Articles & Cases
Foreign Charities Operating in and from Canada
January 28, 2007
Foreign Charities Operating in and from Canada
Many foreign charities are interested in operating in Canada for numerous reasons including the ability to fundraise and obtain grants, to make use of Canadian expertise, or to carry on charitable activities in Canada. In this article I will focus on European and American charities interested in having a presence in Canada. Some U.S. or European charities want to undertake charitable activities in Canada. Others want to use Canada as an extension of their fundraising activities while others want to fundraise and work with the Canadian charity to have the Canadian charity conduct similar operations in other countries, for example, international development, religious activities or education.
We are frequently asked by foreign charities what structure should they use in Canada and we will discuss the following ideas:
1) No presence in Canada
2) Work with Canadian charity that has similar objects.
3) Special status for certain listed Foreign Universities
4) Special Status for Foreign Charities that have recently received Gifts from the Canadian Government
5) Tax treaty exemptions
6) Representative Office
7) Non-profit corporation
8) Non-profit corporation with registered Canadian charitable status
In addition we will provide a brief overview of regulatory requirements for Canadian registered charities.
In this article we will not discuss unincorporated associations or trusts as a vehicle for setting up a charity in Canada because although they may save a small amount of money initially with an unincorporated association there is no limited liability and with a trust there is significant potential personal liability of the trustees. Therefore both these vehicles are rarely used for operating charities with international affiliations.
1) No Presence by Foreign Charity in Canada
If an organization is not involved in Canada, has no activities in Canada and is not interested in fundraising or grants from Canadians, Canadian corporations or foundation then it makes perfect sense to not have a presence in Canada.
2) Work with Canadian charity that has similar objects.
If the foreign charity has a donor who wishes to make a one time or small donation it may not be cost effective to set up a structure for that one time or small donation. It may be possible for another Canadian registered charity that is involved with similar work to receive the one-time donation and to use it to fund its own activities outside of Canada or a joint project with the foreign charity. The problem with working with another charity that has similar objectives is that it may not be a permanent solution and you are beholden to the Canadian charity. However this may not be appropriate when large amounts of money are involved or when you are trying to create a long term presence in Canada either from an organizational or fundraising perspective.
3) Special status for certain listed Foreign Universities
Certain foreign Universities that have student bodies which ordinarily include students from Canada may receive a special status on application and acceptance whereby that foreign university can issue Canadian tax receipts. These universities are known as ”Schedule VIII Universities”. This exception only applies to universities who consistently have Canadian students studying at them.
4) Special Status for Foreign Charities that have recently received Gifts from the Canadian Government
Another category which only affect as a few listed foreign charities are foreign charitable organization outside of Canada to which Her Majesty in right of Canada (federal government or its agents) has made a gift in the corporation’s taxation year or the preceding 12 months. (see CRA Circular 84-3R5 Gifts to Certain Charitable Organizations Outside Canada). Recent examples of Her Majesty in right of Canada gifts include: Aga Khan Foundation, Aga Khan University Foundation, Buddhist Compassion Relief Tzu Chi Foundation R.O.C., Canadian International School of Hong Kong Limited, Cayman Islands National Recovery Fund, Center for Strategic and International Studies (United States), Council for Canadian American Relations, Inc., International Peace Garden Inc., Stedelijk Museum (Holland), The Centre for our Common Future, The Foundation for Canadian Studies in the United Kingdom, The State Hermitage Museum Russia, Woodrow Wilson International Centre for Scholars United States, Village Focus International, The American Assembly United States.
5) Tax Treaty Exemptions
Some tax treaties allow foreign charities special status vis-à-vis donations from residents of the foreign country to Canadian charities and residents of Canada to the foreign charity.
