22 January 2004 External T.I. 2003-0036531E5 - Patronage Dividends and Non-Profit Organizations

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Can a co-operative corporation that can pay patronage dividends qualify as a non-profit organization within the meaning of paragraph 149(1)(l) of the Act?

Position: No

Reasons: Our long-standing position is that the ability to make a payment of a patronage dividend would constitute a distribution of income for the personal benefit of a member of the co-operative, thereby disqualifying it as an NPO.

2003-003653
XXXXXXXXXX Kimberly Duval
(613) 957-8982
January 22, 2004

Dear XXXXXXXXXX:

Re: Patronage Dividends and Non-Profit Organizations

We are writing in reply to your letter of August 15, 2003 wherein you requested our general views regarding whether the payment of patronage dividends would disqualify a corporation from being considered a non-profit organization within the meaning assigned by paragraph 149(1)(l) of the Income Tax Act (the "Act"). We apologize for the delay in responding.

Comments

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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

The CRA's general views regarding non-profit organizations are found in Interpretation Bulletin IT-496R. As noted in paragraph 11 of IT-496R, no part of the income of an association, whether current or accumulated, can be payable to, or otherwise made available for the personal benefit of, any member of the association that is not a member described in paragraph 13 of IT-496R. Our long-standing position is that the payment of a patronage dividend would constitute an offside distribution for the personal benefit of a member of the association.

Since you have argued that the Department of Finance could not have intended this result, we have taken the liberty of informally discussing patronage dividends and paragraph 149(1)(l) of the Act with officials from the Department of Finance. They have concluded that our long-standing position reflects their views on the matter. Consequently, there is no basis for allowing corporations that pay, or have the ability to pay, patronage dividends to qualify as non-profit organizations within the meaning assigned by subsection 149(1)(l) of the Act.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c. Mr. Craig Grant

Calgary Tax Services Office