The International Journal
of Not-for-Profit Law

Volume 2, Issue 3, March 2000

A quarterly publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor


Introduction: "Codes of Conduct for Partnership in Governance: Texts and Commentaries"
By Tatsuro Kunugi and Martha Schweitz

On the Establishment of Social Organizations Under Chinese Law
By Ge Yunsong

Australia's Nonprofit Taxation Reforms
By Myles McGregor-Lowndes


Codes of Conduct for Partnerships in Governance: Text and Comments
Edited by Tatsuro Kunugi and Martha Schweitz
Reviewed by Catherine Shea

Case Notes

Central and Eastern Europe: Croatia | Poland | Serbia

Middle East and North Africa: Egypt

Newly Independent States: Azerbaijan

North America:
the United States

South Asia:

Country Reports

Asia Pacific:
| East Timor |
New Zealand
| the Philippines | Vietnam

Central and Eastern Europe: Regional | Kosovo | Romania

Latin America:
Regional | Belize | Brazil | Venezuela

Newly Independent States:
Russia | Ukraine

Middles East and North Africa: Sudan

North America:
| Mexico |
the United States

South Asia:

Sub-Saharan Africa:
Cameroon | Kenya |
Sierra Leone
| South Africa | Tanzania | Zimbabwe

Western Europe:
France | Germany |
the United Kingdom

Self Governance

Law and Governance-- A Lesson in Limits
By Leon Irish and Karla Simon

Trends in Self-Regulation and Transparency of Nonprofits in the U.S.
By Robert O. Bothwell

The Role of Governing Boards in Fostering Accountability
By Crispin Gregoire

Financial Implications Affecting Nonprofit Nongovernmental Organizations Today
By Michael A. Freedman

International Grantmaking

Grantmaking by U.S. Foundations in Canada: A Canadian Lawyer Provides a Plain Language Primer
By Blake Bromley

Community Philanthropy

Community Philanthropy Initiative of the European Foundation Centre

Transatlantic Community Foundation Network

New Website


General | Brazil | Kenya | Russia

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Editorial Board

Subscription Information

Previous Issues

ICNL Homepage

International Grantmaking

Grantmaking by U.S. Foundations in Canada: A Canadian Lawyer Provides a Plain Language Primer *

By Blake Bromley

Note: This article focuses on the concerns of grantmaking foundations, and does not address legal issues specifically pertaining to U.S. corporate grantmakers. Canadian grantmaking by U.S. corporations will be dealt with in a future Legal Dimensions article.

The generally increasing economic integration of the North American continent, particularly since passage of the North American Free Trade Agreement, can be seen in the philanthropic sector as well. The relevant laws and tax treaty provisions between the U.S. and Canada make certain cross-border charitable transactions somewhat more attractive to the U.S. participants than comparable transactions in other foreign countries.

What are the Legal Issues?

For U.S. private foundations, the legal issues of grantmaking in Canada begin at the same point as for cross-border grantmaking generally. Potential grantors will want to be sure that their grants made in Canada do not constitute “taxable expenditures” and will generally want to be sure that their grants constitute “qualifying distributions.” Despite the existence of new guidance from the IRS, private foundations must still rely on traditional methods to ensure compliance.

Equivalency determinations and Canadian organizations. For U.S. private foundations that don’t wish to undertake expenditure responsibility or assure compliance with the out-of-corpus rules, there is always the option of limiting their foreign grantmaking to organizations that are legally the “equivalent” of a U.S. public charity. Under the latest IRS interpretation of the charitable contribution section of the U.S.-Canada Treaty, Notice 99-47, all Canadian registered charities are deemed to be the equivalent of Section 501(c)(3) tax-exempt organizations under the U.S. Internal Revenue Code. Furthermore, if the Canadian charity provides the necessary financial information to the IRS, it may establish that it is the equivalent of a U.S. public charity, rather than a U.S. private foundation. However, the Notice is silent as to whether private foundations may rely on this equivalency. In the absence of explicit guidance, a U.S. grantor would still appear to be required to make equivalency determinations and secure “equivalency affidavits” (discussed in the Legal Dimensions article “What’s Behind the Foreign Public Charity Equivalence Affidavit?” by Betsy Buchalter Adler and Ingrid P. Mittermaier (June 1999)) from Canadian grantees that are the equivalent of U.S. public charities -- even those that are registered charities under Canadian law. Alternatively, a private foundation may exercise expenditure responsibility (discussed in the Legal Dimensions article “Grantmaking by Private Foundations in the International Arena” by Thomas Chomicz (Nov. 1998)) in connection with grants made to organizations that cannot demonstrate they are the equivalents of U.S. public charities. If the Canadian entity is the equivalent of a U.S. private foundation, the out-of-corpus rules (discussed in the Legal Dimensions article “The Out-of-Corpus Rules Reviewed,” by Milton Cerny and Doug Varley (April 1999)) will need to be followed. .

The Legal ABC’s of Your Canadian Grantees

A potential U.S. private foundation grantor may want a basic understanding of the Canadian legal rules that define and affect the operations of their potential Canadian grantees. Among other things, this information may help them in distinguishing those grantees capable of satisfying the requirements of public charity “equivalency” from those for which another grantmaking strategy will be needed.

Classes of Canadian registered charities. There are two broad classes of registered charities in Canada: operating charities (or charitable organizations) and charitable foundations. The differences in how these two classes of charities are defined (as discussed below) have a profound impact on their ability to carry on international grantmaking and activities.