For example the United States has a tax treaty with Canada. Article XXI of the United States-Canada Income Tax Treaty deals with exempt organizations. Here is the full text of see
Article XXI of the Canada-U.S. Tax Treaty. For a Canadian charity to be recognized by the IRS they must follow Notice 99-47. For a list of US charities that are ‘exempt organizations’ in Canada see the Canada Revenue Agency (“CRA”) document T4016 Exempt U.S. Organizations under Article XXI of the Canada-United States Tax Convention . Here is a copy of the full text n99-47 IRS Guidance Relating to Article XXI of the United States-Canada Income Tax Convention. For a full discussion see “Exemption of Canadian Charities under the United States-Canada Income Tax Treaty” by Michael Seto and Mary Jo Salins. At http://www.irs.gov/pub/irs-utl/topicc01.pdf There may be filing and other requirements, however, the biggest limitation on using the provisions of the income tax treaty is that the Canadian donor may only use this deduction against U.S. source income and only up to a certain percentage. The vast majority of Canadians will not have U.S. source income and therefore using the United States-Canada income tax treaty is only of marginal utility.
6) Representative Office
The Representative Office is not a separate legal entity of the foreign charity. As a foreign charity cannot be resident in Canada, one of the requirements for registration as a Canada charity, therefore the foreign charity cannot obtain registered charity status or issue tax receipts. Furthermore, as the Representative Office is not a distinct legal entity there is no separate limited liability from the foreign charity and the foreign charity is liable for all debts, expenses or liabilities of their office. The Representative Office may be appropriate to maintain a presence in Canada and obtain funds from organizations that do not require tax receipts such as the Canadian government or CIDA, or some Canadian businesses.
7) Non-profit without Charitable Status
A Canadian non-profit is covered under paragraph 149(1)(l) of the Income Tax Act (Canada) and is a club, society or association, that is not a charity as defined in the Income Tax Act (Canada) and it is organized and operated solely for:
* social welfare;
* civic improvement;
* pleasure or recreation; or
* any other purpose except profit.
A foreign charity can setup and operate an independent non-profit entity either under Canadian Federal legislation or legislation for each of the provinces. Incorporations under the Canada Corporations Act are most common for charities that will be operating in more than one province or internationally. Such a non-profit cannot be a subsidiary of the foreign charity.
If a non-profit corporate entity is set up in Canada the advantages include limited liability status, a permanent presence in Canada, and once the non-profit organization is registered, it is exempt from paying income tax (under Part I of the Income Tax Act). Similar to the Representative Office a non-profit establishes a presence in Canada and obtain funds from organizations that do not require tax receipts such as the Canadian government or CIDA, or some Canadian businesses. The advantage of being a non-profit without charitable status is you don’t have to apply for charitable status with attendant costs and there is not the extra level of scrutiny, legislation, regulations, imposed by the Income Tax Act and the CRA on registered charities.
Some of the requirements that a non-profit without charitable status is NOT required to comply with include:
* non-arms length composition of directors - a non-profit corporation can have directors who are non-arms length (eg. close family members or business associates). They can be not separate and independent of each other, however, except for a private foundation, Canadian registered charities need a majority of the board to be arms length.
* no requirement that all funds be spent on charitable activities - they have to be spent on activities that fall within the objects in the letters patent but they do not have to be only charitable. This can be important when operating outside of Canada as CRA does have a somewhat restrictive view of what is charitable.
* the disbursement quota rules that generally require that charities disburse 80% of their funds for they issued tax receipts in the previous year, does not apply to non-profits. The disbursement quota rules, dealt with further below, are an attempt by CRA to limit fundraising and administrative charges compared to the charity's own charitable activities or gifts to other Canadian registered charities.
For information of what requirements a Canadian federal non-profit does have you can see our article Requirements for Canadian Federal Non-profit Corporations that do NOT have CRA registered charity status.
One of the issues that arises when setting up a non-profit corporation is whether there are Canadian supporters who can be involved with the ongoing maintenance of the organization or whether employees will be hired to do that. With a Canadian federal non-profit corporation there is no requirement that the directors or officers be resident Canadians, however, rarely will a Canadian federal non-profit be set up without at least some Canadians involved on the board.
