One of the major obstacles facing renewable energy co-operatives is the concern that, although they are a co-operative for the purposes of the Cooperative Corporations Act (Ontario) (the “CCA”), they may not be co-operatives for the purposes of the Income Tax Act (Canada) (the “ITA”).
In order to be a “co-operative corporation” for the purposes of the ITA, the corporation must, among things, satisfy the requirements set out in section 136(2)(a) of the ITA which requires:
The statute by or under which it was incorporated, its charter, articles of association or by-laws or its contracts with its members or its members and customers held out the prospect that payments would be made to them in proportion to patronage.
The concept of a “renewable energy co-operative” was introduced to address an issue relating to the “business with members” rule contained in the CCA. Because a renewable energy co-operative sells all of its electricity generated to the power grid, it could not satisfy the “business with members” test and, as such, its ability to remain a co-operative under the CCA would be in jeopardy. The “renewable energy co-operative” was created as an exception to the “business with members” rule.
However, the amendments made to the CCA in creating the “renewable energy co-operative” concept created a problem for renewable energy co-operatives seeking to be RRSP eligible. The concept of “patronage” is relatively unique to co-operatives. In for-profit businesses, payments to shareholders are customarily made by dividends. Dividends are based on the amount and class of investment in a business.
Patronage is based on the amount of business done by members. Section 55(3) of the CCA provides:
The amount that is allocated, credited or paid in each fiscal year to members or non-members of a co-operative other than a renewable energy co-operative (emphasis mine) is known as the patronage return.
Section 55(6) of the CCA provides:
The surplus arising from the business of a renewable energy co-operative in each fiscal year shall be allocated, credited or paid to the members in accordance with the by-laws of the co-operative.
Given the foregoing, section 55(3) of the CCA provides that an amount paid to members or non-members of a co-operative other than a renewable energy co-operative is patronage. Amounts paid to members of renewable energy co-operatives are not patronage but surplus. Given this, a renewable energy co-operative is not a “co-operative” for the purposes of the ITA.
It has been said that where one door closes another opens. Interestingly enough, it may be the problem creates the solution. Renewable energy co-operatives may want to consider becoming a “public corporation” for the purposes of the ITA. A “public corporation” is, pursuant to the provisions of the ITA Regulations, a qualified investment for both Registered Retirement Savings Plans ("RRSPs") and Registered Retirement Income Funds ("RRIFs"). In addition, pursuant to the Regulations to the ITA, a bond, debenture, note or similar obligation of a public corporation is a qualified investment for RRSPs and RRIFs.
Can a renewable energy co-operative become a public corporation? The Regulations to the ITA prescribe that certain conditions must be satisfied for “a corporation other than a co-operative corporation (within the meaning assigned by section 136 of the Act)” (emphasis mine) to be a public corporation. However, as noted above, a renewable energy co-operative is not a “co-operative corporation” for the purposes of section 136 of the ITA. As a result, it would appear that a renewable energy co-operative could become a “public corporation” for the purposes of the ITA provided the following conditions can be satisfied.
In order to become a “public corporation” as defined in section 89(1) of the ITA, a renewable energy co-operative must be a corporation resident in Canada, must elect in prescribed manner to be a public corporation and must at the time of the election comply with prescribed conditions relating to (1) the number of shareholders, (2) the disbursal of ownership of its shares, and (3) the public trading of its shares. The following is a brief summary regarding how these conditions could be satisfied:
The Number of Shares
The Regulations to the ITA provide there must be no fewer than:
- when the shares of a class are equity shares, 150; and
- in any other case, 300 persons, other than insiders of the corporation, each of whom holds;
- not less than 1 block of shares of that class; and
- shares of that class have an aggregate fair market value of not less than $500.00.
An “insider of a corporation” would include a person who is an employee of the corporation or a person who does not deal at arm's length with the corporation and whose right to sell or transfer shares is restricted as prescribed.
A “block of shares” is, with respect to any class of capital stock of a corporation,
- 100 shares if the fair market value of one share of the class is less than $25.00,
- 25 shares if the fair market value of one share of the class is $25.00 but less than $100.00; and
- 10 shares it the fair market value of one share of the class is $100 or more.
Disbursal of Ownership of Its Shares
The Regulations to the ITA provide that insiders of a corporation shall not hold more than 80% of the issued and outstanding class of shares eligible for distribution to the public.
Public Trading of Shares
The Regulations to the ITA prescribe that a class of shares of the capital stock of a corporation are qualified for distribution to the public only if “a prospectus, registration statement or similar document (emphasis mine) has been filed with… a public authority in Canada pursuant to and in accordance with the law of … any province and there as been a lawful distribution to the public…”.
Is an offering statement issued pursuant to the CCA a “similar document”? The CCA provides that an offering statement must provide “full, true and plain disclosure of all material facts relating to the securities proposed to be issued”. This is the same statutory test as is mandated for a prospectus filed pursuant to the Securities Act (Ontario). Shares issued pursuant to a prospectus are explicitly qualified. Given the level of disclosure, I believe that a very strong argument can be made that an offering statement is a “similar document” for the purpose of the Regulations to the ITA.
Assuming the renewable energy co-operative can meet the prescribed conditions, the election to be a public corporation is made by filing the prescribed form with Canada Revenue Agency.
The following is but a brief summary of issues surrounding renewable energy co-operatives and RRSP eligibility. There are other rules and regulations that will have to be addressed that may impact upon eligibility. Timing and sequencing of actions may be an issue. The tax consequences of the change in status to a public corporation should be addressed. Renewable energy co-operatives should not become a public corporation without a favourable opinion from legal and/or accounting advisors. That being said, it appears there may be a way “out of the box” for renewable energy co-operatives to become RRSP eligible.