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 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 | 176 |
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.
20 September 2005 External T.I. 2005-0140601E5 F - Ristournes - Coop de travailleurs actionnaire
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).
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(1.1)
Administrative Policy
25 October 2004 External T.I. 2004-0086261E5 F - Ristournes
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.
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).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Amount | allocation in proportion to patronage could be made at a zero rate | 18 |
| Tax Topics - Statutory Interpretation - Absurdities | 49 |
Subsection 135(2.1)
Administrative Policy
25 February 2015 External T.I. 2013-0503941E5 F - Priority of subsections 135(2) or 135.1(3)
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 | 127 |
Subsection 135(3)
Administrative Policy
29 April 2005 External T.I. 2005-0117371E5 F - Ristourne payée à une société de personnes
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.
12 May 2004 External T.I. 2004-0072951E5 F - Ristournes versées dans un REÉR
Regarding a patronage payment made to an RRSP, CRA stated:
[W]here the person receiving the payment of a patronage dividend under section 135 is a person who is exempt from tax under the provisions of section 149, such as a trust governed by an RRSP, the payer is not required to make the prescribed deductions.
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
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.
6 October 2005 External T.I. 2005-0146061E5 F - Coop de travailleurs actionnaire - montants versés
After finding that a workers shareholder cooperative qualified as a cooperative corporation within the meaning of s. 136(2), CRA stated:
[P]atronage dividends computed in accordance with section 226 of the Cooperatives Act, based on the volume of work performed by a member for the corporation of which the workers cooperative is a shareholder, would satisfy the definition of "allocation in proportion to patronage" in subsection 135(4). Such a patronage dividend received by a worker who is a member of a shareholder worker co-operative will be included in computing the worker's income pursuant to subsection 135(7) for the taxation year in which the dividend was received.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) | interest on a preferred share was a dividend | 27 |
| Tax Topics - Income Tax Act - Section 136 - Subsection 136(2) | workers shareholder cooperative qualified | 108 |
19 January 2005 External T.I. 2004-0081001E5 F - Réserve de valorisation d'une coopérative
S. 149.1 of the Quebec Cooperatives Act provided that certain cooperatives could set up an “enhancement reserve” to value the use of the cooperative's services, s. 149.2 contemplated that such reserve could be allotted in the form of rebates to the persons or partnerships who ceased to be members or auxiliary members of the cooperative following their resignation or otherwise, and s. 149.4 contemplated that such rebates would be allocated in proportion to the business done by those persons or partnerships with the cooperative or with business corporations or partnerships in which the cooperative held shares or units.
After noting that s. 18(1)(e) prohibited the deduction of the reserve, CRA addressed the question whether a cooperative may deduct amounts it pays as patronage dividends pursuant to ss. 149.2 and 149.4, by indicating that this was a question of fact.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(b) | enhancement reserve of Quebec cooperative added to capital | 51 |
17 July 2001 External T.I. 2001-0091015 F - RISTOURNES DE COOPERATIVES DE TRAVAILLEURS
In finding that a worker cooperative could deduct patronage dividends to members, CCRA stated:
[T]he term "customer", for the purposes of section 135, includes a member to whom the workers' cooperative renders services by directly or indirectly providing work. In addition … an amount declared by a cooperative to be a patronage dividend to a member, computed on the basis of the volume of work performed directly or indirectly by that member for the cooperative, would be a deductible amount pursuant to subsection 135(1) since it would meet the definition of "allocation in proportion to patronage".
13 April 2000 Internal T.I. 2000-0005737 F - IMPOSITION DES RISTOURNES
The company paid rebates to its customers, including the taxpayer who was a member, at the end of its fiscal period, computed at rates that varied according to the volume of purchases made during the year. The Agency indicated that, based on the information provided, it could not determine with certainty whether the rebates paid to the taxpayers constituted allocations in proportion to patronage, rather than volume rebates, as it did not know whether the amounts were credited to all other customers of the cooperative who were members.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Timing | year end rebate amounts, if not allocations in proportion to patronage, were not includible at that time in s. 9 income as the conditions precedent for their payment had not yet been met | 91 |
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 | 27 |
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) | 29 |
Customer
Administrative Policy
29 January 2018 External T.I. 2017-0702731E5 - Patronage dividends and partnerships
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 | 76 |
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 | 62 | |
| Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) | property acquired only because parent so directed | 92 |
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
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 | 74 |
Subsection 135(7) - Payment to customer to be included in income
Administrative Policy
9 December 2010 External T.I. 2010-0364001E5 F - Ristourne de consommation, feuillet T4A
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 218 | T4A required where annual payments in proportion to patronage exceed $500 | 96 |
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 135 - Subsection 135(4) - Allocation in Proportion to Patronage | 41 |