2019-0824091E5 Members of a credit union of the same class

Principal Issues: Would payments made to members of one branch of a credit union be considered as made to “members of the credit union of the same class” for purposes of the definitions of “allocation in proportion to borrowing” and “bonus interest payment” in subsection 137(6)?

Position: General comments provided.

Reasons: The allocations in proportion to borrowing or bonus interest payments, as the case may be, must be credited to all taxpayers who were members of the credit union of the same class in the year.

Author: Johnstone, Alexander
Section: 137(6) “bonus interest payment”, “allocation in proportion to borrowing”

XXXXXXXXXX                                                                                                                 2019-082409
                                                                                                                                         Alex Johnstone
                                                                                                                                        (613) 410-9134
October 28, 2020

Dear XXXXXXXXXX:

Re: Members of a credit union of the same class

This is in reply to your email of September 19, 2019, in which you ask whether payments made to members of one branch of a credit union would be considered payments to “members of the credit union of the same class” for purposes of the definitions of “allocation in proportion to borrowing” and “bonus interest payment” in subsection 137(6) of the Income Tax Act. 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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

Section 137 of the Act provides rules that apply to the taxation of credit unions. Subsection 137(2) of the Act generally allows a credit union to deduct the total of (i) bonus interest payments, and (ii) payments pursuant to allocations in proportion to borrowing, made by the credit union within the year or within 12 months thereafter, to members of the credit union, to the extent that such payments were not deductible in the immediately preceding taxation year.

The term “bonus interest payment” for a taxation year is defined in subsection 137(6) of the Act as an amount credited by a credit union to a person who was a member of the credit union in the year on terms that the member is entitled to or will receive payment thereof, computed at a rate in relation to

(a) the amount of interest payable in respect of the year by the credit union to the member on money standing to the member's credit from time to time in the records or books of account of the credit union, or

(b) the amount of money standing to the member's credit from time to time in the year in the records or books of account of the credit union.

Moreover, the amount must be credited at the same rate in relation to the amount of interest or money, as the case may be, as the rate at which amounts were similarly credited in the year to all other members of the credit union of the same class.

The term “allocation in proportion to borrowing” for a taxation year is defined in subsection 137(6) of the Act as an amount credited by a credit union to a person who was a member of the credit union in the year on terms that the member is entitled to or will receive payment thereof, computed at a rate in relation to

(a) the amount of interest payable by the member on money borrowed from the credit union, or

(b) the amount of money borrowed by the member from the credit union.

Moreover, the amount must be credited at the same rate in relation to the amount of interest or money, as the case may be, as the rate at which amounts were similarly credited for the year to all other members of the credit union of the same class.

Subsection 137(6) of the Act defines a “member” of a credit union and includes a person who is recorded as a member on the records of the credit union and is entitled to participate in and use the services of the credit union. The Act does not provide any guidance as to what constitutes a class of taxpayer. However, it is our understanding that membership (including membership classes) in a credit union is generally governed by the credit union’s relevant incorporating documents/by-laws established in accordance with the relevant credit union statute.

In our view, where a particular class of member is determined, the deduction for a taxation year under subsection 137(2) of the Act by a credit union for bonus interest payments or payments pursuant to allocations in proportion to borrowing, as the case may be, requires such bonus interest payments or allocations in proportion to borrowing to be credited to all taxpayers who were members of that particular class in the year.

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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