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Indivisible Reserve

CWCF: Indivisible Reserve

What is an Indivisible Reserve?

An indivisible reserve in a worker co-op is property owned by the co-operative/the co-operative movement which can never be divided among members.  It is created by allocating a set percentage (e.g., 20% or 40%) of annual surpluses to the indivisible reserve.

Who “owns” the capital in the reserve?

 It is permanent co-operative capital, and is notionally seen as the value of the common effort of the members. As long as the co-op is operating as a co-op, it can use the indivisible reserve like any other retained earnings.  In other words, this reserve can be controlled by the members, but not accessed by them for distribution to themselves individually.  “Indivisible” means that if the co-op ceases to exist as a co-operative (e.g., because it is wound up, or sold), the reserve will go to a co-op development fund, a federation or another co-operative organization and not be available to the individual members.

Why should we care about establishing an Indivisible Reserve?

 Because indivisible reserves can never be cashed out by individual members, they provide long-term investment capital that supports longevity of the co-op, across generations.  The indivisible reserve is a means by which worker co-op members can demonstrate strong commitment to the worker co-operative movement and its values.

Should the indivisible reserve be mandatory (through legislation), or optional?

Mandating the indivisible reserve arguably restricts the democratic rights of members to determine the affairs of their co-op, including its procedures on who may benefit from the accrued value of the co-operative’s activities. (It benefits the broader co-operative sector and future generations but could make it more challenging to promote the worker co-op model.)  In addition, it may discourage a potential conflict or perceived inequity between founding and subsequent members.  In principle, both of these benefits can be provided for by the members through their decisions if they so choose without any intervention by the state.  In many cases, co-ops do make this choice.

 The question arises as to whether this should be imposed upon co-operatives by legislation, or whether it should be a democratic decision of the members of any particular co-operative.

Individual Reserve Member Input

Member input is requested regarding the following four options, some of which could be combined or staged:

  1. Mandatory approach: That CWCF should seek a mandatory indivisible reserve along with seeking that profits invested in indivisible reserves not be taxed. (It should be noted that the success of such a proposal will require agreement with two ministries in each jurisdiction (province, territory &/or federal level), the one responsible for co-op law and the one responsible for taxation. To have exemption from most of the corporate tax, which is federal, would also require the agreement of Finance Canada.) OR
  2. Focus only on taxation: Instead of seeking a mandatory indivisible reserve, seek a federal tax change so that any worker co-operative  whose articles of incorporation specify the creation of an indivisible reserve not pay corporate tax on the proportion of their income allocated to the indivisible reserve.  (This would be an additional benefit to all worker co-ops in Quebec where indivisible reserves are mandatory, as well as a benefit to worker co-ops in other regions who entrench an indivisible reserve in their constituting documents.)  It would be possible to seek a mandatory indivisible reserve at a later time.) OR
  3. Optional approach with education: That instead of seeking legislative change around indivisible reserves, CWCF should educate worker co-ops about adopting an indivisible reserve by decision of the membership, through changes to their constitution.  Part of this education project would be to discuss the potential of this to help strengthen one’s own co-operative and the worker co-op movement.  OR
  4. No action / purely optional approach (status quo): That CWCF not undertake either a lobby effort or an education project regarding indivisible reserves.

 There could be other options considered, too.

 If the mandatory approach is chosen, there would be a follow-up question: what is the percentage of annual surplus which would be placed in the indivisible reserve?  If the indivisible reserve is adopted by decision of a co-op, the members can decide on the percentage.

In either case, we would suggest that the indivisible reserve, upon a co-op’s dissolution, be allocated to a co-operative development fund, to other worker co-ops(s), or to a federation of worker co-ops, as decided by the members.

Dec. 2013 UPDATE:

At the Nov. 2013 CWCF AGM, members held a consultation and then passed a resolution.  It directs CWCF to consult with the broader co-operative sector in Canada regarding the possibility of seeking favourable tax treatment for those co-ops which have an indivisible reserve, and whether it is for all co-ops or only worker co-ops, to present a proposal to Finance Canada and others.  The full resolution is attached, below.

March 2017 UPDATE:

CWCF has decided to add Option 2, above, to its list of federal lobby proposals, as it still remains unclear what the position of the broader co-operative sector is.  Thus the focus is for preferential tax treatment but only for co-operatives within the scope of CWCF, i.e. worker co-ops, multi-stakeholder co-ops with substantial worker control, worker-shareholder co-ops and smaller producer (artisan, social, etc.) co-ops are also eligible to be part of CWCF.

A 25-minute video of Marty Frost on indivisible reserves, in EN (in favour of optional)
A 25-minutes video of Alain Bridault on indivisible reserves, in FR (in favour of mandatory)