The overwhelming majority of registered charitable organizations in Canada - both operating charities and charitable foundations - are legally incorporated. As in the U.S., under Canada’s system of federalism, registered charitable organizations of either type can be incorporated under the incorporation statutes of any of the individual Canadian provinces. Unlike in the United States, it is also possible in Canada to incorporate under a federal statute, the Canada Corporations Act, as a non-share capital corporation. This authorizes the corporation to operate in all ten provinces of Canada as well as the territories.

The various federal and provincial incorporation statutes and regulations may differ in terminology and specific requirements. In Ontario, for example, a charity incorporates as a “non-share-capital corporation,” while in British Columbia it would incorporate as a “society.” Unlike the United States, all incorporation statutes in Canada require charitable organizations to have members as well as directors.

While the incorporating statutes vary in different provinces, tax privileges flow from federal legislation, the Income Tax Act, and so are uniform throughout the country. Apart from Quebec, Ontario and Alberta no provinces require corporations to file provincial income tax returns in addition to the federal tax return. While rates of provincial tax vary, they are generally based upon the same income inclusions and deductions as set out in the federal Income Tax Act.

International activities by Canadian grantees. A topic of potential special interest to U.S. cross-border grantmakers thinking of teaming up with a Canadian charitable organization will be the ability of the Canadian partner charity to operate internationally. The Canadian rules governing the international activities of charitable organizations vary depending on whether the organization in question is an operating charity or a charitable foundation.

The Income Tax Act has no geographic limitation on charitable operations, although it does require that a registered charity be established in Canada and continue to be resident in Canada. However, the effective result of Canadian laws is that an operating charitable organization can carry on its activities internationally while a charitable foundation is generally restricted to making grants to “qualified donees,” almost all categories of which are either Canadian institutions or institutions with strong Canadian ties.

Canadian charitable organizations can carry on charitable activities anywhere in the world because they are defined in terms of their “activities”. Revenue Canada, the Canadian federal tax agency, gives great emphasis to the wording in the Income Tax Act that defines a charitable organization as “an organization, whether or not incorporated, all the resources of which are devoted to charitable activities carried on by the organization itself.” This provision that charitable activities must be carried on by the charity itself is used to prevent outright grants to foreign charities. Therefore, if a Canadian charitable organization wants to make a grant to a foreign charity, it is necessary for the Canadian charitable organization to establish an agency or contractual relationship with the foreign charity and to characterize its expenditure of funds as an activity of the Canadian charity. It is not possible for a charitable foundation or a charitable organization to simply mail a donation to a foreign charity or make an outright grant in the way that it could if the recipient charity were also registered in Canada.

The definition of a charitable foundation under the Income Tax Act has no reference to its activities but only to its “purposes”. Although there is no stated geographic requirement that Canadian charitable foundations expend their funds in Canada, they are effectively required to make their grants to Canadian charities or other “qualified donees”. Practicing lawyers and Revenue Canada officials have differing views as to whether Canadian charitable foundations are legally prohibited from making an outright grant to foreign charities. However, everyone agrees that only grants to “qualified donees” qualify for inclusion in the calculation of expenditures which determine whether or not a foundation has met its annual disbursement quota. A Canadian charitable foundation must annually disburse amounts equivalent to 4½% of its investment assets plus 80% of “receipted” gifts in the previous year (subject to certain exceptions). As a charity's registration can be revoked if it does not meet its disbursement quota, in most cases this effectively prevents grants to foreign charities unless the foundation in question has investment income greater than 4½% of its assets or is willing to make grants from its corpus.

One further note: As noted above, a Canadian charitable foundation has an annual disbursement requirement that is based in part on the amount of its “receipted” gifts. While receipts issued to Canadian charities are exempted from this calculation, there is no exemption for receipts issued to foreign charities. As a result, a U.S. foundation should not require that its donation be acknowledged by an official donation tax receipt from the Canadian registered charity.

Some Successful Strategies

U.S. private foundation grantors may use a number of well-proven strategies to fund Canadian organizations:

About the Author

Blake Bromley is a lawyer carrying on practice in Vancouver, Canada. He works extensively with private foundations in doing tax planning for their own funding as well as grantmaking. He also assists operating charities in structuring their legal relationships with related charities in other countries and carrying on international activities. For copies of this article with citations to legal authority, contact Mr. Bromley at or call 604/683-7006 . This article was edited by Timothy R. Lyman, of Day, Berry & Howard LLP in Hartford, CT, Betsy Adler, of Silk, Adler & Colvin in San Francisco, CA, James M. Parks, of Cassels Brock & Blackwell in Toronto, Canada, Connie Higginson, of the American Express Foundation and Jane Nober, of the Council on Foundations.

* This article was originally published as a “Legal Dimensions” paper in the Council of Foundations’ quarterly journal, International Grant-making, and is reproduced here with the kind permission of the Council. The “Legal Dimensions” series is coordinated by Joyce Chandran of the Council on Foundations with assistance from the Day, Berry & Howard Foundation (“promoting positive developments in the law, legal scholarship and legal education”). Inquiries may be addressed to Ms. Chandran at or 202/467-0386 or to Timothy R. Lyman, President of the Day, Berry & Howard Foundation, at or 860/275-0329 .


Copyright 2008 The International Center for Not-for-Profit Law (ICNL)
ISSN: 1556-5157