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.
RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY
Principal Issues:
(1)Whether patronage dividends declared by a co-op should be allocated between shares of the co-op held by a member directly and shares of the co-op held by the member's RRSP?
(2)When a co-op customer receives shares of the co-op or equity in the co-op as consideration for the sale of product to the co-op, is the customer required to include the value of the shares or the value of the equity in income as sales revenue?
(3)Can a co-op member contribute shares of the co-op or equity in the co-op to his RRSP?
Position TAKEN:
(1)No. All of the patronage dividends should be allocated to the member and included in his income.
(2)It is the full sales price of the product that must be included in computing income.
(3)Yes, but the shares or equity must be transferred to the member's RRSP at fair market value.
Reasons FOR POSITION TAKEN:
(1)For patronage payments to qualify for deduction under subsection 135(1), the payments must be made pursuant to allocations in proportion to patronage. An "allocation in proportion to patronage" is defined in subsection 135(4) and essentially means an amount computed at a rate in proportion to patronage (i.e., the amount of business done with the customer in the taxation year). There is no basis for a patronage dividend to be allocated to an RRSP since the RRSP does not do business with the co-op.
(2)This position is consistent with the comments in paragraphs 6 and 7 of IT-490 concerning barter transactions.
(3)Assuming that the shares or equity meet the definition of "qualified investment" in subsection 146(1) by virtue of subsection 4900(12) of the Regulations, the member can contribute the shares or equity to his RRSP at their fair market value.
5-960304
XXXXXXXXXX J. Leigh
Attention: XXXXXXXXXX
February 22, 1996
Dear Sirs:
Re: Patronage Dividends, Check-off and Qualified Investments
This is in reply to your letter of January 17, 1996 in which you have asked our views on the allocation of patronage dividends when shares of a cooperative corporation (co-op) are held by a member and by the member's registered retirement savings plan (RRSP). You have also asked us to comment on the treatment of an increase in a member's equity through "check-off" and whether the shares of a co-op or equity in a co-op are qualified investments for RRSP purposes.
Patronage dividends
Subsection 135(1) of the Income Tax Act (the "Act") allows a deduction to a taxpayer for payments made pursuant to allocations in proportion to patronage. An "allocation in proportion to patronage" for a taxation year is defined in subsection 135(4) of the Act. In order for a payment to fall within this definition, several conditions must be satisfied. One such condition is that an amount must be credited by a taxpayer to a customer on terms that the customer is entitled to or will receive payment of the amount, computed at a rate in proportion to patronage (i.e., the amount of business done with the customer in the taxation year) 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.
It is our view that since a patronage dividend is computed based on the amount of business the customer did with the co-op and such amount is to be paid or credited to the customer, there is no basis for allocating any of the patronage dividend to the customer's RRSP as it does not do business with the co-op. Shareholding of the co-op is not a relevant factor in determining "allocations in proportion to patronage" (i.e., patronage dividends).
Check-off
Where a taxpayer receives a payment in kind as consideration for goods sold in the course of carrying on business, the taxpayer must include the full sales price of the goods in computing income from the business. Accordingly, when a customer sells a product to a co-op, the full sales price of the product must be included in computing the customer's income notwithstanding that the customer accepts shares of the co-op or equity in the co-op as full or partial payment for the product.
Qualified investments
A co-op member may contribute shares of the co-op or equity in the co-op to the member's RRSP if the shares or equity qualify as investments for RRSP purposes. A "qualified investment" for an RRSP is defined in subsection 146(1) of the Act and includes investments prescribed by subsection 4900(12) of the Income Tax Regulations (the "Regulations"). Subsection 4900(12) of the Regulations (applicable after December 2, 1992) allows a "qualifying share" in respect of a "specified cooperative corporation" to be a qualified investment for an RRSP, provided that the RRSP annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the share. These terms are defined in subsection 4901(2) of the Regulations.
If the conditions respecting "specified cooperative corporation" and "qualifying share" are satisfied at the time the member's RRSP acquires the shares or equity and the member is not a "connected shareholder" of the co-op immediately after the RRSP acquires the shares or equity, it is our view that the shares or equity can be contributed to the member's RRSP and an amount in respect thereof may be deducted by the member to the extent permitted by section 146. (In the case of a contribution of equity, the proper documentation must be prepared to show the transfer of the equity to the member's RRSP.) The amount deductible in respect of shares or equity transferred to an RRSP would be their fair market value at the time of contribution. It should be noted that the fair market value of the equity may not be the same as its book value particularly if there are restrictions on the ability of the member to withdraw the amount.
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 that these comments will be of assistance.
Yours truly,
Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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