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.
Whether income received an allocation in proportion to patronage (subsection 135(7)) is income from an active business (and eligible for the small business deduction or the M&P deduction) and/or is income included in determining resource profits.
No opinion - patronage dividends may represent adjustment in price of product or distribution of profits.
Question of fact and all relevant facts and documentation have not been provided.
XXXXXXXXXX Denise Dalphy
July 19, 1996
Re: Patronage Allocations
This is in reply to your letter of July 3, 1996 wherein you enquired further about the characterization of amounts included in income pursuant to subsection 135(7) of the Income Tax Act.
It may be that in a marketing co-operative, a patronage dividend is essentially a belated payment for the product and therefore amounts to an increased price received for the product, and that in a merchandising co-operative, a patronage dividend represents a reduction in the price paid for the product. However, this is not necessarily reflective of the actual situation. R. Craig McIvor's book, Recent Growth in Canadian Co-operatives, contains the text of Mr. Hazen Hansard, Q.C.'s speech at the Fifteenth Tax Conference. Mr. Hansard stated (at page 7):
"The paying of "patronage dividends" was evolved early in the game as a means of remitting to the members of the co-op the excess of revenues over expenditures, the original theory being that this was merely handing back to the members what already belonged to them as being their share of the saving resulting from their co-operative effort. When, however, the larger co-operatives began to expand their activities, so that they were dealing for the account of others than their members and were engaging in other business activities in many instances not remotely related to their members' individual interests, such patronage dividends would include not only what might properly be described as savings of the members but also income earned as a result of doing business for others and carrying on other businesses. "
In another speech given at the same tax conference (reproduced at pages 18 and 19 of the aforementioned book) Mr. Cecil Lament said, in discussing marketing co-operatives:
"In the case of the co-operative grain elevator companies, they extended their activities into flour milling, oil processing, printing and publishing for profit, buying, selling and processing grains and seeds, selling fertilizers, chemicals, coal, flour, farm supplies, binder twine, acting as principals and agents for various types of insurance and fidelity bonds, real estate and rental operations, trading in grain and engaging in export grain operations. Profits on these multifarious operations are merged in their general operating profits and are not distinguished from the earnings made on their primary functions of handling grain of their members or shareholders. Their so-called surplus at the end of any year does not represent an under-payment to their members, but on the contrary directly represents the net result, whether profit or loss, of their overall operations comprising handling, merchandising, manufacturing, processing and trading. Their dealings are not confined to members alone. On the contrary, they solicit the business of the public generally and in respect of business done with non-members, pay no patronage dividends but retain any profit resulting from such business as part of their general funds."
We would refer to cases such as Fraser Valley Milk Producers' Association v. Minister of National Revenue, (1929) S.C.R. 435, and Sedgewick Co-operative Association Ltd. v. The Queen, 83 DTC 5455 (FCTD) in making the above determinations.
With respect to the question of whether the patronage payments are included in computing the recipient's active business income, you may wish to consider cases such as Anderson Logging Co. v. The King (1925) SCR 45, Sutton Lumber and Trading Co. v. M.N.R., 53 DTC 1158 (SCC), Ensite Ltd. v. The Queen, 86 DTC 6521 (SCC), Canadian Marconi Co. v. The Queen, 86 DTC 6526 (SCC), among others, in making a determination. In the context of the resource allowance, cases such as Cominco Ltd. v. The Queen, 84 DTC 6535 (FCTD) and R. v. Gulf Canada Limited, 92 DTC 6123 (FCA) would of course be relevant.
As we stated in our letter dated May 22, 1996, determinations as to whether an amount that is required to be included in computing a taxpayer's income as "patronage dividends" pursuant to subsection 135(7) of the Act is income from an active business (and eligible for the small business deduction or the manufacturing and processing profits deduction), or is considered income that is included in determining "resource profits", as defined in section 1204 of the Income Tax Regulations, are questions of fact. All relevant facts and documentation relating to the patronage allocation would have to be examined in order for us to determine whether a particular patronage allocation could be characterized in the same manner as the recipient's underlying activity.
These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2 and are therefore not binding on Revenue Canada.
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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