2015-0613961E5 Patronage dividends - partnership income

Principal Issues: In computing the “income of the taxpayer attributable to business done with members” as defined in subsection 135(4), is the taxpayer required to include its share of income from a Canadian limited partnership?

Position: Yes

Reasons: Legislation

Author: Omstead, Jennifer
Section: 9, 12(1)(l), 96(1), 135(1), 135(2), 135(4)

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                                                            Jennifer Omstead
                                                            2015-061396

February 29, 2016

Dear XXXXXXXXXX:

Re: Patronage dividend deduction

This is in response to your email of September 22, 2015 concerning the meaning of the phrase “income of the taxpayer for the year” in the definition of “income of the taxpayer attributable to business done with members” in subsection 135(4) of the Income Tax Act (the “Act”). Specifically, you have asked whether a cooperative corporation that is a limited partner of a Canadian limited partnership is required to include its share of partnership income in computing its income for the year for the purposes of subsection 135(4) of the Act.

Our comments

This technical interpretation provides general comments about the provisions of the 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 IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Subject to subsections 135(1.1) to (2.1) and 135.1(3) of the Act, subsection 135(1) of the Act allows a deduction in computing a taxpayer's income for a taxation year where the taxpayer has made a payment pursuant to allocations in proportion to patronage to its customers within the year or within 12 months thereafter. An "allocation in proportion to patronage" for a taxation year is defined in subsection 135(4) of the Act to mean an amount credited by the taxpayer to a customer of that year, on terms that the customer is entitled to or will receive payment of the amount, computed at a rate in proportion to patronage with appropriate differences in the rate for different types of goods, products or services and for different classes, grades, or qualities of such goods, products, or services.

It is generally required that all customers be credited at the same rate for similar goods or services. If they are not and non-member customers are involved who are credited at a different rate than members, or are excluded from the allocation altogether, the amount deductible in the year by the taxpayer under subsection 135(1) of the Act is subject to the limitation in subsection 135(2) of the Act. The effect of subsection 135(2) of the Act is to limit the deduction of patronage dividends to members to the part of the “income of the taxpayer for the year attributable to business done with members”.

In calculating the part of the income of the taxpayer for the year attributable to business done with members, reference must be made to the definition of "income of the taxpayer attributable to business done with members" in subsection 135(4) of the Act.  This phrase is defined as the proportion of the income of the taxpayer for the year (before any deduction under section 135 of the Act) that the value of goods or products acquired, marketed, handled, dealt in or sold or services rendered by the taxpayer from, on behalf of, or for members, is of the total value of those same components in respect of all customers of the taxpayer during the year. Your specific question relates to the determination of the “income of the taxpayer for the year” within that definition where the taxpayer is a limited partner of a Canadian limited partnership.

Subsection 96(1) of the Act 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.

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) of the Act.

We trust that these comments will be of assistance.

Yours truly,

Jenie Leigh
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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