19 June 1995 Ministerial Letter 9515698 - PATRONAGE DIVIDENDS BY NON CO-OP.

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:

Whether non co-operatives can deduct patronage dividend payments and whether such non co-ops can effect payment by issuing shares without the need to exchange paper.

Position TAKEN:

YES and YES.

Reasons FOR POSITION TAKEN:

The Act does not restrict deduction of patronage dividends to co-ops. Isuuing of shares could be considered a constructive payment.

DM'S OFFICE (2) ADM 950842
ASSOCIATE DEPUTY MINISTER (1)
ADM'S OFFICE (2)
RETURN TO 15TH FLOOR, ALBION TOWERS

June 19, 1995

XXXXXXXXXX

Dear XXXXXXXXXX:

I am replying to your letter of June 9, 1995, wherein you requested confirmation that private retailers, who are not organized as co-operatives, may, in computing income, deduct the amount of patronage dividends paid to customers, and that the payment may be made by the issuance of shares without the need for exchange of paper. You also inquired whether there are any additional conditions not described in Interpretation Bulletin IT-362R2 that must be met to qualify for the deduction.

The comments in Interpretation Bulletin IT-362R2 represent the Department's current position respecting the deduction of patronage dividends. It describes the conditions that must be met in order to deduct patronage dividend payments. However, in order to obtain assurance that these conditions have been met, taxpayers proposing to rearrange their business affairs to be able to issue patronage dividends may want to request an advance income tax ruling.

While it is our understanding that the payment of patronage dividends is not usually undertaken by organizations which are not co-operatives, sole proprietors, partnerships and ordinary corporations may also qualify for the patronage dividend deduction. Other business aspects such as the dilution of shares, possible effects on financing arrangements and the detailed accounting required must be considered. As you noted in your letter, paragraphs 10 and 11 of the Bulletin describe an arrangement whereby patronage dividends may be paid by the issuance of shares without the need to exchange paper. The shares issued must represent full consideration for the patronage dividend required. Of course retailers that are not incorporated cannot issue shares. They would have to issue debt instruments or some other form of equity. These arrangements may be employed by both co-operatives and private retailers who are not organized as co-operatives.

I trust these comments will be of assistance to you.

		Yours sincerely,
		Ian E. Bennett

Wm. P. Guglich

957-2102
June 16, 1995