A public foundation disbursed funds, by way of unrestricted gifts, without direction and control over the resources gifted, to certain U.S. 501(c)(3) organizations during taxation years ending prior to 2022. Art. XXI(7) of the Canada-U.S. Treaty provided that, for purposes of Canadian taxation, a gift made by a resident of Canada in a taxation year to an organization - that was resident in the U.S., was generally exempt from U.S. tax, and could qualify in Canada as a registered charity if it were created or established and resident in Canada - as a gift to a registered charity, subject to potential numerical limitations. The Directorate stated:
Generally, organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under [IRC] section 501(c)(3). The CRA accepts that, pursuant to the tax relief measure described in paragraph 7 of Article XXI … a gift made by a Canadian resident to a U.S. 501(c)(3) organization will be an eligible gift for purposes of the deduction in computing taxable income under section 110.1 …. or a non-refundable tax credit … under section 118.1 … subject to the income limitations, described in those sections, from U.S. sources.
The Directorate (after describing the more elaborate subsequent rule) noted that “prior to June 23, 2022, a charity’s registered status was subject to revocation, pursuant to subsections 149.1(2), (3) [or] (4) … if the charity made disbursements by way of gift to a donee that was not a ‘qualified donee’,” and then noted that U.S. 501(c)(3) organizations would not qualify as “qualified donees” as defined in s. 149.1(1) assuming that they were not registered with CRA as described in paras. (b) or (c) of that definition. The Directorate stated that the “Canada-U.S. Treaty provides limited tax relief to residents of Canada and the U.S. who may be subject to double taxation on income and on capital imposed on behalf of each country” and then concluded:
[O]ther than the United Nations or its agencies, only foreign entities that have applied for and were registered by the Minister are a qualified donee … . [S]ince subsections 149.1(2), (3) and (4) … govern the revocation of a charity’s registered status, and not the imposition of taxes, the Canada-U.S. Treaty does not apply to those provisions. Accordingly … Article XXI[(7)] of the Canada-U.S. Treaty does not deem a U.S. 501(c)(3) organization to be a qualified donee, for purposes of subsections 149.1(2), (3) and (4) … .
The Directorate indicated that essentially the same analysis applied to gifts made to U.S. 501(c)(3) organizations by a private foundation or a charitable organization.