22 June 1999 External T.I. 9906675 - COOPERATIVE CORPORATIONS

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 a taxable benefit arises to a shareholder of a corporation that develops and operates a resort for owners of recreation vehicles where the shareholders have the right to use the resort.

Position:

General comments only since we do not have all the facts. It is not clear if the writer wants the corporation to be a cooperative corporation as defined in subsection 136(2) of the Act. It is also a question of fact as to whether a benefit is conferred on a shareholder but it does appear that subsection 15(1) of the Act would apply.

Reasons:

The law.

XXXXXXXXXX 		990667

June 22, 1999

Dear Sir:

Re: Cooperative Corporations

This is in reply to your letter of March 5, 1999, wherein you requested our views on whether a benefit arises under Income Tax Act (the "Act") as a consequence of a proposed issuance of shares by a corporation.

You advise that you and a group of friends would like to develop a recreation vehicle resort through a corporation established as a "cooperative concept". Although all the facts are not known to us it appears from your letter that non-voting preferred shares will be issued to anyone "purchasing" a portion of the resort from the corporation. It also appears that a common share may be issued to a holder of a non-voting preferred share once a certain number of sites have been sold or a certain amount of time has passed. You advise that such shareholders will be able to use the resort for their own personal use and ask whether a taxable benefit would arise to the individuals owning the non-voting preferred shares due to the fact that such owners will be able to use the resort facilities.

Your request relates to a proposed transaction involving specific taxpayers. Confirmation of the income tax consequences of such transactions will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996, issued by Revenue Canada (copy attached). Moreover, the Department does not provide tax planning advice and it would appear that before you proceed with any advance income tax ruling request that you seek the views of a competent tax advisor. Although we are not able to comment specifically on the situation described in your letter we can offer the following general comments.

A cooperative corporation is defined in subsection 136(2) of the Act to mean, inter alia, a corporation incorporated under federal or provincial law providing for the establishment of such a corporation for the purpose of marketing natural products belonging to or acquired from its members or customers, purchasing supplies, equipment or household necessities for or to be sold to its members or customers or of performing services for its members or customers if three conditions are also met. Briefly, these three conditions, in general terms, require that the prospect specifically be set out that payments will be made to the corporation's members and customers in proportion to patronage; none of the members have more than one vote in the affairs of the corporation; and at least 90% of the corporation's members be individuals. It remains a question of fact as to whether a corporation such as described in your letter would be able to meet the requirements of subsection 136(2) of the Act.

Notwithstanding the above, it is our view that subsection 15(1) of the Act may apply to a situation where a corporation owns recreational real estate for the benefit of its shareholder(s). Where subsection 15(1) of the Act applies the amount or value of the benefit will be included in the particular shareholder's income for the taxation year except to the extent that it is otherwise deemed by section 84 of the Act to be a dividend. Further, the application (or non-application) of this particular subsection does not depend on whether the type of share owned is a common share or a preferred share since the test is essentially whether a benefit has been conferred on the particular shareholder (or on a person in contemplation of that person becoming a shareholder) that is not otherwise dealt with by another section of the Act.

Therefore while we hope that our comments are of assistance to you, as indicated in paragraph 22 of IC-70-6R3, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch