On May 19, 2015, the Court of Quebec released its judgment in
Emballages Starflex Inc. v. Agence du Revenu du
Québec in which the court held that for donations made
by residents of Quebec to U.S. charities, donors may not claim the
taxable benefit afforded under the Canada-U.S. Tax
Convention (the "Treaty") in
respect of such donations under the Taxation Act (Quebec).
The Court went on to hold that this was also the case in situations
where a taxable benefit in respect of such donations could be used
to reduce the income taxes owed under the federal Income Tax
Emballage Starflex Inc. ("Starflex")
is a company located in Quebec that manufactures packaging
equipment. For its taxation year ending on August 31, 2009,
Starflex claimed a deduction from its income of $1,350,953 in
respect of various charitable donations that it made throughout the
year. In particular, it claimed deductions in respect of $492,575
worth of donations to charities located in the United States.
Starflex claimed this deduction based on Article XXI(7) of the
Treaty, which permits the taxable benefit ordinarily flowing from
donations made to US registered charities to be used to reduce the
income tax payable on US sourced income.
Revenu Québec rejected Starflex's use of the US
donation receipts on the grounds that Article XXI(7) of the Treaty
does not apply to Quebec's Taxation Act since Quebec
it is not a party to the Treaty.
Interestingly, the Taxation Act (Quebec) recognizes
certain benefits granted by tax treaties to which Canada has
entered but to which Quebec is not a party. Section 488 of the
Taxation Act provides an exclusion from income of amounts
that are exempt from income tax in Québec or in Canada by
virtue of a provision of a tax agreement entered into with a
country other than Canada.
The Court concluded, however, that section 488 did not apply in
the context of Article XXI(7) of the Treaty because Article XXI(7)
provided "relief from taxation" and not "exemption
from taxation" as is required by section 488 of the
Taxation Act. This interpretation is problematic for
several reasons. First, the interpretation is overly technical and
ignores the purpose of the provision, which is to permit the
application to Quebec's fiscal legislation of the effects of
tax treaties entered into by Canada. Second, Article XXI(7)
provides that donations made to US charities are treated as if the
donations had been made to a Canadian charity. Under the
Taxation Act, a donation by a corporation to a charity in
Canada permits the corporation to deduct from its taxable income
the value of such donations. The effect of such a deduction is that
such amounts are exempt from taxation.
Fortunately, Starflex has appealed the decision to the Court of
Appeal of Quebec. It is hoped that the Court of Appeal will
interpret section 488 of the Taxation Act to give effect
to the benefits of Article XXI(7) of the Treaty for Quebec donors.
Until such time, care must be taken when making charitable
donations by residents of Quebec to U.S. charities that are not
recognized as qualified donees in Canada.
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