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:
Deduction of patronage dividends to a sole shareholder/customer where the corporation is not a co-operative and a contract is entered into in a particular year.
Position:
General comments only due to specific proposed transaction. A corporation does not have to be a co-operative and contract entered into during a year would not met the throughout the year requirement in paragraph 135(5).
Reasons:
Wording of legislation and see above.
XXXXXXXXXX 961881
Attention: XXXXXXXXXX
September 10, 1996
Dear Sirs:
Re: Patronage Dividends
Section 135 of the Income Tax Act ("the Act")
This is in reply to your letter of May 21, 1996 requesting an interpretation on the above matter. We apologize for the delay in responding to your letter.
It appears that your request relates to a proposed transaction to be undertaken by a specific taxpayer. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a written request for an advance income tax ruling which is submitted in accordance with Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Nevertheless, we can offer the following general comments which we caution may not apply to the fact situation described in your letter.
It is our view, as expressed in the summary of Interpretation Bulletin IT-362R, that section 135 of the Act is not confined in its application to co-operatives, and that "ordinary corporations" and other taxpayers may qualify for the deduction of patronage dividends where all the conditions prescribed by that section are met.
As mentioned in paragraph 1 of IT-362R a patronage payment may qualify for a deduction under subsection 135(1) of the Act, where an "allocation in proportion to patronage", has been made by the taxpayer. An "allocation in proportion to patronage", is defined in subsection 135(4) of the Act, and requires, inter alia, that "...an amount be credited by a taxpayer to a customer of that year on terms that the customer is entitled to or will receive payment thereof,...".
The word "credited" is not otherwise defined in the Act, however, we are of the view that the mere recording of an amount in the accounting records would not be "credited" for the purpose of the definition of "allocation in proportion to patronage" in subsection 135(4) of the Act unless the amount so recorded represents a legal liability of the corporation to pay the amount to the recipient as a patronage dividend.
Another condition set out in the definition of an "allocation in proportion to patronage" is found in paragraph (b) of that definition. That paragraph requires for an amount to be considered an allocation in proportion to patronage, the prospect that the amounts would so be credited must be held out by the taxpayer to the taxpayer's customers in advance. The holding out of such a prospect is provided in subsection 135(5) of the Act and is discussed in paragraph 9 of IT-362R. It is our view that where a contract with a customer is entered into sometime during a taxpayer's current taxation year then the "throughout the year" requirement, in paragraph 135(5)(a) of the Act, would not be met for that particular year.
While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on the Department.
Yours truly,
Section Chief
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch
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