Article 21

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.

Will a bequest made by will to a U.S. organization qualify for a charitable donation credit on the individual’s final return? CRA summarized the rules under s. 118.1(5.1)(b) and s. 118.1(1) – charitable gift – para. (c) generally permitting a graduated rate estate (GRE) of the individual to carry back the gift amount (for the donation to a charity of property received by it on the individual’s death) to the terminal return of the individual.

CRA went on to discuss the gift limit in para. (a) of the definition of “total gifts” in ss. 118.1(1) and the limited relief provided for gifts to US organizations under Art. XXI(7) of the Canada-U.S. Convention. In that latter regard it stated:

The Canada-U.S. Tax Convention (the Treaty) provides limited tax relief with respect to gifts made by Canadian residents to certain U.S. organizations that are not qualified donees. Pursuant to paragraph 7 of Article XXI of the Treaty, a gift made by a resident of Canada in a taxation year to an organization that is resident in the U.S. that is generally exempt from U.S. tax, and that could qualify in Canada as a registered charity if it were created or established and resident in Canada, will be treated as a gift to a registered charity. In this regard, the amount of relief that would be available under the Act is restricted to the income of the resident for that year from U.S. sources. However, the restriction to income from U.S. sources does not apply to the eligible amount of a gift to a college or university at which the resident or a member of the resident's family is or was enrolled. The CRA accepts that any organization that is exempt under section 501(c)(3) of the U.S. Internal Revenue Code will qualify for the purposes of paragraph 7 of Article XXI of the Treaty.

(a) A gift made by a Canadian-resident corporation to a U.S. resident charity described in Art. XXI, para.7 of the Canada-U.S. Treaty is deemed to be a “gift to a registered charity” for purposes of the Act, subject to an assumption that the corporation’s income only includes its income arising in the U.S. What is the meaning of U.S.-sourced income, e.g., would U.S.-sourced capital gains qualify? CRA responded:

[U]nless a specific meaning is given to that expression in the relevant Treaty provision, such as in Article XXIV (…paragraph 3) and Article XI (…paragraph 4), Canadian domestic sourcing rules should be used. These sourcing rules are generally set out in Folio S5-F2-C1… .

For the purposes of paragraph 7 of Article XXI of the Treaty, the CRA’s view is that “income” includes the taxable portion of a capital gain. Thus, if in a particular taxation year the corporation has a capital gain that is considered to have a U.S. source (see paragraphs 1.62 to 1.65 of the… folio), the taxable portion thereof would be considered “income arising in the United States”… .

(b) Is there an ability to carry forward amounts of such gifts that are not deductible because of the U.S.-source income limitation? CRA responded:

[T]he eligible amount of such gifts may be deducted by the corporation, generally up to 75 per cent of its income from U.S. sources, and… the five year carryover rule in paragraph 110.1(1)(a)…equally applies to [such] gifts

Does Art. XXI, para. 7 of the Canada-U.S. Convention allow charitable foundations as defined in s. 149.1(1) to make donations to U.S. charitable organizations that are exempted under IRC s. 501(c)(3)?

[P]aragraph 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.

Activities undertaken in Canada, including through leased premises, that related primarily to fund raising would not constitute a business of the U.S. exempt organization.

CRA found that a lump sum paid in two instalments paid as a “compensatory allowance” under French law by a French-resident ex-spouse of the Canadian-resident taxpayer was not includible in her income as a “support amount,” as defined in ITA s. 56.1(4). CRA found that this result was not altered by other-income Article (Art. 21) of the Canada-France Convention.

Before any consideration could be given to allowing an exemption for investment income paid to a U.S. master trust, the trust would be required to provide documentation that will clearly explain how it acted in trust for, or as agent for, the ultimate beneficial owners, the identity and residency of each beneficial owner, and the details of how the income was distributed to them.

Where a trust resident in Canada has made a designation under s. 104(22) with respect to U.S.-source income earned by the trust and distributed to a beneficiary who is resident in Canada and has made a donation to a U.S. charity, such income will not qualify as income arising in the United States for purposes of paragraph 6 of Article XXI of the U.S. Convention, given that s. 104(22) recharacterizes the income only for limited purposes.

Re taxation of a U.S. charitable organization's share of dividends received by a U.S. partnership from a Canadian resident corporation.

Exempt organizations created in a country with which Canada has a tax treaty are residents of that contracting state for treaty purposes and are therefore entitled to the same benefits as those provided under a tax treaty to other residents of that state. For example, income or taxable capital gains derived by charitable organizations described in Article XXI(1) of the Canada-U.S. Convention, which is resident in the United States, will be exempt from Canadian tax by virtue of that paragraph provided that Article XXI(3) does not apply.

Where a tax-exempt organization is a member of a partnership which has been subject to Part XIII tax on income payments received by it, RC on application of the exempt partner will refund the difference between the pro rata share of the Part XIII tax and the amount which would have been withheld if the exempt partner had received the income directly.