The International Journal
of Not-for-Profit Law

Volume 3, Issue 3, March 2001

By Arthur B. C. Drache, Q.C.

In August we attended a symposium in Barbados sponsored by the Europhil Trust which dealt with the problems related to cross-border donations.

The consensus of the participants was that the Canada-U.S. Tax Treaty remains the most progressive bilateral treaty in the world when it comes to cross-border donations. But as we started thinking about the issue, we decided that the attractions of the Treaty notwithstanding, it actually was used less than some other domestic tax rules to allow Canadians to make donations to the United States. We thought that a listing of the possibilities might be of use to readers.

1. Paragraph 6 of Article XXI of the Treaty allows Canadians to donate to U.S. 501(c)(3) organizations and get Canadian tax relief. The problem is that the relief is limited to 75% of the donor’s U.S. source income. So unless the Canadian donor has a flow of income from the United states, this very generous provision will not work. Paragraph 5 of the same article allows a U.S. donor to donate to a Canadian charity, but again there is the source of income limitation.
2. If the Canadian resided in Canada near the U. S. boundary and is a “commuter” to the United States and his or her chief source of income was a business or employment in the United States, subsection 118.1(9) of the Income Tax Act allows donations to be claimed in Canada for gifts to a 501(c)(3) organization and treated for Canadian tax purposes as though they had been given to a Canadian registered charity. This provision is designed to allow Canadians who, for example, live in Windsor and work in Detroit to give donations to U.S. charities without any hassle.
3. If a Canadian wants to make a gift to an American (or sometimes other foreign university), the gift can be treated as though it had been made to a Canadian institution if the University is listed on Schedule VIII of the Income Tax Act. To be listed a post-secondary school must be an accredited degree granting institution, be recognized as such by the jurisdiction in which it is situate, and must normally have Canadian students attending. There is no requirement, however, that the Canadian donor or a family member was or had been a student at the institution.
4. One of the most common method by which gifts are made to foreign organizations is indirectly, through a Canadian registered charity. Normally, these will be “friends of…” organizations or simply be organizations which have interests in common with the American or other foreign charity. Very often these Canadian organizations will carry on activities in the United States through agency agreements with American organizations…or through partnerships and the like. Occasionally, they will carry on their work directly in the U.S. The CCRA has now ceased to list their discussion paper on carrying on charitable activities abroad on their web site but the paper is now formally a brochure.
5. If a Canadian (either as an individual or in corporate form) carries on business in the United States, it may be possible to make donations and to treat them as promotional or other business expenses. It is interesting to note that the United States and Mexico have an agreement whereby American companies can make donations to charities in Mexico and can treat those donations as though they are charitable donations for domestic American purposes. We have no such agreement with either the United States or Mexico.

Because there is so much direct contact between Canadians and the United States, both in business and non-business contexts, it is apparent that the government(s) have sought methods to allow cross-border giving…though the source of income limits are a real hindrance to gifts flowing in either direction. But Canada is less generous in its dealing with other countries and there are no treaty provisions to allow cross-Border donations with (say) the countries or origin of those who live in this multi-cultural country.

There are two, very limited additional ways of getting funds out of the country and still getting Canadian tax relief.

If Her Majesty in the Right of Canada has made a gift to a foreign charity during the current taxation year or during the immediately preceding twelve month, an individual or business gift to that same organization will qualify for Canadian tax relief. Information Circular 84-3R4 sets out the most current list, thin gruel for the most part. We might add that it isn’t enough that an ambassador, for example, makes a contribution to a local charity from his or her discretionary funds. This has to be a Gift by Her Majesty, not just out of Her Majesty’s funds.

Gifts to the United Nations or an agency thereof will also qualify for tax relief in the same fashion as a domestic gift. While few Canadians are likely to want to make a donation to the U.N. itself, it does have a large range of agencies, many of which carry on work of interest to Canadians and which may be supported directly.

On the other hand, Canadian organizations which want to get funds from U.S. donors (Canadian universities soliciting funds from U.S. based alumni are the main example) will often set up foundations in the United States. This works well because the U.S. rules allow a much more generous flow of funding from charitable organizations and foundations to leave their shores than does Canada.

The conference to which we alluded at the start of this piece had as its primary focus donations within the European Community. But as discussions continued, it became clear that there were impediments all over the world. For example, one of our Barbadian hosts who is, amongst other things, a distinguished charities lawyer pointed out that while many Canadians vacationed in Barbados and while many actually owned property there, there would be no tax relief if a Canadian wanted to contribute to a Barbadian charity or cultural organization. Our friend noted that many Canadians did so anyway, without tax relief, but he figured that if tax relief could be given, Barbadian charities could get enhanced benefits from Canadians who often benefited from their very existence. He did tell us that Canadian companies (of which there were many) carrying on business in Barbados were generous, but he knew they were treating gifts as business expenses, rather than donations…something not available to most individuals.

With all the talk of globalization, usually with reference to making money of a cross-border basis, it seems to us there should be some thought given at an international level to more generous and mutual tax treatment for cross-border charitable donations. We don’t have it bad when we look only to the United States, but that is the country which probably is least in need of Canadian generosity. An approach to the problem from the point of view of helping out as opposed to the current viewpoint that cross-border donations may be fraudulent, would be useful.

But we have cynics for policy makers…not people who have generous spirits. More’s the pity!