Taxation of Canadian Cooperatives
 

As a corporation, a cooperative is subject to both federal and provincial income tax on its taxable income.  In most instances a cooperative will qualify for a special low tax rate on its first $200,000 of income.  If the cooperative has taxable income greater than $200,000 it will pay a higher rate of tax on such excess.

Patronage dividends

The Income Tax Act (Canada) permits cooperatives to deduct any amounts declared as patronage dividends from its calculation of its taxable income.  The payment of patronage dividends will both reduce the cooperative’s taxable income and its liability for income tax.  A cooperative which deals only with its members has an opportunity to reduce or eliminate its taxable income in a given year.
 

Definition of a Patronage Dividend Payment

 A patronage dividend represents a payment that has been allocated to a customer according to the proportion of business that he or she has conducted with the cooperative during the year.  In order to deduct patronage dividends, the cooperative must allocate dividend payments at the same rate to all customers who conducted the same level of business with the cooperative.  In other words, preferential treatment cannot be given to one group of members over another.  In cases where the cooperative deals with several different types of goods or goods that vary in terms such as quality, then different rates may apply to reflect these differences.  If the cooperative conducts business with non-members and they either do not receive patronage dividend payments, or receive payments at a different rate than members, then limitations are placed on the amount of patronage dividends that the cooperative may deduct when computing its taxable income.

What constitutes a payment of a patronage dividend?

The Income Tax Act allows for some flexibility in what actually represents a “payment” of a patronage dividend.  Patronage payments may be carried out in a variety of ways.  For instance, payments may be made in the form of cash, or by crediting a member’s equity account in the cooperative.  Regardless of what form the payment takes, the recipient of the patronage dividend must include it as part of his income for that taxation year.  Thus, in the case where the member receives a patronage dividend in the form of a credit to his equity account in the cooperative, the member is still responsible to include that dividend as part of his personal income in that year, even though he may not receive the cash equivalent of the dividend for several years.  The cooperative is required to withhold a tax of 15 percent on individual patronage payments in excess of $100 and submit this amount to the Receiver General on the customer’s behalf.

In the case of a new generation cooperative, if the cooperative makes patronage dividend payments to its members, then the cooperative may deduct these payments when computing its income for tax purposes.  The members of the new generation cooperative will be required to include these patronage dividends in their individual incomes.
 

This look at cooperative taxation is by no means exhaustive: as with corporate taxation, Canadian cooperative taxation can be quite complex.  A tax professional should be consulted when dealing with taxation issues.

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Sources:

Corman, Jeff and Murray Fulton. 1989. Patronage allocation, growth, and member well-being in co-operatives. Occasional paper series 89.01. Centre for the Study of Co-operatives: University of Saskatchewan.

Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended. Consolidated to July 20, 1998.

Ish, Daniel. 1981. The Law of Canadian Co-operatives. Toronto: Burroughs and Company.