If an established U.S. or European charity sets up a Canadian non-profit or charity then consideration should be given to having an agreement between the foreign charity and the Canadian organization. Such an association agreement would cover issues such as the purpose of the two organizations, representation of the foreign charity on the Canadian organization’s board of directors, ownership of intellectual property such as trade marks and copyright, a license to use intellectual property and clauses dealing with dispute resolution or termination of the relationship.
An example of when a non-profit without charitable status may be useful is an organization that will be receiving all of its funds for operations from either a incorporated business or a Canadian government department such as the Canada International Development Agency (CIDA). The sponsor or contributor will presumably have other requirements of their own.
8) Non-profit with Registered Canadian Charitable Status
For most foreign charities interested in having a real and substantial presence in Canada after reviewing the various options this is the preferred route. It has the same benefits as a non-profit without charitable status namely limited liability, permanent presence, and being exempt from paying income tax. It also provides the most flexibility in terms of fundraising and obtaining grants because the organization will have the status of being a Canadian registered charity and can issue donation receipts. The ability to issue tax receipts is the most important difference.
The importance of being able to issue donation receipts is illustrated below. Canadian charities can issue tax receipts which give a donor a credit that can be worth depending on the taxpayer, the province and the type of donation between 30-60 cents on the dollar of value of the gift. Canadian rarely will donate funds to a foreign charity when, for example, the $10,000 donation costs them $10,000 instead of a donation to a registered Canadian charity costing them only $5,400.00 after the tax credit is factored in. This reduction in a donor's income tax is important for many donors. For small donations it may not make much of a difference but for larger donations it is more tax effective and efficient to donate to a registered Canadian charity. In Canada we use the term “qualified donee” which refers to largely registered Canadian charities, amateur athletic associations, the UN and its agencies, some foreign universities and a small number of other organizations that the Canadian government has recently donated to. With recent changes in the Federal budget which allows preferential treatment of the donation of certain marketable or public securities the tax savings are even greater.
There are other advantages of being a registered Canadian charity including partial or full rebate on property tax. As well many institutions in Canada will not fund organizations unless they are registered Canadian charities (“qualified donees”) either because they are required by law to only fund registered charities or they have just decided for administrative simplicity to use the status of registered Canadian charity as a way of limiting those who can apply for grants.
One final advantage outside of the tax realm of using a Canadian entity is that many Canadians prefer to donate to Canadian charities, rather than foreign charities or even Canadian non-profits that are not registered charities, whether because of nationalistic reasons or concerns over accountability.
OVERVIEW OF REGULATORY REQUIREMENTS FOR CANADIAN REGISTERED CHARITIES
Foreign charities that wish to establish a Canadian registered charity need to be aware that they will have to comply with legal requirements of Canadian charity if there activities are within Canada and to the extent that the activities of the Canadian Registered charity is outside of Canada there are additional requirements.
Canadian Requirements for Canadian Charity Operating in Canada
There are a number of requirement in order for the CRA to confer registered charity status including:
1) the organization must be established and operated for charitable purposes. In Canada courts and the CRA have identified four general categories of charitable purposes namely:
•the relief of poverty;
•the advancement of education;
•the advancement of religion; or
•certain other purposes that benefit the community in a way the courts have said are charitable.
All the purposes of the organization must be charitable, not some or most.
2) the organization must devote its resources to charitable activities.
3) The charity must be resident in Canada. A Canadian federal non-profit corporation set up under the Canada Corporations Act is resident in Canada even if some or all of its directors are non-resident.
4) The charity cannot use its income to benefit its members.
As outlined in T4063 from CRA:
“A charity also has to meet a public benefit test. To qualify under this test, an organization must show that:
•its activities and purposes provide a tangible benefit to the public;
•those people who are eligible for benefits are either the public as a whole, or a significant section of it, in that they are not a restricted group or one where members share a private connection, such as social clubs or professional associations with specific membership; and
•the charity's activities must be legal and must not be contrary to public policy.”
