Article 21

A 99% interest in a limited partnership (“Third Tier LP”) was held by two U.S.-resident non-profit organizations (the “Tax Exempt Partners”), which were exempt under Art. XXI(1) of the Canada-US Treaty and were “qualifying persons”, through two intermediate partnerships. The remaining 1% interest in Third Tier LP was held by a Canadian-resident corporation (“Canco1”), which was unrelated to the Tax Exempt Partners.

Third Tier LP received timber royalties and rents (the “royalties”) from the exploitation of its Canadian real property by a corporation (“Canco2”) which was related to Canco1. None of the above partnerships carried on a trade or business in Canada, and they were treated as partnerships for US and Canadian income tax purposes.

CRA noted that:

Article IV (7)(a) might apply to deny Treaty benefits on an amount of income, profit or gain received by a resident of one of the Contracting States (e.g., the United States) through an entity that is a non-resident of the United States and that is treated as fiscally transparent in the source state (Canada) but not in the residence state (the United States).

However, that was not the case here as the partnerships were fiscally transparent for US purposes. CRA concluded that royalties derived by the Tax Exempt Partners were exempt from Canadian withholding tax under the Treaty.

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. Art. XXI(7) of the Canada-U.S. Treaty provided that, for purposes of Canadian taxation, a gift made by a resident of Canada in a taxation year to an organization - that was resident in the U.S., was generally exempt from U.S. tax, and could qualify in Canada as a registered charity if it were created or established and resident in Canada - as a gift to a registered charity, subject to potential numerical limitations. The Directorate stated:

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 [IRC] section 501(c)(3). The CRA accepts that, pursuant to the tax relief measure described in paragraph 7 of Article XXI … 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 …. or a non-refundable tax credit … under section 118.1 … subject to the income limitations, described in those sections, from U.S. sources.

The Directorate (after describing the more elaborate subsequent rule) noted that “prior to June 23, 2022, a charity’s registered status was subject to revocation, pursuant to subsections 149.1(2), (3) [or] (4) … if the charity made disbursements by way of gift to a donee that was not a ‘qualified donee’,” and then noted that U.S. 501(c)(3) organizations would not qualify as “qualified donees” as defined in s. 149.1(1) assuming that they were not registered with CRA as described in paras. (b) or (c) of that definition. The Directorate stated that 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” and then concluded:

[O]ther than the United Nations or its agencies, only foreign entities that have applied for and were registered by the Minister are a qualified donee … . [S]ince subsections 149.1(2), (3) and (4) … 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 … Article XXI[(7)] 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) … .

The Directorate indicated that essentially the same analysis applied to gifts made to U.S. 501(c)(3) organizations by a private foundation or a charitable organization.

Will a bequest made by will to a U.S. organization qualify for a charitable donation credit on the individual’s final return? CRA summarized the rules under s. 118.1(5.1)(b) and s. 118.1(1) – charitable gift – para. (c) generally permitting a graduated rate estate (GRE) of the individual to carry back the gift amount (for the donation to a charity of property received by it on the individual’s death) to the terminal return of the individual.

CRA went on to discuss the gift limit in para. (a) of the definition of “total gifts” in ss. 118.1(1) and the limited relief provided for gifts to US organizations under Art. XXI(7) of the Canada-U.S. Convention. In that latter regard it stated:

The Canada-U.S. Tax Convention (the Treaty) provides limited tax relief with respect to gifts made by Canadian residents to certain U.S. organizations that are not qualified donees. Pursuant to paragraph 7 of Article XXI of the Treaty, 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. In this regard, the amount of relief that would be available under the Act is restricted to the income of the resident for that year from U.S. sources. However, the restriction to income 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 CRA accepts that any organization that is exempt under section 501(c)(3) of the U.S. Internal Revenue Code will qualify for the purposes of paragraph 7 of Article XXI of the Treaty.

(a) A gift made by a Canadian-resident corporation to a U.S. resident charity described in Art. XXI, para.7 of the Canada-U.S. Treaty is deemed to be a “gift to a registered charity” for purposes of the Act, subject to an assumption that the corporation’s income only includes its income arising in the U.S. What is the meaning of U.S.-sourced income, e.g., would U.S.-sourced capital gains qualify? CRA responded:

[U]nless a specific meaning is given to that expression in the relevant Treaty provision, such as in Article XXIV (…paragraph 3) and Article XI (…paragraph 4), Canadian domestic sourcing rules should be used. These sourcing rules are generally set out in Folio S5-F2-C1… .

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… folio), the taxable portion thereof would be considered “income arising in the United States”… .

(b) Is there an ability to carry forward amounts of such gifts that are not deductible because of the U.S.-source income limitation? CRA responded:

[T]he 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… the five year carryover rule in paragraph 110.1(1)(a)…equally applies to [such] gifts

Does Art. XXI, para. 7 of the Canada-U.S. Convention allow charitable foundations as defined in s. 149.1(1) to make donations to U.S. charitable organizations that are exempted under IRC s. 501(c)(3)?

