Principal Issues: Whether charitable foundations are allowed to make gifts to section 501(c)(3) US charities, because of paragraph 7 of article XXI of the U.S. Tax Convention?
Position: No.
Reasons: American charities are not deemed to be qualified donees under paragraph 7 of article XXI of the Canada-U.S. Tax Convention. Proposed changes to subsections 149.1(3) and 149.1(4).
APFF - Financial Strategies and Instruments Roundtable 5 October 2012
APFF Conference 2012
Question 4 -- Cross-border donations and application of the Canada-U.S. Tax Convention to charitable foundations
Where a Canadian taxpayer makes charitable donations to a registered charity, the taxpayer can generally benefit from advantageous tax incentives provided under the Income Tax Act - either a donation deduction or a donation tax credit.
However, corporate globalization and the mobility of people are leading donors to consider donating to non-Canadian charities.
According to Technical Interpretation 2010-0380811E5 (footnote 1), a corporation resident in Canada ("Canco") could benefit from the tax incentives available in Canada for donations made to certain U.S. charities, subject to certain conditions. If the U.S. donee is tax exempt under section 501(c)(3) of the Internal Revenue Code ("IRC"), then in accordance with Article XXI (7) of the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (the "Convention"), Canco may claim a deduction for a gift to a U.S. donee, not to exceed 75% of its income from U.S. sources.
In addition, charitable foundations (i.e., private foundations and public foundations) as defined in subsection 149.1(1) are used as intermediaries to collect donations and distribute them to charitable organizations for their ultimate use for charitable purposes.
Questions to the CRA
Does paragraph 7 of Article XXI of the Convention apply to charitable foundations within the meaning of subsection 149.1(1), allowing them to make donations to U.S. charitable organizations that are exempt by virtue of section 501(c)(3) of the IRC?
Would other restrictions apply to donations to foreign donors?
CRA Response
As stated on the CRA's website, the CRA's position is that a registered charity cannot carry out its charitable purposes by transferring its funds to an organization that is not a qualified donee. The transfer by gift to a non-qualified donee could compromise its charitable status.
In the budget documents of March 29, 2012 (see "Previously Announced Measures" in Annex 4: Tax Measures: Supplementary Information, Notices of Ways and Means Motions and Draft Amendments to Various GST/HST Regulations), the Government has confirmed its intention to proceed with certain previously announced tax and related measures, (as modified to take into account consultations and deliberations since their release), including legislative proposals released on July 16, 2010 relating to income tax technical and bijuralism amendments.
The legislative proposals announced on July 16, 2010 provided for proposed amendments to subsections 149.1(3) and 149.1(4), so that the registration of a public foundation or private foundation can be revoked if it makes gifts (other than a gift made in the course of its charitable activities) to persons or entities that are not qualified donees. The amendments are expected to apply to donations made after December 20, 2002.
The CRA is of the view that paragraph 7 of Article XXI of the Convention does not allow for a U.S. charity to be treated as a "qualified donee" within the meaning of subsection 149.1(1).
Consequently, Article XXI, paragraph 7, of the Convention does not allow charitable foundations to make donations to U.S. charities.
Robert Gagnon
(613) 957-9768
2012-045123
FOOTNOTE
Due to our system requirements, footnotes contained in the original document are reproduced below:
1. CRA, Technical Interpretation 2010-0380811E5 November 4, 2010.