Section 135

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.

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.

CRA indicated that a shareholder worker co-operative can make payments to its members that will be deductible under s. 135(1), stating:

In F2001-0091015, we … noted that the term "customer" for the purposes of section 135 includes a member to whom the worker cooperative renders services by providing work directly or indirectly. We then concluded that a patronage dividend that is calculated on the basis of the amount of work done directly or indirectly by that member for the co-operative would be a deductible amount under subsection 135(1) since it would satisfy the definition of "allocations in proportion to patronage". …

In the case of a payment made pursuant to an allocation in proportion to patronage, we are of the view that the amount of such a payment received by a worker who is a member of a shareholder worker co-operative will be included in computing the worker's income under subsection 135(7) for the taxation year in which the payment was received. On the other hand, the calculation of "earned income" for the purposes of subsection 146(1) does not include a patronage dividend received by a worker pursuant to subsection 135(7).

"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."

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).

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):

After referring to the legislative proposal to add s. 135(1.1) applicable to payments made after March 22, 2004 and related changes to the preamble to s. 135(1), CRA stated:

[A] Canadian corporation that is neither a cooperative corporation within the meaning of subsection 136(2) nor a credit union will not be able to deduct patronage dividends paid to a non-arm's length customer. Consequently, if the customer in question is a wholly-owned subsidiary of the payer that is neither a cooperative nor a credit union, patronage dividends paid after March 22, 2004 will not be deductible by the payer, even if the transaction and the corporate structure do not provide any tax benefit or the patronage dividends are reported before that date.

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).

Regarding the withholding tax treatment of a payment made pursuant to an allocation in proportion to patronage (a "patronage dividend") to a partnership, CRA stated:

Subsection 135(3) provides that where a taxpayer pays a patronage dividend to a person resident in Canada who is not exempt from tax under section 149, the taxpayer must withhold tax in the manner provided in that subsection. Where a patronage dividend is paid to a partnership, it is our view that withholding tax should be made taking into account the status of each member of the partnership.

In finding that an amount received by virtue of an allocation in respect of "consumer goods or services" as defined in s. 135(4) is not required to be included in computing the income of a taxpayer, CRA stated:

The term "consumer goods or services" is defined in subsection 135(4) as goods or services the cost of which was not deductible by the taxpayer in computing the income from a business or property. Generally, those goods or services are for the personal consumption of the customer rather than for carrying on a business.

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.