| October 1, 1990 | |
| Provincial and International | Rulings Directorate |
| Relations Division | G. Arsenault |
| 957-2126 | |
| Attention: C. Savage | |
| Acting Director | |
| 901836 |
SUBJECT: 24(1)
This is in reply to your Memorandum dated August 7, 1990 whereby you advised that you have received a request from the trustee of the Trust for an exemption from Part XIII tax. The relevant facts were summarized by you to be as follows:
24(1)
You have requested our comments on the following issues:
1. Would a trust whose income is exempt in its hands and in the hands of the beneficiaries be a "resident of a Contracting State" for treaty purposes?
2. Could the Trust qualify as a "charitable organization" for purposes of paragraph 1 of Article 21?
3. Could the Trust qualify as a "trust constituted and operated exclusively for charitable purposes" as described in subparagraph 212(14)(c)(iii)?
Our Comments
1. The Department has adopted the position that a tax exempt organization can be resident in a Contracting State for purposes of Article XXI of the Convention notwithstanding that the organization may not be a "resident of a Contracting State" within the meaning of that term as defined by Article IV of the Convention because of it not being liable to tax.
If tax exempt organizations were not eligible for Article XXI relief, the Article would effectively be rendered meaningless. The Department of Finance has advised us that the use of the phrase "resident in" rather than "resident of" in Article XXI of the Convention was intentional so as to clarify that the Article applied to organizations that are not liable to tax. This is also confirmed by the Technical Explanation of paragraph 1 of Article XXI of the Convention.
2. So far as we can determine based upon a review of our files in respect of Article XXI of the Convention, we have not adopted a position in respect of the meaning of the term "a religious, scientific, literary, educational or charitable organization" as used in that Article.
It would appear that the Trust would not be a "charitable organization" as that term is defined by paragraph 149.1(1)(b) of the Income Tax Act. However, it is by no means clear that this definition is applicable for purposes of Article XXI of the Convention as it is arguable that the context in which the term is used in Article XXI requires otherwise. In particular, the term used in Article XXI is "a religious, scientific, literary, educational or charitable organization", not simply "a charitable organization". Furthermore, because paragraph 1 of Article XXI of the Convention only permits an exemption in Canada to the extent the organization is exempt in the United States as "a religious, scientific, literary, educational or charitable organization", it is arguable that this term should be defined by the law of the United States, i.e. the law of the Contracting State in which the organization is resident. Accordingly, it may be appropriate to determine whether the Trust is exempt from tax in the United States by virtue of it being considered in the United States to be "a religious, scientific, literary, educational or charitable organization".
3. Generally, there are considered to be four principal types of charitable trusts, namely:
1) trusts for the relief of poverty;
2) trusts for the advancement of education;
3) trusts for the advancement of religion; and
4) trusts for other purposes beneficial to the community.
While the trust would not appear to qualify as a charity under any of the first three types of trusts mentioned above, we do not have sufficient information to rule out the possibility that it qualifies as a charity under the fourth type, e.g. trusts for other purposes beneficial to the community. We understand that the English courts have held, on the facts of the particular cases under consideration by them, that trusts for the provision of public works and public amenities, for the improvement of the locality and for resettlement and rehabilitation of victims of disaster are charitable as being "trusts for other purposes beneficial to the community". General parameters in respect of the qualification of a trust as a charity of this fourth kind have been set forth by the fairly numerous decisions of the English courts in respect of this issue. We have not, however, undertaken sufficient research of the relevant decisions of the courts nor do we have sufficient information to permit us to express an opinion as to whether or not the Trust would qualify as a charity of the fourth type mentioned above. If you wish us to pursue this matter further, please provide us with a copy of the documentation establishing and governing the trust together with whatever other information you can obtain concerning whether there is a definable community, e.g. a definable group of individuals, that the trust was established to benefit.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch