Priority Foundation – Federal Court of Appeal finds that Art. XXI(7) of the Canada-US Convention does not require donations made by a Canadian registered charity to a US charity to be treated as made to a qualified donee

Priority Foundation appealed the publication of a notice revoking its charitable registration, made on the basis that it had been using its funds to make donations to entities that were exempted from U.S. taxation under Code s. 501(c)(3) but which were not registered charities and qualified donees. It relied on Art. XXI(7) of the Canada-U.S. Income Tax Convention (the “Convention”):

For the purposes of Canadian taxation, gifts by a resident of Canada to an organization that is a resident of the United States, that is generally exempt from United States tax and that could qualify in Canada as a registered charity if it were a resident of Canada and created or established in Canada, shall be treated as gifts to a registered charity; however, no relief from taxation shall be available in any taxation year with respect to such gifts (other than such gifts to a college or university at which the resident or a member of the resident's family is or was enrolled) to the extent that such relief would exceed the amount of relief that would be available under the Income Tax Act if the only income of the resident for that year were the resident's income arising in the United States.

The numerous reasons of Roussell J.A. for rejecting the submissions of Priority that Art. XXI(7) required its donations to be treated as if made to qualified donees included:

• Although the current version of Art. XXI(7) notably had been broadened from the 1956 version by replacing a reference to “the computation of taxable income” by a reference to "for the purposes of Canadian taxation," this did not establish “that the phrase ‘for the purposes of Canadian taxation’ was intended to be all-encompassing, such that it would impact the requirements for ongoing charitable registration under the ITA for Canadian registered charities”.
• If Art. XXI(7) had the effect of deeming a U.S. 501(c)(3) entity to be a registered charity and therefore a qualified donee, this would imply that such a donee was required to keep Canadian records; and It would be “highly unusual that the Minister's powers of revocation mentioned in paragraph 230(2)(a) would extend to U.S. 501(c)(3) entities”.
• A reading of the U.S. Treasury Technical Explanation and an IRS guidance notice suggested that the drafters of the Tax Convention did not envisage that it would go as far as interfering with each country's authority to determine the statutory requirements a registered charity must meet to maintain its charitable registration; and supported the view that “the purpose of the treaty was to provide relief from the imposition of taxes and not to regulate the conditions an organization must satisfy to maintain its charitable registration in the organization’s resident state”.
• Furthermore, Priority's submission, if correct, would suggest that a “Canadian resident individual or corporate taxpayer with no U.S. income wishing to donate to a specific U.S. charity to whom Priority made gifts could have circumvented the U.S. income limitation by making the gift to Priority” which “could not have been the result that was intended by the contracting states”.

Neal Armstrong. Summary of Priority Foundation v. Canada (National Revenue), 2025 FCA 180 under Treaties – Income Tax Conventions – Art. 21.