29 April 1996 External T.I. 9609515 - PATRONAGE DIVIDENDS AND QUALIFIED INVESTMENTS

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:

1.Whether our position concerning the allocation of patronage dividends when shares of a co-op are held by a member's RRSP conflicts with an earlier opinion relating to bonus interest payments made by a credit union on deposits in RRSPs.

2.What would the Department consider to be "proper documentation" when a member's equity in a co-op is transferred to an RRSP.

Position:

1.There is no conflict.

2.No comment.

Reasons:

1.We are dealing with two different scenarios and different provisions of the Act apply.

2.We have not addressed this issue before. Initially, it will be up to the co-op and the RRSP trustee to determine what is necessary in the way of documentation. We will make our determination on post assessment.

		5-960951
XXXXXXXXXXJ. Leigh

Attention: XXXXXXXXXX

April 29, 1996

Dear Sirs:

Re: Patronage Dividends and Qualified Investments

This is in reply to your letter of March 6, 1996 requesting clarification of our position concerning the allocation of patronage dividends when shares of a cooperative corporation (co-op) are held by a member's registered retirement savings plan (RRSP). You have also asked for our views on the type of documentation that should be prepared to show the transfer of a member's equity in a co-op to an RRSP when the equity is not documented by way of issued shares, but rather by an equity account maintained by the co-op.

It appears that your request relates to a proposed fact situation involving specific taxpayers. Confirmation as to the income tax consequences of a proposed transaction will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. We can, however, offer the following general comments in response to your letter.

Patronage dividends

We are unable to confirm your view that patronage dividends should be allocated based on shareholding since shareholding is not a relevant factor in determining whether an amount qualifies as an "allocation in proportion to patronage," as defined in subsection 135(4) of the Income Tax Act (the "Act"). As stated in our letter of February 22, 1996, it is our view that for a patronage dividend to qualify for deduction under subsection 135(1) of the Act, it has to be computed based on the amount of business the customer did with the co-op and it has to be paid or credited to that customer. Since it is the customer and not the customer's RRSP that does business with the co-op, there is no basis for allocating any of the patronage dividend to the customer's RRSP.

In your letter, you indicated that the above position seemed to conflict with a technical interpretation given on June 25, 1991 concerning payments by a credit union of bonus interest based on balances in a depositary RRSP. In our view, there is no conflict since the facts and substance of that particular situation are different from the one you presented to us. In the credit union scenario, there was a direct linkage between the bonus interest payments and the RRSP as the bonus interest payments were computed based on the deposits in the RRSP. In the situation you presented, there is no linkage between the patronage dividends and the RRSP since the RRSP does not do business with the co-op.

Contribution of equity to an RRSP

Since the concept of transferring a member's equity in a co-op to an RRSP is not one that we have considered before, we are unable at this time to provide guidance as to the type of documentation that should be prepared. However, in our view, there must be clear evidence that a legally effective transfer has in fact taken place.

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