Dear Sir/Madam:
Re: 24(1) Patronage Dividends — Request for Advance Income Tax Ruling
This is in reply to your letter of August 2, 1991 requesting an advance income tax ruling on behalf of your client, 24(1). As outlined in paragraph 14 of Information Circular IC70-6R2 and further to our telephone conversation (Holloway 19(1) we are unable to provide you with an advance income tax ruling for the following reasons:
1. Your request contained alternative courses of action on behalf of 24(1).
2. One of your questions concerns tax-related calculations, and
3. There does not appear to be satisfactory evidence that a proposed transaction is being seriously contemplated.
However we offer the following comments on the taxation of patronage dividends.
Our Comments
Subsection 135(1) of the Income Tax Act (the "Act") provides that there may be deducted from a taxpayer's income, the total of "payments made pursuant to allocations in proportion to patronage". Provided members waive their entitlement to receive payment of the dividend, and do not waive their right to an allocation, dividends declared will be considered to be "allocations in proportion to patronage" pursuant to paragraph 135(4)(a).
The form of the waiver and the method of determining the amounts to be allocated and paid would have to be reviewed before a determination of deductibility under subsection 135(1) of the Act could be made. If a permanent waiver constituted a waiver of the right to an allocation, the requirements of 135(4)(a) might not be met.
Paragraph 10 of Interpretation Bulletin IT-362R explains that a patronage payment may be effected by "a payment or transfer of property to some other person, at the direction of, or with the concurrence of a customer, as a benefit to the customer or to benefit such other person (to the extent that it is to be included under subsection 56(2), in computing the customer's income for a taxation year)". Whether or not the waiving of patronage dividends would result in an income inclusion under subsection 56(2) is a question of fact.
Paragraph 1 of Interpretation Bulletin IT-335R, Indirect Payments, lists the four conditions to be met in determining whether or not an amount should be included in a taxpayer's income under subsection 56(2). Provided these conditions are met, those waiving their rights would have to include the amounts so waived in income.
Your deposit will be returned under separate cover. We trust these comments will be of assistance.
Yours truly,
E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch