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: Does paragraph 7 of Article XXI of the Canada-US Treaty deem a U.S. 501(c)(3) organization to be "qualified donee" for purposes of subsections 149.1(2), (3) and (4) of the Act?
Reasons: 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. Subsections 149.1(2), (3) and (4) govern the revocation of a charity's registered status and not the imposition of taxes.
February 15, 2023
Charities Directorate Income Tax Rulings Directorate
Compliance Division Financial Institutions Section
Assisted Compliance Section
Attention: Daniel Davies-Ostrom,
Senior Audit Advisor 2022-092573
Paragraph 7 of Article XXI of the Canada-United States (U.S.) Income Tax
Convention (the “Canada-U.S. Treaty”)
We are writing in response to your email dated December 16, 2021, in which you requested our views regarding the interaction between the Income Tax Act (Act) and paragraph 7 of Article XXI of the Canada-U.S. Treaty. We apologize for the delay of our response.
Briefly, you have advised that Charities Directorate’s Compliance Division (CD) has engaged in a number of audits which have involved Canadian registered charities (which collectively include a “charitable organization”, “public foundation” or “private foundation” within the meanings assigned by subsection 149.1(1) of the Act) making unrestricted gifts to certain tax-exempt organizations within the meaning of the U.S. Internal Revenue Code section 501(c)(3) (U.S. 501(c)(3) organizations). In one example you have described, 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. In your view, a public foundation that makes an unrestricted gift to such U.S. 501(c)(3) organizations will be subject to revocation of its registered status under the Act pursuant to subsection 149.1(3) of the Act.
You further advise that the public foundation and their representative suggest that the transactions are permitted by virtue of paragraph 7 of Article XXI of the Canada-U.S. Treaty. In this regard, the foundation or their representative, as the case may be, have advanced the argument that in situations where there is inconsistency between the Canada-U.S. Treaty and the Act, the provisions of the Canada-U.S. Treaty take precedence over the Act.
You have asked whether the Canada-U.S. Treaty deems a U.S. 501(c)(3) organization to be “qualified donee” as that term is defined in subsection 149.1(1) of the Act, such that the public foundation would be permitted to make unrestricted gifts to a U.S. 501(c)(3) organization, for purposes of subsections 149.1(3) of the Act. You have also asked whether a “charitable organization” or “private foundation” that makes an unrestricted gift to a U.S. 501(c)(3) organization would similarly be subject to revocation of their registered status pursuant to subsections 149.1(2) or (4) of the Act, respectively, as the case may be.
Disbursements by registered charities
Sections 149.1 and 149.2 (section 149.2 is referred to for information purposes and not applicable to the request described herein) of the Act set out the rules that govern registered charities and other qualified donees. A registered charity is not subject to Part I tax (income tax) pursuant to paragraph 149(1)(f) of the Act. However, the charity may be subject to certain penalties or have its tax-exempt registered status revoked if it contravenes the rules in sections 149.1 or 149.2 of the Act.
Under recently amended (endnote 1) subsection 149.1(3) of the Act, in force on June 23, 2022, the Minister may, revoke the registration of a public foundation for any reason described in subsection 168(1) or where the foundation, pursuant to paragraphs (b) and (b.1),
(b) fails to expend amounts in any taxation year, on charitable activities carried on by it and by way of gifts made by it that are qualifying disbursements, the total of which is at least equal to the foundation's disbursement quota for that year; or
(b.1) makes a disbursement, other than
i) a disbursement made in the course of charitable activities carried on by it, or
ii) a qualifying disbursement.
Similar rules apply to charitable organizations and private foundations pursuant to recently amended (endnote 2) subsections 149.1(2) and 149.1(4) of the Act respectively.
A “qualifying disbursement” is defined in subsection 149.1(1) of the Act to mean a disbursement by a charity, by way of a gift or by otherwise making resources available,
(a) subject to subsection 149.1(6.001), to a qualified donee, or
(b) to a grantee organization, if
(i) the disbursement is in furtherance of a charitable purpose (determined without reference to the definition “charitable purposes” in subsection 149.1(1)) of the charity,
(ii) the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity, and
(iii) the charity maintains documentation sufficient to demonstrate
(A) the purpose for which the disbursement is made, and
(B) that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity.
A “grantee organization” is defined in subsection 149.1(1) to include a person, club, society, association or organization or prescribed entity, but does not include a qualified donee.
It should be noted that prior to June 23, 2022, a charity’s registered status was subject to revocation, pursuant to subsections 149.1(2), (3) and (4) of the Act, as the case may be, if the charity made disbursements by way of gift to a donee that was not a “qualified donee”.
The term “qualified donee” is defined in subsection 149.1(1) of the Act (endnote 3) and applies for purposes of the Act by virtue of subsection 248(1) of the Act. In the context of your request, the relevant qualified donees in subsection 149.1(1) of the Act, in part, includes,
a) a registered charity (defined as a charitable organization, private foundation or public foundation, or a branch, section, parish, congregation or other division thereof, that is resident in Canada and was either created or established in Canada);
b) a university outside Canada, the student body of which ordinarily includes students from Canada, that has applied for and was registered by the Minister;
c) a foreign charity that meets the criteria described in subsection 149.1(26) of the Act and that has applied to the Minister and was registered by the Minister, or
d) the United Nations or an agency of the United Nations.
The Canada-U.S. Treaty
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. As stated earlier, a registered charity is not subject to Part I tax pursuant to paragraph 149(1)(f) of the Act.
Paragraph 7 of Article XXI of the Canada-U.S. Treaty provides that, for purposes of Canadian taxation, 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, subject to the percentage limitations in respect of the deductibility of gifts to registered charities to the income of such resident arising in the United States. Paragraph 7 of Article XXI of the Canada-U.S. Treaty also provides that the income limitations 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 technical explanation to paragraph 7 clarifies that the paragraph applies to the credit for charitable contributions allowed under current Canadian tax law (i.e., the Act).
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 Internal Revenue Code section 501(c)(3). The CRA accepts that, pursuant to the tax relief measure described in paragraph 7 of Article XXI of the Canada-U.S. Treaty, 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 of the Act (corporations) or a non-refundable tax credit (individuals) under section 118.1 of the Act, subject to the income limitations, described in those sections, from U.S. sources.
As described above, other than the United Nations or its agencies, only foreign entities that have applied for and were registered by the Minister are a qualified donee, for purposes of section 149.1 of the Act. In our view, since subsections 149.1(2), (3) and (4) of the Act 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, we remain of the view that paragraph 7 of Article XXI 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) of the Act.
We trust our comments will be of assistance.
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
1 Paragraphs 149.1(3)(b) and (b.1) amended by 2022, c. 10, s. 16(5), effective June 23, 2022.
2 For charitable organizations, paragraphs 149.1(2)(b) and (c) amended by 2022, c. 10, s. 16(4), effective June 23, 2022. For private foundations, paragraphs 149.1(4)(b) and (b.1) amended by 2022, c. 10, s. 16(6), effective June 23, 2022.
3 The definition "qualified donee" in subsection 149.1(1) amended by 2011, c. 24, s. 52(1), in force January 1, 2012.
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