27 February 1998 External T.I. 9728355 - ARTICLE XXI(6) OF U.S. TREATY

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 the U.S. charitable organization can be considered to be a qualified donee for purposes of section 149.1 of the Act pursuant to Article XXI(6) of the Canada-United States Income Tax Convention (the "Convention")

Position:

No

Reasons:

Article XXI(6) of the Convention merely treaty gifts to U.S. charities as gifts to Canadian registered charities if certain conditions are met. It does not deem such U.S. charities to be Canadian registered charities. Furthermore, greater relief than what was intended under that Article would have been provided if U.S. charities were treated as qualified donees.

972835
XXXXXXXXXX S. Leung

Attention: XXXXXXXXXX

February 27, 1998

Dear Sirs:

Re: Article XXI(6) of the Canada-United States
Income Tax Convention (the "Convention")

We are writing in response to your letter of October 17, 1997 in which you requested our interpretation of Article XXI(6) of the Convention with respect to the following hypothetical fact situation.

Foundationco is a private foundation within the meaning of subsection 149.1(1) of the Income Tax Act (the "Act").USFoundationco is a tax-exempt organization within the meaning of Section 501(c)(3) of the Internal Revenue Code which is generally exempt from United States tax and that could qualify in Canada as a registered charity (as defined under subsection 248(1) of the Act) if it were a resident of Canada and created or established in Canada. Foundationco was granted status as a registered charity under the Act on the condition, among other things, that it is constituted and operated exclusively for charitable purposes. The term "charitable purposes" is defined under subsection 149.1(1) of the Act to include the disbursement of funds to qualified donees and the term "qualified donee" is also defined under that subsection to mean a donee described in any of paragraphs 110.1(1)(a) and (b) and the definitions "total charitable gifts" and "total Crown gifts" in subsection 118.1(1) of the Act.

1. Foundationco wishes to make a donation to USFoundationco to support its activities.

You requested our confirmation of your view that such a donation would be a qualified donation to a registered charity by virtue of Article XXI(6) of the Convention as such a donation is to be treated for the purposes of the Act as if it were a gift to a registered charity.

Our Comments

paragraph 6 of Article XXI of the Convention states, in part:

"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 ... 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."

In our view, the effect of paragraph 6 of Article XXI of the Convention is that qualifying gifts to United States charities, within the limits provided in that paragraph, will be treated as if they were made to a registered charity in Canada. This provision does not, however, deem a United States charity to be a Canadian registered charity for the purposes of the Act such that the United States charity would become a qualified donee. It merely treats a gift to a United States charity as a gift to a Canadian registered charity.

In our opinion, a United States charity would only qualify as a qualified donee for a particular taxpayer if Her Majesty in right of Canada had made a gift to it within that taxpayer's taxation year or the 12 months immediately preceding that particular year.

Furthermore, relief is only provided under paragraph 6 of Article XXI of the Convention to a resident of Canada who has U.S. source income in the year a gift was made by the resident to a U.S. organization. In the case at hand, it appears that unwarranted greater relief would be provided if we were to accept that USFoundationco is a qualified donee within the meaning of subsection 149.1(1) of the Act.

We trust you will find our above comments to be of assistance.

Yours truly,

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