26 August 2010 External T.I. 2010-0367981E5 - Distribution of union assets on wind-up

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: What income tax implications arise for union members in receipt of a distribution from a union on wind-up?

Position: Generally, the disposition of the right to be a member of the union will constitute a disposition of a capital property that has a cost base of nil such that the distribution, representing proceeds of disposition, will be included in the member's income as a capital gain.

Reasons: See above.

XXXXXXXXXX
									2010-036798
									Renee Sigouin
									(613) 957-2128
August 26, 2010

Dear XXXXXXXXXX :

Re: Distribution of Union Assets to Members on Wind-Up

We are writing in response to your email correspondence dated May 18, 2010 concerning the taxability of a distribution of funds from a union to its members on wind-up. The distribution was made by cheque to all eligible members of the union who were paying dues at the time of the decertification with the amount of the distribution based on each member's length of membership and past contributions to the union. Although not indicated in your correspondence, we have assumed that the union was still considered to be a labour organization for the purposes of paragraph 149(1)(k) of the Income Tax Act (the "Act").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced 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. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

The distribution of surplus union funds on wind-up results in the union members realizing a "disposition", as defined in subsection 248(1) of the Act, of their right to be a member of the union. Pursuant to section 38 of the Act, each member would realize a taxable capital gain computed as half of the member's capital gain from the disposition of his or her right to be a member of the union. On the assumption that the members did not pay any specific amount to become a member of the union, the adjusted cost base ("ACB") of each member's right in the union would be nil. It should be noted that, in determining the ACB, the cost of the right to be a member of the union should not include the member's annual membership dues.

Notwithstanding the foregoing, we note that paragraph 6(1)(j) of the Act requires a taxpayer to include in computing his or her employment income amounts received in the year as a reimbursement in respect of any amount that would be deductible under subsection 8(1) of the Act (such as union dues). Paragraph 6(1)(j) of the Act does not require an income inclusion where the amount received as a reimbursement is taken into account in computing the taxpayer's deduction under subsection 8(1) for the year or a preceding taxation year.

Broadly speaking, where a payment from a union to its members is made within the framework of the cessation of the activities of the union and its dissolution, one must determine what portion, if any, of the amount received by each member represents a reimbursement of annual union dues and what portion represents 'proceeds of disposition', as this term is defined in section 54 of the Act, of his or her right to be a member of the union. This is a determination of fact, however, we would generally expect that the portion of the distribution up to the amount of annual dues paid in the year would represent a reimbursement thereof, and the remaining portion would be proceeds of disposition. The amount of the distribution representing a reimbursement of union dues would not be included in determining the proceeds of disposition of the member's right to be a member of the union for the purposes of computing the capital gain.

Finally, the union would be required to complete a T4A slip for each member in respect of the portion, if any, of the distribution that represents a reimbursement of the member's union dues, to the extent that the reimbursement exceeds $500. There are no reporting requirements with respect to the portion of the distribution that represents proceeds on the disposition of his or her right to be a member of the union.

We trust that these comments have been of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch