that such a dividend payment would be made. The holding forth of such a prospect is provided in subsection 135(5).

We are of the view that patronage dividends that are not paid within the allowable time frame would be disallowed because they are not paid according to subsection 135(1) of the Act. Nonpayment would not necessarily mean that the dividends were not an allocation in proportion to patronage. For further information on this matter, a copy of Interpretation Bulletin IT-362R is enclosed.

As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any questions do not hesitate to contact us.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch