23 March 1995 Internal T.I. 9505687 - PATRONAGE DIVIDEND

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:

To confirm that patronage dividend paid by a cooperative constitutes payment as defined in 135(4).

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

Routine

								March 23, 1995

	VANCOUVER TAX SERVICES				HEADQUARTERS
	Attention: Jim Lawson				Income Tax Rulings and
	             Audit Division			  Interpretations Directorate
								Adèle St-Amour
(613) 957-8953

								7-950568

Patronage Dividend - XXXXXXXXXX

This is in response to your memorandum of March 1, 1995 requesting our confirmation that the patronage dividend issued by XXXXXXXXXX constitutes payment within the meaning of paragraph (b) of the definition of "payment" in subsection 135(4) of the Income Tax Act ("the Act"). You also asked whether withholding payments are mandatory given that the dividends are non-taxable.

Facts

1.The patronage dividend issuance is detailed in the finance and audit committee minutes of XXXXXXXXXX with respect to the patronage dividend for the year ended December 31, 1993, as follows:

a) XXXXXXXXXX will declare a patronage dividend equal to net income before tax.

b)The patronage dividend declared for the year will be allocated among all members of XXXXXXXXXX based upon the patronage of each member for the year.

c)Pursuant to XXXXXXXXXX of the By-Laws, members who are allocated a patronage dividend for the year shall apply the whole of that dividend to the purchase of additional shares of XXXXXXXXXX

2.The By-Laws of XXXXXXXXXX stipulate at Article XXXXXXXXXX the following:

XXXXXXXXXX

Comments

We are of the view that the issue of shares by XXXXXXXXXX from its capital stock to a member in satisfaction of patronage dividends constitutes payment within the meaning of paragraph b) of the definition of "payment" in subsection 135(4) of the Act since such issue results from members' liability to purchase such shares pursuant to a by-law of XXXXXXXXXX However, this is not a confirmation that the deduction for payments is made pursuant to "allocations in proportion to patronage" as defined in 135(4) of the Act.

Subsection 135(3) provides that a withholding tax of 15% applies on patronage dividends in excess of $100 paid to a resident of Canada except a person exempt from tax under section 149. This tax is then applied against the customer's eventual tax liability for the year. Section 218 of the Income Tax Regulations provides that every person who makes payments pursuant to an allocation in proportion to patronage shall make an information return in prescribed form (T4A). Since there is no provision in the Act to waive such obligations, the withholdings are mandatory. As mentioned by Mrs. St-Amour in a telephone conversation, the waiving of withholding payments is strictly an administrative decision that should be taken in consultation with the Source Deduction Section of your District Office. In taking this decision, you may consider that XXXXXXXXXX may not be able to determine which payments are in respect of consumer goods or services.

We trust the above comments will be of assistance to you. If you have any question do not hesitate to contact us.

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