28 November 1995 GST/HST Interpretation 11925-1[4] - Payment of Patronage Dividends

I refer to the memorandum of March 31, 1995 from XXXXX of your office wherein she requested confirmation of the recommendation made concerning the XXXXX[.] In the memorandum of January 24, 1994 from Mike Place to XXXXX, it was our determination that XXXXX does not qualify as a non-profit organization as defined in subsection 123(1) of the Excise Tax Act (ETA), as it has the ability to pay patronage dividends to its members. The Standard By-Laws set out in the appendix to XXXXX, the Act under which XXXXX is incorporated, provides for the payment of patronage dividends by organizations governed by that Act.

The Supplemental By-Laws enacted by XXXXX are silent on the issue of the payment of patronage dividends. Since, it is the combination of the Standard By-Laws and Supplemental By-Laws under which the affairs of the organization are to be regulated, governed or managed, it is apparent that XXXXX possessed the ability to pay patronage dividends. Furthermore, the Memorandum of Association indicate that no part of the income of the Association shall be distributed to members except for the payment of patronage dividends.

XXXXX has subsequently amended it's Memorandum of Association deleting from the objectives, the phrase, "Except for the payment of patronage dividends" from paragraph (a). As a result of this change, the Memorandum of Association no longer provides for the payment of patronage dividends. On this basis, XXXXX has suggested that the Department reconsider it's earlier decision on XXXXX status as a non-profit organization.

In the memorandum prepared by XXXXX it was recommended that XXXXX should not be considered a non-profit organization for the purposes of the GST as the change to its Memorandum of Association does not alter the ability of XXXXX to pay patronage dividends to its members, as provided in the Standard By-laws.

Pursuant to section 1 of XXXXX a memorandum of association must be prepared by XXXXX persons who wish to associate themselves as a Co-operative Association. Pursuant to section 3 of XXXXX the memorandum of Association must state the name of the association, its object, and its address, as well as any information on share capital, terms of membership, and the basis of which the interest of each member is to be determined.

Pursuant to section 38 of XXXXX the amount available for distribution to members at the close of each fiscal year shall be allocated in the manner provided by the bylaws (i.e., not in the memorandum of association). It appears that XXXXX must amend it's Supplemental By-laws if it wishes to restrict its ability to pay patronage dividends, and to qualify as a non-profit organization. Accordingly, we agree with the recommendation as outlined in the memorandum of March 31, 1995.

If you have any questions or comments, please do not hesitate to contact Dwayne Moore, Tax Policy Officer, at (613) 954-4206.

J.A. Venne
Director
Special Sectors
GST Rulings & Interpretations

c.c.:      D. Moore