Section 135

Subsection 135(1) - Deduction in computing income

Administrative Policy

19 November 2013 External T.I. 2011-0414201E5 F - Coop, ristournes, société de personne

a Coop dealing with an LP of which it is a partner has the LP as its customer, and not the LP customers

A coop holds an interest in a limited partnership whose members also are members of the coop. For purposes of s. 135, are the customers of the coop the LP or the customers of the LP? CRA stated (TaxInterpretations translation):

Subsection 135(1) provides a deduction in the computation of the income of a taxpayer for a taxation year when it pays an amount as "an allocation in proportion to patronage" ... ("Patronage Dividend"). ...

Paragraph 96(1)(a) provides that the amount of income, non-capital loss or net capital loss of a partner of a partnership is computed as if the partnership were a separate person resident in Canada. Given that subsections 135(1) and (2) envisage the deduction of a payment of a Patronage Dividend in the computation of the income of a partner, paragraph 96(1)(a) applies for the purposes of subsection 135(1) and (2). Consequently, when a Coop deals with an LP of which it is a partner ... the customer of the Coop is the LP and not the customers of the LP.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(a) customers of LP rather than of members 164

22 July 2013 External T.I. 2012-0467231E5 - Patronage dividends and capital gains

Patronage dividends paid to members totalling the amount of taxable capital gains realized by a co-op will be deductible by the co-op pursuant to s. 135(1), provided all requirements of section 135 are met.

19 June, 1995 T.I. 950842 (C.T.O. "Patronage of Dividends by Non Co-op"

"Private retailers who are not organized as co-operatives may deduct the amount of patronage dividends paid to customers. Such payment may be made by the issuance of shares without the need for exchange of paper."

13 March 1992 External T.I. 5-920029 -

Payments made by a credit union to non-members which were similar in nature to allocations in proportions to borrowing and bonus interest payments paid to members, might be deductible by the credit union pursuant to s. 135(1).

13 March 1992 T.I. (Tax Window, No. 18, p. 7, ¶1804)

A credit union can deduct payments made to non-members which, if made to members, will be deductible under s. 137(2) provided that the payments melt all the requirements of s. 135(4)(a). It is possible to allocate a credit in an amount of nil to either all of the members or all of the customers who are non-members., No. 18, p. 7, ¶1804):

Subsection 135(2) - Limitation where non-member customer

Cases

The Queen v. Consumers' Co-Operative Refineries Ltd., 87 DTC 5409, [1987] 2 CTC 204 (FCA)

The taxpayer paid patronage dividends to its sole member in respect of refined products sold to it but no such payments were made to purchasers of crude oil produced by wells in which the taxpayer had an interest. The Court of Appeal affirmed the conclusion of Reed, J. that in order to attain the "obvious object" of limiting the deductibility of patronage dividends only when the differentiation between customers is not reasonably attributable to differences in the goods or products that are sold to the co-operative, there can be a zero allocation of payments for purposes of s. 135(2).

Subsection 135(2.1)

Administrative Policy

25 February 2015 External T.I. 2013-0503941E5 F - Priority of subsections 135(2) or 135.1(3)

numerical carryforward example

CRA addressed a numerical example where the cash dividends and patronage dividends paid as tax-deferred cooperative shares for the year were $6 million and $26 million, respectively, and the income attributable to business done with members for the year was $20 million, and stated:

[F]or the purposes of subsection 135(1), subsection 135.1(3) limits the deductible amount to $17 million (85% of $20 million). Consequently, the excess of $9 million ($26 million - $17 million) is non-deductible under subsection 135(1) and cannot be carried forward to subsequent years. For the purposes of the limitation under subsection 135(2), the amount that may be deducted by the taxpayer for the year is $20 million, being the lesser of:

(a) all payments referred to in subsection 135(1), or $23 million ($17 million + $6 million); and

(b) the portion of the taxpayer's income attributable to business done with members, being $20 million.

…$3 million ($23 million - $20 million) can be carried forward to subsequent years under subsection 135(2.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 135.1 - Subsection 135.1(3) non-deductible excess cannot be carried forward 119

Subsection 135(4) - Definitions

Allocation in Proportion to Patronage

Administrative Policy

14 December 2012 External T.I. 2012-0436981E5 F - Ristournes de coopératives de travailleurs

distribution on winding-up of enhancement reserve does not qualify

S. 149.5 of the Quebec Cooperatives Act provides for the inclusion in a shareholding workers cooperative’s enhancement reserve of a portion of the capital gain realized on the disposal of the shares of the shareholding workers cooperative upon its winding-up. S. 185 thereof, which governs the distribution of the reserve on a winding-up, provides that the balance remaining in the enhancement reserve shall be paid to the members for the preceding five fiscal years in proportion to the business done with the cooperative. Would such distributions be allocated in proportion to patronage? CRA responded:

We have analyzed the elements relating to the payment of an enhancement reserve made by a shareholding workers cooperative pursuant to section 185 of the Cooperatives Act and we are of the view that such a payment would not be made pursuant to allocations in proportion to patronage.

