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.
Principal Issues: Whether a patronage dividend paid in the form of shares qualifies under paragraph (a) of the definition of "payment" in subsection 135(4) of the Act.
Position: Not in this case.
Reasons: One of the conditions is that an amount of money be disbursed in the course of redeeming the shares in the year or within 12 months thereafter. Based on the facts provided, the shares will not be redeemed within the stipulated time.
XXXXXXXXXX
2009-034546
July 14, 2010
Dear XXXXXXXXXX :
Re: Patronage Dividends
This is in reply to your letter dated October 19, 2009 requesting clarification on the application of subsection 135(4) of the Income Tax Act (the "Act") to a particular fact situation. Specifically, you asked for our views on whether a cooperative corporation ("Subco") that is a wholly-owned subsidiary of another cooperative corporation ("Parentco") is considered to have made a "payment" as defined in subsection 135(4) of the Act when Parentco issues shares of Parentco to Subco's members in satisfaction of Subco's patronage allocation.
Briefly, Subco will make a cash payment to Parentco to be used for patronage payments. Parentco will hold the cash in trust for Subco. Subco and Parentco will enter into a contractual agreement whereby Parentco would deliver to the members of Subco a specified amount of the cash held in trust in the form of shares of Parentco. The shares would have a face value equal to the specified amount. The remaining cash held in trust would be distributed by Parentco to the members of Subco on Subco's behalf.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to offer the following general comments which may be of assistance.
Subsection 135(1) of the Act allows a deduction in computing a taxpayer's income for a taxation year where the taxpayer has made a payment pursuant to allocations in proportion to patronage to its customers within the year or within 12 months thereafter. For the purposes of section 135 of the Act, the term "payment" is defined in subsection 135(4) of the Act to include three different ways of effecting payment.
In particular, pursuant to paragraph (a) of the definition of "payment" in subsection 135(4) of the Act, a share issuance may qualify as a payment if the following conditions are met:
(1) the shares issued are shares of the taxpayer or of a corporation of which the taxpayer is a subsidiary wholly-owned corporation,
(2) the taxpayer or that corporation has in the year or within 12 months thereafter disbursed an amount of money in the course of redeeming the shares, and
(3) the redemption amount is equal to the total face value of the shares issued.
In the situation described, Parentco will use a portion of the cash received from Subco to make patronage payments to the members of Subco and make the balance of the payment by issuing its own shares having a face value equal to the amount of the undistributed cash. There is no plan to redeem the Parentco shares within the time stipulated in paragraph (a) of the definition of "payment" in subsection 135(4) of the Act. Accordingly, it is our view that Subco will not be considered to have made a "payment" as defined in subsection 135(4) of the Act.
While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.
Yours truly,
Jenie Leigh
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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