19 December 1996 External T.I. 9629805 - ARTICLE XXIX B(1) AND ARTICLE XXI(6)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether bequest to U.S. charities is creditable under paragraph 1 of Article XXIX B of Canada-U.S. Income Tax Convention

Position:

No.

Reasons:

Paragraph 1 of Article XXIX B is only for U.S. estate tax purposes, it is not relevant to Canadian taxation. Donations to U.S. charities are governed under Article XXI(6) of the Convention.

		962980
XXXXXXXXXX	S. Leung

Attention: XXXXXXXXXX

December 19, 1996

Dear Sirs:

Re: Paragraph 1 of Article XXIX B and Paragraph 6 of
Article XXI of the Canada-U.S. Income Tax Convention

We are writing in response to your letter of July 31, 1996 to the Toronto Tax Services Office which has directed your enquiry to us for reply. You enquired about whether a bequest to a U.S. tax-exempt charity by a Canadian resident decedent is deductible in computing the income tax payable of the decedent in Canada in the year of death under paragraph 1 of Article XXIX B of the Canada-U.S. Income Tax Convention (the "Convention") if the decedent has no U.S. source income in the year of death. If it is deductible, you feel that there is an "apparent conflict" in the interpretations of paragraph 1 of Article XXIX B of the Convention and paragraph 6 of Article XXI thereof as the latter permits a deduction only to the extent that the decedent has U.S. source income.

Our Comments

Paragraph 1 of Article XXIX B of the Convention provides that a Contracting State shall accord the same death tax treatment to a bequest by an individual resident in one of the Contracting States to a qualifying exempt organization referred to in paragraph 1 of Article XXI of the Convention which is resident in the other Contracting State as it would have accorded if the organization had been a resident of the first Contracting State. This paragraph is for U.S. estate tax purposes only and is particularly aimed at providing a relief for Canadian residents who are not U.S. citizens and who bequeath property to a Canadian registered charity. This is because pursuant to the estate tax provisions under the Internal Revenue Code of the U.S. (the "Code"), a U.S. citizen or resident is able to deduct gifts to any public charity organized either in the U.S. or elsewhere. Also under the Code, a Canadian resident who is not a U.S. citizen and who bequeaths property to U.S. public charities is allowed a deduction for U.S. estate tax purposes. Now under Article XXIX B of the Convention for U.S. estate tax purposes, a resident of Canada who was not a U.S. citizen immediately before death and who bequeaths property to a Canadian registered charity will be treated as if he or she had bequeathed property to a charity organized in the U.S. Consequently, the amount of such bequest will be allowed as a deduction for U.S. estate tax purposes under the Code provided that the property so bequeathed is part of the assets that would be included in the gross estate situated in the U.S. of the decedent. Since there is no estate tax in Canada, paragraph 1 of Article XXIX B of the Convention would have no application in Canada. In Canada the deductibility of charitable gifts to U.S. exempt organizations is continued to be governed by paragraph 6 of Article XXI of the Convention and the provisions of the Income Tax Act (the "Act").

Hence, in the situation where a decedent who was a Canadian resident not a U.S. citizen immediately before death bequeaths property to a U.S. tax-exempt charity, paragraph 6 of Article XXI of the Convention would apply and paragraph 1 of Article XXIX B of the Convention would not apply. If the decedent has no U.S. source income in the year of death or in the year immediately preceding the year of death, no donation credit will be allowed under section 118.1 of the Act.

We trust you will find the above to be of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch

ENDNOTES

^1. This is also the understanding of the U.S. as can be found in page 14 of "Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Canada" prepared by U.S. Joint Committee on Taxation, dated May 23, 1995, which states:

"Although this provision (paragraph 1 of Article XXIX B) appears on its face to grant reciprocal benefits, it is in effect only a concession by the United States to allow a U.S. estate tax deduction for charitable bequests by a Canadian resident to a qualifying Canadian resident organization. Charitable bequests by Canadian residents to qualifying U.S. resident organizations are already deductible from the Canadian gains at death tax under the terms of the existing treaty."

^2. See subsection 118.1(4) of the Act.