19 June 1995 Memorandum 950842 (C.T.O. "Patronage Dividends Paid by Non Co-ops")

"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." Payment of a patronage dividend may be affected by the issuance of shares.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt 25

27 March 1995 External T.I. 5-943197 -

General discussion.

7 June 1993 T.I. (Tax Window, No. 31, p. 23, ¶2549)

The payment by a non-profit housing project for seniors of the excess of the selling price for units over the cost of construction would not qualify as a patronage dividend because the housing units would not be "goods or products".

26 August 1992 T.I. (Tax Window, No. 23, p. 19, ¶2138)

A payor organization will not be considered to have failed to make "allocations in proportion to patronage" by virtue of members waiving their right to a particular dividend, provided they do not waive their right to receive all allocations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 135 - Subsection 135(7) 27

Customer

Administrative Policy

29 January 2018 External T.I. 2017-0702731E5 - Patronage dividends and partnerships

a partnership is not fiscally transparent for patronage dividend purposes

Can a cooperative corporation, that is a member of a limited partnership, deduct patronage dividends computed on the basis of sales made by the partnership to its customers who are members of the cooperative corporation? In responding negatively, CRA stated:

A “customer” is defined in a relation to a taxpayer and must be a customer of that taxpayer.

[S]ubsection 96(1) … applies to treat a partnership as a separate person for the purposes of computing the income of each partner … . Accordingly, the deduction under section 135 of the Act must be computed at the partnership level on the basis of the allocations in proportion to patronage by the partnership to the partnership’s customers.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(a) partnership rather than member was taxpayer for patronage dividend purposes 74

Income of the Taxpayer Attributable to Business Done With Members

Cases

Interprovincial Co-operative Ltd. v. The Queen, 87 DTC 5115, [1987] 1 CTC 222 (FCTD)

It was held that although suppliers shipped to, and billed, members of the co-operative directly, the members acted as agents of the co-operative when they acquired goods from the suppliers, as evidenced inter alia by the fact that they pledged the co-operative's credit when they so acquired goods. [C.R.: Agency]

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 60
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) property acquired only because parent so directed 90

Sedgewick Co-operative Association Ltd. v. The Queen, 83 DTC 5455, [1984] CTC 14 (FCTD)

Since the word "income" in s. 135(4)(d) (and s. 135(2)) is not preceded by the word "business", that "income" is to be calculated on the basis of the general rules provided by the Act and accordingly includes taxable capital gains (S.3(b)). The effect of this interpretation is that there is no taxation on capital gains that are distributed to the patrons of consumer co-operatives.

Administrative Policy

29 February 2016 External T.I. 2015-0613961E5 - Patronage dividends - partnership income

flow-through of partnership income to cooperative

Is a cooperative corporation that is a limited partner required to include its share of partnership income in computing its income for s. 135(4) purposes? CRA responded:

Your specific question relates to the determination of the “income of the taxpayer for the year” within that definition [of "income of the taxpayer attributable to business done with members"] where the taxpayer is a limited partner of a Canadian limited partnership.

Subsection 96(1)…requires that the income of a taxpayer from a partnership be computed as if the partnership were a separate person resident in Canada. A partnership initially computes its income at the partnership level and the income of the partnership is then allocated to the partners to be included in the partners’ income for tax purposes. The nature and source of the income from the partnership is retained when allocated to the partners. …

[A] taxpayer’s share of partnership income from a Canadian limited partnership is required to be included in computing its income for the year for purposes of [that] definition… .

In the situation described, it is our view that a taxpayer’s share of partnership income from a Canadian limited partnership is required to be included in computing its income for the year for purposes of the definition of “income of the taxpayer attributable to business done with members” in subsection 135(4)... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) flow-thrugh of LP income for s. 135 purposes 68

Subsection 135(7) - Payment to customer to be included in income

Administrative Policy

26 August 1992 T.I. (Tax Window, No. 23, p. 19, ¶2138)

A patronage dividend will not be included in the income of a co-operative member if the member unconditionally foregoes her present and future right to the dividend.