2014-0551921E5 Agricultural co-op patronage dividends

Principal Issues: Will the entity cease to be exempt from income tax if it changes its by-laws to permit the payment of patronage dividends to its members?

Position: The change of by-laws is inconsequential. But the entity will cease to be exempt if, at time of payment, the patronage dividend includes an amount of income.

Reasons: Patronage dividend may include an amount of income. However, the simple return of members' contributions or adjustment to cost of goods and services provided to members for the year, would not be considered payment of income.

Author: Messore, Anna
Section: 149(1)(e)

XXXXXXXXXX                                            2014-055192
                                                                    A. Messore

March 5, 2015

Dear XXXXXXXXXX:

Re:  Cooperative agricultural organization

This is in response to your email interpretation request of October 22, 2014, regarding the tax implications of a recent amendment to the by-laws of your client organization, the XXXXXXXXXX (“Association”). All statutory references in this letter are to the Income Tax Act, unless otherwise specified.

The Association, a cooperative corporation created under the Cooperatives Act XXXXXXXXXX, provides low-interest, accessible financing to XXXXXXXXXX.  The Association borrows money from financial institutions at a preferential interest rate and relends the money to its members at the same interest rate in order to facilitate XXXXXXXXXX.  In order to obtain a loan, members are required, under the XXXXXXXXXX and its regulations, to provide a security deposit to the Association.

The Association’s revenues consist of the membership fees charged to members and, to a lesser extent, the interest received on the investment of mandatory security deposits and reserve funds. In general, the Association strives to operate on a cost recovery basis, with little or no annual profit having been realized in recent years.

The Association submits that it is exempt from income tax under paragraph 149(1)(e).  In accordance with subsection 137(1) of the Cooperatives Act, the Association recently amended its by-laws to permit the distribution of patronage dividends, subject to the recommendation of the Board of Directors and the approval of its members.  The question is whether the Association will continue to qualify for the exemption under paragraph 149(1)(e) after this amendment to its by-laws.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 149(1)(e) provides that the taxable income of an organization is exempt from tax under part I of the Act for a period throughout which an organization is an agricultural organization, board of trade or a chamber of commerce no part of the income of which is payable to, or otherwise available for the personal benefit of any proprietor, member or shareholder of the organization.

The Canada Revenue Agency’s position is that an organization that makes a payment of, or has the ability to make a payment of, a patronage dividend, would usually no longer meet the conditions of paragraph 149(1)(e).  This is because it would be difficult to ensure that no part of the patronage dividend is paid from amounts, such as investment income, that are income of the organization.  Consequently, the Income Tax Rulings Directorate will not confirm that an organization is organized as an exempt entity under paragraph 149(1)(e) if its governing legislation provides for the ability to pay patronage dividends.

However, an organization would not cease to qualify for the exemption under paragraph 149(1)(e) based solely on the fact that it overestimated the membership fees for the year and refunded the excess fees to its members within a reasonable time frame.

The organization’s financial records, together with the facts surrounding the distribution must support the characterization of the amounts as a refund of fees.  Additionally, in order to ensure that the payment is simply a return of fees and not income available for the personal benefit of a member, the payments should be available, proportionately, to all members or groups of members of the organization.  The fact that this may be done by way of a patronage dividend would not, in and of itself cause the organization to cease to qualify for the tax exemption.

We trust these comments will be of assistance.

Yours truly,

Roger Filion, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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