Considering Indivisible Reserves as Non-Profit Capital for Taxation Purposes

CMC is advocating that the Government of Canada consider indivisible reserves as non-profit capital for taxation purposes, as it cannot be divided amongst members of a co-operative. Instead, at the co-operative’s dissolution or sale, they are allocated to another co-operative entity. It is permanent co-operative capital treated as a public good similar to all reserves in non-profit organizations (including non-profit co-operatives), which members have no private claim to it.  

Indivisible reserves can be mandatory or adopted by an irrevocable choice of a co-operative. They are derived from a portion of a co-operative’s annual surpluses and contribute to the capitalization, longevity, and development, while acting as a disincentive to demutualization. 

Many countries support co-operatives with indivisible reserves by removing the burden of corporate taxation on the proportion of their income allocated to the indivisible reserve.  Legislative safeguards can also be put in place to: 

• Ensure that the tax-related benefits are available, or, 
• Ensure that any related federal financial support is protected and paid back, in the event of dissolution or liquidation.   

The International Cooperative Alliance (ICA) in its Guidance Notes to the Cooperative Principles (2015) points out that an indivisible reserve emphasizes the co-operative difference. This is under the third co-operative principle, Member Economic Participation, as part of the capital becomes common property of the co-operative. This is why when members are developing their co-operative and setting up reserves, at least, part of the latter should be indivisible.  

There are jurisdictions where the indivisible reserve is mandatory for all types of co-operatives, specifically in Quebec and Newfoundland and Labrador, as well as in non-profit housing co-operatives across Canada. CMC is not advocating for mandatory indivisible reserves in “for-profit” co-operatives. However, CMC is advocating for  fair tax treatment and/or other fair public policy implemented for co-operatives that do have them.