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:
Whether non co-operatives can deduct patronage payments and whether such non cop-ops can effect payment by issuing shares without the exchange of paper.
Position TAKEN:
YES & YES.
Reasons FOR POSITION TAKEN:
The Act does not restrict deduction of dividends to co-ops. Issuing of shares could be considered a constructive payment.
ADM'S OFFICE (2) ADM 950842
RETURN TO 15TH FLOOR, ALBION TOWERS
SUBJECT OR CORPORATE FILE
June 19, 1995
MEMORANDUM FOR IAN E. BENNETT
SUBJECT: DEDUCTION OF PATRONAGE DIVIDENDS BY PRIVATE BUSINESS
The purpose of this briefing note is to respond to the June 9, 1995, submission of XXXXXXXXXX who has been retained by a group of independent retailers and manufacturers in XXXXXXXXXX. The issues are whether private retailers, who are not organized as co-operatives, can deduct patronage dividends in computing their taxable income, and whether the patronage dividends can be exchanged for shares in the retailer without the need for an exchange of paper.
Summary of Issues
In computing income for a taxation year, any taxpayer may, if certain conditions are met, deduct patronage dividend payments made to customers. Co-operatives take advantage of this provision and reduce their taxable income and income tax payable to nil by paying patronage dividends to members. The patronage dividend may be paid in cash, by giving merchandise or merchandise vouchers, or by issuing shares to the customers. The issuance of shares as payment of the patronage dividend is generally provided in the bylaws or authorized by the customer thereby eliminating the need for an exchange of paper. Such authorization or bylaw provision eliminates the need to issue cheques to the customer as payment of the patronage dividend and the customer then issuing a cheque to the co-operative to purchase shares. XXXXXXXXXX is seeking assurance that this deduction is also available to retailers who are not organized as co-operatives.
Position of the Taxpayer's Representative
XXXXXXXXXX is concerned that the co-operatives have an unfair advantage over their competitors if retailers, who are not organized as co-operatives, cannot deduct patronage dividends and pay such patronage dividends by issuing shares without the need to exchange paper.
Background
XXXXXXXXXX has discussed this issue with the Department of Finance who informed him that the Income Tax Act does not restrict the possibility of deducting patronage dividends in computing income to co-operatives. The Department of Finance also informed him that it is Revenue Canada that ultimately decides if a patronage dividend payment meets all the conditions to be deductible in computing income and referred him to our Interpretation Bulletin IT-362R2 which discusses the conditions that must be met in order to deduct patronage dividends.
XXXXXXXXXX requests assurance that retailers, other than co-operatives, can deduct patronage dividends to reduce taxable income and that payment of such dividends can be effected by issuance of shares without the need to exchange paper. XXXXXXXXXX also asks if there are other conditions respecting deductibility in addition to those described in Interpretation Bulletin IT-362R2.
Analysis
As stated in Interpretation Bulletin IT-362R2, although it is usually a co-operative that deducts patronage dividends this deduction is available to any taxpayer who qualifies including sole proprietors, partnerships and ordinary corporations. However, private retailers usually achieve a reduction of taxable income by employing other sales strategies such as a 30 per cent off sale or a pay no GST sale without the burdensome paper work involved in patronage dividends. Paying of patronage dividends requires a taxpayer to record and track each customer's transactions for the year. For most retailers, this would be either too costly or beyond the capability of their accounting procedures and, therefore, payment of patronage dividends is not a practical alternative.
The numerous conditions that must be met in order to deduct patronage dividends are described in detail in Interpretation Bulletin IT-362R2. There are no other conditions that must be met in order to deduct patronage dividends.
A patronage dividend is only deductible if it is paid in the year or within 12 months after the year. The payment may be made by issuance of shares. Where such arrangement is authorized by the customer, the need for the taxpayer to issue a cheque to the customer for the patronage dividend and for the customer to then issue a cheque for the shares would be eliminated. This is discussed in the Interpretation Bulletin IT-362R2 and XXXXXXXXXX is aware of it as he has made reference to it. A proprietor or partnership or corporation can also pay patronage dividends by issuing debt instruments provided such arrangement is authorized by the customer. However, the issuance of shares by corporations, other than co-operatives, may not be attractive to all corporations, as it would dilute the equity of the current shareholders. In addition, the issuance of debt instruments has its problems in that the debt load would be increased and, if restrictive terms and conditions are incorporated, there may be valuation problems.
Conclusion
It is the Department's position, as described in Interpretation Bulletin IT-362R, that retailers, who are not organized as co-operatives, can deduct the amount of patronage dividends paid in computing income. It is also the Department's position that the payment can be effected by issuing shares without the need for the exchange of paper.
Denis Lefebvre
Interim Assistant Deputy Minister
Policy and Legislation Branch
Wm. P. Guglich
957-2102
June 15, 1995
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