There are many factors which could preclude an organization from obtaining or maintaining registered status including:
a) providing personal benefits to members or directors, not including paying for services rendered or legitimate expenses.
b) Having objects which are political including promoting a political party or a political doctrine, however, this does not prevent a charity that has been set up exclusively for charitable purposes from undertaking some limited non-partisan political activities which assist in accomplishing the charity’s objects.
c) Acts of private benevolence or creating an organization or fund which sets out to help one particular individual, or specifically named individuals or family as the Courts have a concern about the lack of public benefit.
Additional Requirements for Canadian charities
Distinctions between Charitable Organization, Public Foundation and Private Foundation
The Income Tax Act and CRA divide charities into three categories namely charitable organization, public foundation or private foundation. The difference between these three entities largely relates to whether a majority of the directors are at arms length and the source of receiptable income. In brief a foreign charity will almost always want to be considered a charitable organization in Canada, unless it is planning on donating most funds that it receives to other Canadian registered charities.
Disbursement quota
Canadian charities are encouraged by the disbursement quota rules to spend as much as possible on charitable activities and as little as possible on administrative and fundraising expenses. The rules set out what amounts are required to be spent on charitable activities in each year. In its simplest form a charity must disburse each year eighty (80%) percent of the charity’s last years receipted income, subject to exceptions. Therefore if a new charity this year receives $100,000 cash gift with no restrictions on it, the charity will have to spend $80,000 next year on charitable activities and no more that $20,000 on administrative and fundraising expenses.
Filing the T3010A
Within 6 months of the end of a charity’s fiscal year, the Canadian registered charity must file the T3010A form, the Registered Charity Information Return. Failure to file this form will probably result in fines and the loss of registered charity status. The form is typically prepared by the accountant of the charity. It is important that charities diarize the date
Maintaining adequate books and records
Canadian charities must keep adequate books and records, in Canada, whether electronic or paper based, to confirm that they still qualify for charitable status, to allow for verification of donation receipts as well as the charity’s revenue and expenditures. A Canadian charity must also keep source documents. The CRA has a guide entitled “Keeping Records – RC4409” which provides further details as well as Information Circular 78-10R entitled Books and Records Retention/Destruction.
Provincial regulation of fundraising
Some provinces have legislation that affects charities, fundraising or issuance of receipts for those provinces.
Provincial Requirements for Extra Provincial Licences
If a charity is going to carry on its operation in a province then it may be required to file forms and register in that province. For example, a federal non-profit corporation with an office in Toronto will need to register with the Ontario government. If that same federal non-profit were to decide to operate an office in another province it may have to register in that province. It depends on the extent of the presence in the particular province. As well the complexity and expense varies widely depending on the province. If the charity will operate under a name which is different from its official name then there may be a requirement for a business name registration for that business name.
Tax receipt issues
There are restrictions in terms of what can result in the issuance of a tax receipt and also what amounts can the receipt be issued for. As well there are strict requirements as to the form of tax receipt. For example, a donation of services is not receiptable. These rules must be complied with.
Other issues
When one is running a charity, like a business, there are a plethora of other legal issues that should be considered including corporate governance, employment contracts, leases for office space or equipment, risk management and insurance.
Canadian Requirements for Canadian Charities Operating Outside Canada.
Above we have discussed various options for a foreign charity operating in Canada and the basic legal requirements for a Canadian charity. If the foreign charity proceeds with creating a non-profit corporation and obtaining registered charitable status and if that Canadian charity wishes to operate outside of Canada, for example to do international development, educational or religious work then you may wish to review my paper on Canadian Charities Operating Outside Canada
If you are a foreign charity and you have any questions with respect to operating in Canada please contact Mark Blumberg at mark@blumbergs.ca or at 416-361-1982 x. 237. To find out more about legal services that Blumbergs provides to Canadian and non-Canadian charities and non-profits please visit our Non-Profit and Charities page.
