2017-0702731E5 Patronage dividends and partnerships

Principal Issues: Can a taxpayer that is a cooperative corporation and a member of a partnership deduct, under subsection 135(1), patronage dividends based on business the members have conducted with the partnership?

Position: A taxpayer may deduct patronage dividends payments that are computed in relation to business it has done with or on behalf of its customers. Where a partnership has customers for purposes of section 135, the deduction under that section must be made at the partnership level.

Reasons: Subsection 135(1) sets out the conditions under which a taxpayer may deduct payments it makes to its customers pursuant to allocations in proportion to patronage, which are defined as amounts computed in relation to business done with or on behalf of the taxpayer’s customers. Subsection 96(1) of the Act applies to treat the partnership as a separate person for purposes of section 135 of the Act.

Author: Johnstone, Alexander
Section: ss. 135(1), (4)

XXXXXXXXXX                                                                                             2017-070273
                                                                                                                     Alex Johnstone
                                                                                                                     (613) 410-9134

January 29, 2018

Dear XXXXXXXXXX:

Re. Patronage dividend - limited partnership

This is in reply to your email of May 10, 2017 in which you ask whether a cooperative corporation that is a member of a limited partnership may deduct, in computing income, patronage dividends computed on the basis of sales made by the limited partnership to the partnership’s customers who are the members of the cooperative corporation. In your email, you describe that the limited partnership only sells one type of product line compared to the corporation’s multiple product lines. We apologize for the delay in responding.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

By virtue of paragraph 20(1)(u) and subsection 135(1) of the Act a taxpayer may deduct, in computing income for a taxation year, the total of all payments made by the taxpayer to its customers pursuant to allocations in proportion to patronage within the year or within 12 months thereafter.

Subsection 135(4) of the Act defines the phrase “allocation in proportion to patronage” for a taxation year as

an amount credited by a taxpayer to a customer of that year on terms that the customer is entitled to or will receive payment thereof, computed at a rate in relation to the quantity, quality or value of the goods or products acquired, marketed, handled, dealt in or sold, or services rendered by the taxpayer from, on behalf of or to the customer, whether as principal or as agent of the customer or otherwise, with appropriate differences in the rate for different classes, grades or qualities thereof, if

(a)   the amount was credited

(i)   within the year or within 12 months thereafter, and

(ii)  at the same rate in relation to quantity, quality or value aforesaid as the rate at which amounts were similarly credited to all other customers of that year who were members or to all other customers of that year, as the case may be, with appropriate differences aforesaid for different classes, grades or qualities, and

(b)   the prospect that amounts would be so credited was held out by the taxpayer to the taxpayer's customers of that year who were members or non-member customers of that year, as the case may be.

A “customer” is defined under subsection 135(4) as a customer of a taxpayer and includes a person who sells or delivers goods or products to the taxpayer, or for whom the taxpayer renders services. A “customer” is defined in a relation to a taxpayer and must be a customer of that taxpayer.

In our view, given that paragraph 20(1)(u) and section 135 of the Act relate to the computation of income, subsection 96(1) of the Act applies to treat a partnership as a separate person for the purposes of computing the income of each partner, notwithstanding that under common law the partners of a partnership are considered to be carrying on the business of the partnership. 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.

We hope that these comments will be of assistance.

Yours truly,

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

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