Credit Union share redemption | Income tax filing | Discussion forum

HermanH said
We are closing out a relative's share ownership at a local credit union.

What happens when the CU cashes out the shares? They send the funds, but how are the gains reported? Interest or capital gains?

She bought the shares when she enrolled decades ago and they are now worth about $500  

I had CU shares several years ago - when I wanted to close out my dealings with that CU, the CU paid me what I paid for the shares - so there was no capital gain.
The dividends which I received were taxed as interest.
Contact the CU and they will explain the process of redeeming shares.

One explanation of 'gross up' is https://taxpage.com/articles-and-tips/dividend-gross-up/ and the amount depends on whether a dividend is an eligible or non-eligible dividend.

It is a concept to avoid double taxation since the dividends paid out by a corporation is out of after tax income (after corporate tax is already paid). To be fair to the shareholder, the share holder needs to be 'given back' theoretical tax paid by the corporation before that dividend income becomes taxable on the shareholder's own tax return.

On the other hand, corporations that pay out interest income pay that out of before tax corporate income and interest payments are thus a tax deduction on the corporate tax return.

One might argue that it doesn't need to be that complicated. Why shouldn't dividends be treated the same way as interest income, OR why not simply make eligible dividends non-taxable to the shareholder? It is a complicated subject but the current system is actually most favourable to Canadians who are residents of Canada for tax purposes and minimizes tax leakage to foreigners who pay taxes to another jurisdiction.

I have belonged to about a dozen CUs over the years. None has ever paid me a penny on my ownership shares per se.

A few pay "dividends", which are not based on the price of ownership shares, but, rather, on annual profits of the CU, shared among members according to a formula. The formula can change from year to year.

CU "dividends" are treated as interest for purposes of CRA, and will be included in T5s annually or whenever required by law to be issued. It's possible she has already declared some or all of this money without being aware of it.
There is no capital gain, gross-up or anything like that; it's just interest.

A few years ago DUCA got into a mess because they forgot to include the profit-sharing in the T slip. They had to issue revised slips. After that, they decided to switch the reward from income to redeeming for an improved interest rate on products. If that product pays you interest, the reward just forms part of your interest income. Some of us still have money there which was accumulated under the previous system which was already declared and taxed accordingly.

I would he inclined to just wait and see what happens as I would prefer to let sleeping dogs lie. It's not like you can do anything about it or offset it.

I think we need to know what was done about the profit-sharing income in all previous years before proceeding with Norman's suggestions. As I think I said earlier, this income could have been included in previous T slips without her realizing it (quite likely, I think). Also, the CU might have changed its system over time, as DUCA has.
I suspect there is some confusion here over terminology; CUs can be confusing in their language around this issue. I would wait and see what T slips arrive next Spring, if any, and see what they match up with. She's going to have to wait until then anyway.