Tax Treatment - Patronage Dividends
With the recent issuance of refund cheques from certain gasoline cooperatives, it is timely to review the tax treatment of such "refunds" or patronage dividends.
Patronage is the amount of business conducted with the particular customer. More specifically, "allocation in proportion to patronage" for a taxation year means 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 of goods, products or services. The amounts so computed are to be credited to the customer in the taxation year or within the 12 month period following the end of the taxation year.
A payment to a customer includes the issuance of a certificate of indebtedness or a share of the corporation to the customer.
The amount actually paid to the taxpayer, and received by the taxpayer, must be included in the income of the taxpayer under S. 135(7) unless the patronage dividend relates to consumer purchases. These are not taxable.
Tax withheld on patronage dividend payments should be claimed as a credit. This is true whether or not the patronage dividend is taken into income.
Example: Patronage Dividend
Issue: Joan is a farmer. She buys her groceries and her fuel at the local co-operative. She has received a T4A representing her patronage dividend for the prior year. Her dividend was $1,000, against which $250 of tax was withheld. Joan's records show that 40% of her expenditures at the Co-op related to groceries, with the balance to fuel. How does she report the income?
Answer: $600 of the patronage dividend should be reported on her statement of farming income. This portion of the dividend, which relates to her farm fuel purchases, is taxable. The other $400, which relates to her consumer purchases, is not taxable.
Joan should report the full $250 withheld as tax withheld at source on her T1 return. The full amount is creditable.
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