[P]aragraph 7 of Article XXI of the Convention does not allow for a U.S. charity to be treated as a "qualified donee" within the meaning of subsection 149.1(1).

Consequently, Article XXI, paragraph 7, of the Convention does not allow charitable foundations to make donations to U.S. charities.

Two non-profit organizations described in Art. XXI of the Canada-U.S. Tax Convention (“USNPO1” and “USNPO2”), held 99.8% and 0.2% membership interests, respectively, in a U.S. LLC (US LLC 1) which, in turn, wholly-owned LLC2 which, like LLC1, was fiscally transparent. LLC2 held a minority interest in a Delaware LP investment fund (LP Fund). The LP Fund had Canadian subsidiaries from which it received interest and dividends.

After referring to the character-preservation rule in Art. IV(6) of the Canada-US Convention, and the exemption in Art. XXI(1) subject to the related-person test in Art. XXI(4), CRA stated:

Accordingly, where a non-profit organization resident in the United States is considered under United States taxation laws to derive Canadian-source income or gains through holdings in one or more tiers of fiscally transparent limited liability companies or partnerships, the income or gains will, subject to Article XXI(4), be eligible for the exemption in Article XXI(1). However, where an amount of Canadian-source income or gain is received from a Canadian-resident entity that is fiscally transparent for United States income tax purposes, the organization will not be considered to derive the amount pursuant to Article IV(7)(b) if the United States income tax treatment of the amount is different than the treatment would be if the Canadian-resident entity were not fiscally transparent.

In essentially confirming that the related-person exclusion in Art. XXI(4) would not apply, CRA stated:

The definition of "related person" in section 251 of the Act will be applied to determine if a person is related to a non-profit organization for the purpose of Article XXI(4). Where a fiscally transparent entity through which a non-profit organization derives income holds de jure control of a corporation, the CRA will not attribute the relationship between the entity and the corporation to the non-profit organization in determining whether income paid by the corporation is income from a related person under Article XXI(4). Instead, where the conditions of Article IV(6) of the Convention are satisfied in respect of an amount derived by a non-profit organization through a fiscally transparent entity (or through multiple tiers of fiscally transparent entities), the CRA will determine whether the non-profit organization is related to a corporation controlled by the entity on the same basis that would be applied to determine if a shareholder of a corporation were related to a subsidiary of the corporation.

We would therefore not consider a non-profit organization to be related to a corporation for Article XXI purposes solely because the organization is a minority partner of a partnership (or is related to such a minority partner) that holds a majority of the voting shares of the corporation.

Where all the members of an LLC are not related to each other, the CRA will not treat the fact of the LLC being related to its Canadian-resident subsidiary (Canco) as a basis for treating interest or dividends paid by Canco to the LLC as being derived by the US-resident LLC members from a related person for purposes of Art. XXI(4) of the Canada-US Convention. CRA will apply the same approach if Canco is instead held by a partnership, i.e., CRA will not attribute the relationship between the partnership and Canco to any members of the partnership.

Activities undertaken in Canada, including through leased premises, that related primarily to fund raising would not constitute a business of the U.S. exempt organization.

CRA found that a lump sum paid in two instalments paid as a “compensatory allowance” under French law by a French-resident ex-spouse of the Canadian-resident taxpayer was not includible in her income as a “support amount,” as defined in ITA s. 56.1(4). CRA found that this result was not altered by other-income Article (Art. 21) of the Canada-France Convention.

Before any consideration could be given to allowing an exemption for investment income paid to a U.S. master trust, the trust would be required to provide documentation that will clearly explain how it acted in trust for, or as agent for, the ultimate beneficial owners, the identity and residency of each beneficial owner, and the details of how the income was distributed to them.

Where a trust resident in Canada has made a designation under s. 104(22) with respect to U.S.-source income earned by the trust and distributed to a beneficiary who is resident in Canada and has made a donation to a U.S. charity, such income will not qualify as income arising in the United States for purposes of paragraph 6 of Article XXI of the U.S. Convention, given that s. 104(22) recharacterizes the income only for limited purposes.

Re taxation of a U.S. charitable organization's share of dividends received by a U.S. partnership from a Canadian resident corporation.

Exempt organizations created in a country with which Canada has a tax treaty are residents of that contracting state for treaty purposes and are therefore entitled to the same benefits as those provided under a tax treaty to other residents of that state. For example, income or taxable capital gains derived by charitable organizations described in Article XXI(1) of the Canada-U.S. Convention, which is resident in the United States, will be exempt from Canadian tax by virtue of that paragraph provided that Article XXI(3) does not apply.

Where a tax-exempt organization is a member of a partnership which has been subject to Part XIII tax on income payments received by it, RC on application of the exempt partner will refund the difference between the pro rata share of the Part XIII tax and the amount which would have been withheld if the exempt partner had received the income directly.