Blumbergs has recently launched www.globalphilanthropy.ca with information to assisting Canadian individuals, non-profits and charities that are conducting, or interested in conducting, foreign activities including international development, humanitarian assistance, and education. It also is geared toward assisting foreign non-profits and charities interested in operating in Canada.
Also to subscribe to Blumbergs’ non-profit and charities law e-mail newsletter please go to http://www.blumbergs.ca/newsletter.php
SOME OF THE REFERENCE DOCUMENTS REFERRED TO IN THE ABOVE ARTICLE.
Canada-U.S. Tax Treaty Provision dealing with Charities
Article XXI: Exempt Organizations
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1. Subject to the provisions of paragraph 3, income derived by a religious, scientific, literary, educational or charitable organization shall be exempt from tax in a Contracting State but only to the extent that such income is exempt from tax in that other State.
2. Subject to the provisions of paragraph 3, income referred to in Articles X (Dividends) and XI (Interest) derived by a trust, company or other organization constituted and operated exclusively to administer or provide benefits under one or more funds or plans established to provide pension, retirement or other employee benefits shall be exempt from tax in a Contracting State if it is resident in the other Contracting State and its income is generally exempt from tax in that other State.
3. The provisions of paragraphs 1 and 2 shall not apply with respect to the income of a trust, company or other organization from carrying on a trade or business or from a related person other than a person referred to in paragraph 1 or 2.
4. A religious, scientific, literary, educational or charitable organization which is resident in Canada and which has received substantially all of its support from persons other than citizens or residents of the United States shall be exempt in the United States from the United States excise taxes imposed with respect to private foundations.
5. For the purposes of United States taxation, contributions by a citizen or resident of the United States to an organization which is resident in Canada, which is generally exempt from Canadian tax and which could qualify in the United States to receive deductible contributions if it were resident in the United States shall be treated as charitable contributions; however, such contributions (other than such contributions to a college or university at which the citizen or resident or a member of his family is or was enrolled) shall not be deductible in any taxable year to the extent that they exceed an amount determined by applying the percentage limitations of the laws of the United States in respect of the deductibility of charitable contributions to the income of such citizen or resident arising in Canada. The preceding sentence shall not be interpreted to allow in any taxable year deductions for charitable contributions in excess of the amount allowed under the percentage limitations of the laws of the United States in respect of the deductibility of charitable contributions.
6. For the purposes of Canadian taxation, gifts by a resident of Canada to an organization which is resident in the United States, which is generally exempt from United States tax and which could qualify in Canada to receive deductible gifts if it were created or established and resident in Canada shall be treated as gifts to a registered charity; however, such gifts (other than such gifts to a college or university at which the resident or a member of his family is or was enrolled) shall not be deductible in any taxable year to the extent that they exceed an amount determined by applying the percentage limitations of the laws of Canada in respect of the deductibility of gifts to registered charities to the income of such resident arising in the United States. The preceding sentence shall not be interpreted to allow in any taxable year deductions for gifts to registered charities in excess of the amount allowed under the percentage limitations of the laws of Canada in respect of the deductibility of gifts to registered charities.
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Guidance Relating to Article XXI of the United States-Canada Income Tax Convention (Notice 99–47)
John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.
PURPOSE
This notice provides guidance concerning a competent authority agreement between the United States and Canada that implements Article XXI (Exempt Organizations) of the United States-Canada Income Tax Convention (Treaty).
BACKGROUND
Article XXI of the Treaty generally provides for deduction of cross-border charitable contributions, and reciprocal recognition of exemption for religious, scientific, literary, educational, or charitable organizations. Diplomatic notes that accompany the Treaty provide that the competent authorities of each of the Contracting States shall review the procedures and requirements for an organization of the other Contracting State to establish its status as a religious, scientific, literary, educational, or charitable organization entitled to exemption under paragraph 1 of Article XXI, or as an eligible recipient of the charitable contributions referred to in paragraphs 5 and 6 of Article XXI, with a view to avoiding duplicate application by such organizations to the administering agencies of both Contracting States. The diplomatic notes also provide that if a Contracting State determines that the other Contracting State maintains procedures to determine such status and rules for qualification that are compatible with such procedures and rules of the first-mentioned Contracting State, it is contemplated that such first-mentioned Contracting State shall accept the certification of the other administering agency of the other Contracting State as to such status for the purpose of making the necessary determinations under paragraphs 1, 5 and 6 of Article XXI.
