Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: (i) Determination of U.S.-sourced income for purposes of paragraph 7 of Article XXI of the Canada/U.S. tax treaty; (ii) Reporting of the donations to a qualifying U.S. charity.
Position: (i) Sourcing rules in the Act apply; (ii) Gifts to a qualifying U.S. charity should be reported in the same manner as gifts to a Canadian registered charity.
Reasons: (i) There are no specific sourcing rules in Article XXI; (ii) There are no special T2 filing instructions.
2015 Tax Executives Institute – Liaison Meeting
Question 7 – U.S. Donations
Article XXI(7) of the Canada-U.S. Tax Convention permits a Canadian corporation to take a donation deduction against its U.S.-sourced income when the Canadian corporation makes a donation to a U.S. charitable organization.
A. Can the CRA clarify the definition of U.S.-sourced income for this purpose? For example, can U.S.-sourced capital gains qualify?
B. If the Canadian corporation has no U.S.-sourced income for the year in question, does a carry-forward system exist, and if so, how long is it?
C. As Schedule 2 on the T2 makes no mention of U.S.-bound donations, what would be the mechanism for disclosing such a donation and claiming a corresponding deduction in the corporation’s tax return?
Paragraph 110.1(1)(a) of the Income Tax Act (the “Act”) permits a corporation to deduct in computing its taxable income for a particular taxation year the eligible amount of a gift made by the corporation to a registered charity in that year, or in any of its five preceding taxation years, to the extent that amount was not previously deducted. Under the Canada-U.S. Income Tax Convention (the “Treaty”), a gift made by a corporation to a U.S. resident organization described in paragraph 7 of Article XXI (“a Qualifying U.S. Charity”) of the Treaty is deemed under that paragraph to be a “gift to a registered charity” for purposes of the Act and is subject to the same general limitations as donations to Canadian registered charities, but on the assumption that the corporation’s income only included its income arising in the U.S. (i.e. income from U.S. sources).
A. Your first question asks us to clarify what the meaning of U.S.-sourced income is for these purposes and, in particular, whether U.S.-sourced capital gains would qualify.
The Treaty does not assign a specific meaning to the expression “arising in” for the purposes of paragraph 7 of Article XXI, i.e. it does not specify how to determine the source of income. The CRA’s view is that unless a specific meaning is given to that expression in the relevant Treaty provision, such as in Article XXIV (per its paragraph 3) and Article XI (per its paragraph 4), Canadian domestic sourcing rules should be used. These sourcing rules are generally set out in Folio S5-F2-C1, Foreign Tax Credit, under the heading “Determination of the location of a source of income”.
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 above-mentioned folio), the taxable portion thereof would be considered “income arising in the United States” in that year for the purposes of paragraph 7 of Article XXI.
B. Your second question asks whether there is any ability to carry forward amounts of gifts made to a Qualifying U.S. Charity that are not deductible because of the U.S.-source income limitation.
It is the CRA’s view that the 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 that the five year carryover rule in paragraph 110.1(1)(a) of the Act equally applies to gifts made by the corporation to a Qualifying U.S. Charity.
C. As for your third question, there are no special T2 filing instructions with regard to claiming gifts made by a corporation in a particular taxation year to one or more Qualifying U.S. Charities. Such gifts should be reported in the same manner as gifts to a Canadian registered charity. However, to support a paragraph 110.1(1)(a) deduction claimed in a particular taxation year for gifts to Qualifying U.S. Charities, the corporation should prepare a statement indicating the gifts to Qualifying U.S. Charities and the amount of its “income arising in the United States” for purposes of paragraph 7 of Article XXI. This statement does not need to be filed with the T2 return but the corporation should keep it in case we ask for it later.
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