New Generation Co-operatives Taxation Issues
Brian J. Taylor, FCA, Deloitte & Touche LLP
How Are Members and Holders of Preferred Shares Taxed?
Purchase of Shares
The purchase of shares is
not a tax deduction.
Patronage Dividends
Members pay personal (or
corporate) income tax on all (allocated and deferred)
patronage dividends received from an NGC. The income is
taxed in the year it is received by the member.
Dividends on Preferred
Shares
Holders of preferred
shares pay tax on dividends received from an NGC.
Dividend Tax Credit
The dividend tax credit
applies to taxable dividends received by individuals but
excludes patronage dividends.
Withholding Tax
An NGC is required to
deduct and withhold 15 percent tax on the portion of
patronage payments (or sum of) exceeding $100. The NGC
remits the tax to the Receiver General on account of the
member's tax liability. When the member files a personal (or
corporate) income tax, the tax withheld will either reduce
taxes otherwise payable or increase the tax refund.
Capital Gains Tax
If a member sells shares,
only 50 percent of any gain is taxable. If the member is a
Canadian-controlled private corporation as defined in the
Income Tax Act of Canada (the Act), the nontaxable portion
of the capital gain can be paid on a tax free basis to its
shareholders if prescribed conditions are met.
How Are NGCs Taxed?
Incorporated organizations, such as NGCs, follow corporate income tax laws.
Unallocated Net Income
Unallocated net income is
taxable at the corporate rate, while deferred patronage
allocations are taxed at the member level.
Dividends on Preferred
Shares
NGCs may choose to pay
dividends to holders of preferred shares. Dividends on
preferred shares are not deductible in computing the income
of the NGC. More information regarding dividends on share
capital is available at www.ccra-adrc.gc.ca/E/pub/tp/i362ret/i362re.txt.html.
Federal Large Corporations Tax
(LCT)
NGCs will be subject to
LCT if capital (as defined in the Act) net of eligible
investments exceeds $10 million. Capital includes debt,
unallocated retained earnings, and other items. The tax rate
is presently 0.225 percent of capital in excess of $10
million. Associated corporations must share the $10 million
exemption.
What Tax Deductions and Credits Apply to NGCs?
Tax deductions reduce an organization's taxable earnings. Tax credits reduce the amount of tax an organization pays.
Patronage
Dividends
Patronage dividends are a tax deduction for a corporation
such as an NGC. However, a patronage payment is deductible
only if it is paid within the year, or within twelve months
of the end of the year, to customers. A patronage payment is
also deductible if it was made in a previous year in which
such payments were not deductible.
Credit is not given to those customers to whom the patronage allocation would be less than $5.00, and no deduction is allowable to the NGC in computing income for such credits not given. More information regarding patronage dividends is available at www.ccra-adrc.gc.ca/E/pub/tp/i362ret/i362re.txt.html.
Interest on Loan Capital
Interest on loan capital
is deductible in computing income provided it is paid or
payable in accordance with the Act. However, interest is not
deductible unless it is paid pursuant to a legal obligation
to pay the interest.
More information regarding interest on loan capital is available at www.ccra-adrc.gc.ca/E/pub/tp/i362ret/i362re.txt.html.
Small Business Deduction
The small business
deduction is an annual tax reduction on up to $200,000 that
may be claimed by a Canadian-controlled private corporation
(CCPC) for carrying on an active business in Canada other
than a "specified investment business" or a "personal
services business." In Saskatchewan, it reduces the
effective corporate tax rate from 45 percent to 20 percent.
Corporations with LCT capital in excess of $15 million are
not eligible for this tax reduction.
More information regarding the small business deduction is available at www.ccra-adrc.gc.ca/E/pub/tp/i73r5et/i73r5e.txt.html.
Tax Considerations for NGCs in Saskatchewan
Saskatchewan Manufacturing and
Processing Investment Tax Credit
Corporations filing a T2
Corporation Income Tax (CIT) Return may be eligible for the
Saskatchewan Investment Tax Credit (ITC) for Manufacturing
and Processing. The ITC is a nonrefundable income tax credit
that is designed to encourage plant and equipment investment
for use in manufacturing and processing activities in
Saskatchewan. The ITC applies as a percentage of the total
capital cost of eligible building and machinery and
equipment purchases. The current rate is 6 percent of
eligible new or used acquisitions. The ITCs can only be used
to offset Saskatchewan income tax otherwise payable. More
information on the ITC is available at www.cbsc.org/sask/sbis
Saskatchewan Corporation
Capital Tax (CCT)
The CCT provides exemption
for "natural product" co-ops where at least 90 percent of
the members are individuals or other co-operative
corporations and none of the members, apart from other
co-operative corporations, has more than one vote.*
The capital tax rate is currently 6 percent of paid-up capital in excess of $10 million. This $10 million is available to every corporation, and does not have to be shared with associated corporations.
*This exemption may not apply to NGCs because preferred shareholders have limited voting rights (the Saskatchewan Department of Finance is apparently working on this issue).
When Do NGCs Pay Income Tax?
Annual Payments
An NGC only has to make one annual income tax payment if the
federal taxes payable for the year or the prior taxation
year are $1,000 or less. An NGC will also make annual income
tax payments if the corporation is in its first taxation
year and is not a continuation of a predecessor
corporation.
Instalment Payments
After the first year of
taxation, and if the prior year's federal taxes were $1,000
or more, NGCs pay income tax in monthly instalments.
Instalment payments are due on the last day of every
complete month of an NGC's taxation year. The first payment
is due one month minus a day from the starting date of the
corporation's taxation year. The rest of the payments are
due on the same day of each month that follows.
Late Returns and Penalties
Penalties may apply if an
NGC files the return late. The penalty for filing a late
return is 5 percent of the unpaid tax that is due on the
filing deadline, plus 1 percent of this unpaid tax for each
complete month that the return is late, up to a maximum of
twelve months. In exceptional cases, interest and penalties
on late payments can be waived or cancelled.
Interest
Interest is charged on
late instalments and late tax payments. The current rate
charged is 10 percent. This interest expense is not
deductible for tax purposes. Interest is also paid to the
taxpayer on refunds. The rate is 2 percent less than
the rate charged. The current rate is 8 percent. This interest income is taxable.
Filing a Corporate Tax
Return
NGCs based in Alberta,
Manitoba, and Saskatchewan mail the T2 Corporate Income Tax
Return to: Tax Centre, Winnipeg MB, R3C 3M2.
Record Keeping
Books and records or
electronic records, including related accounts and vouchers,
must be kept for at least six years from the end of the last
year to which they relate. Books and records or electronic
records must be kept until two years after the date the
corporation is dissolved.