SCOPE OF TREATY RELIEF
The U.S. and Canadian Competent Authorities, pursuant to Article XXVI (Mutual Agreement Procedure) of the Treaty, have entered into a mutual agreement that implements Article XXI as contemplated by the diplomatic notes. Under the terms of the agreement, recognized religious, scientific, literary, educational, or charitable organizations that are organized under the laws of either the U.S. or Canada will automatically receive recognition of exemption without application in the other country. U.S. organizations must be recognized as exempt under section 501(c)(3) of the Code in order to qualify for this treatment. Similarly, Revenue Canada must recognize Canadian organizations as Canadian registered charities.
Moreover, recognized charitable organizations resident in one country will be eligible to receive deductible charitable contributions from residents of the other country. However, in the case of a contribution (or contributions) by a resident or citizen of the United States (other than a contribution to a college or university at which the citizen or resident or a member of his family is or was enrolled), U.S. law requires that the amount of deductions in the aggregate for a taxable year may not exceed a certain percentage of the donor’s Canadian source income. Any excess contribution that is not deductible as a result of this limitation may be carried over and deducted in subsequent taxable years, subject to the same limitations.
Furthermore, the U.S. will presume, in the absence of receiving certain financial information, that all Canadian registered charities are private foundations. Accordingly, if a Canadian registered charity does not provide the U.S. with the financial information needed to determine its foundation classification, the organization will be presumed to be a private foundation under U.S. law, the donor ’s deductible contributions will be limited to 30 percent of the donor’s Canadian source income, and the organization will not have the benefit of being listed in Publication 78, Cumulative List of Organizations. Moreover, although the Canadian registered charity will not be required to apply for exemption, a donor claiming a charitable contribution deduction will be required to show that the organization is a Canadian registered charity.
Alternatively, if a Canadian registered charity provides the U.S. with the information needed to determine its foundation classification, aside from automatic recognition of exemption, the organization will be listed in Publication 78, as a foreign organization, and will be eligible to receive contributions deductible up to 50 percent of the donor’s Canadian source income, assuming it is determined not to be a private foundation. If the Canadian registered charity submits information that establishes that it is a private foundation, it will nevertheless be listed in Publication 78, but deductible contributions will be limited to 30 percent of the donor’s Canadian source income.
Under the agreement, recognition of exemption by the U.S. of a Canadian registered charity will remain in effect until the U.S. determines that the organization fails to satisfy the requirements for exempt status under U.S. law. Further, Canadian organizations will be required to file the applicable Form 990, Return of Organizations Exempt From Income Tax, or Form 990-PF, Return of Private Foundation, unless they receive less than $25,000 of U.S. source income.
DISCLOSURE REQUIREMENT
Section 6114(a) of the Code requires that taxpayers taking the position that a
U.S. treaty overrules a general U.S. tax principle or law must disclose such position on a return of tax or, if no return of tax is required to be filed, as the Internal Revenue Service may prescribe. Accordingly, taxpayers claiming exemption or charitable contribution deductions pursuant to this agreement must disclose this position on their income tax return for the year in which the charitable contribution deduction or claim for exemption is made. Taxpayers may use Form 8833 for this purpose, or they may attach to their return a separate statement indicating that they are claiming exemption or a charitable contribution deduction pursuant to Article XXI of the Treaty. Taxpayers may make reference to Notice 99–47 in their disclosure statement.
DRAFTING INFORMATION
The principal author of this notice is Patrick Kevin Orzel of the Office of Assistant Commissioner (International). For further information regarding this notice, contact Mr. Orzel at (202) 874-1550 (not a toll-free number).