Cross-Border Giving Update: Canadian Charities Cannot Use The Canada- US Tax Treaty To Fund American Charities Directly

A major ruling from the Federal Court of Appeal (the "FCA") has sent a clear message to Canadian registered charities: The Canada-US Tax Treaty (the "Treaty") does not permit Canadian registered charities to make gifts to US charities.

In the case of Priority Foundation v. Minister of National Revenue, 2025 FCA 180, the Court affirmed that the Minister of National Revenue was correct to revoke a Canadian charity's registration because it made gifts to U.S. charities (501(c)(3) organizations). This decision clarifies a crucial point of law for anyone involved in international philanthropy.

The Dispute: When Is a Gift a "Qualifying Disbursement"?

Priority Foundation, a registered Canadian public foundation, had made significant gifts to charities in the United States. When the Canada Revenue Agency (the "CRA") audited the foundation, it determined these were non-qualifying disbursements under the Income Tax Act (the "ITA"). Only gifts made to a qualified donee (which U.S. charities generally are not) count as a qualifying disbursement necessary to maintain a charity's registered status.

Priority Foundation rested its entire appeal on a specific section of the Treaty (Article XXI(7)). This provision states that a gift to a U.S. charity "shall be treated, for the purposes of Canadian taxation, as a gift to a registered charity." Priority Foundation argued that this clause effectively "deemed" their gifts to US charities to be gifts to a qualified donee, making them permissible under the ITA.

The FCA's Verdict: A Tax Shield, Not a Regulatory Passport

The FCA, in a unanimous decision, rejected Priority Foundation's interpretation. The FCA emphasized that the purpose of Article XXI(7) is not to change the regulatory rules for Canadian charities, but rather to provide a specific, limited tax relief to donors.

Here is the core breakdown of the FCA's reasoning:

1. Donor Relief vs. Charity Regulation: The Court concluded that Article XXI(7) is designed to help Canadian resident donors (an individual or corporation) claim a deduction or credit on their Canadian tax return for a gift to a U.S. charity if they have US-source income.
2. Focus on the Gift, Not the Status: The provision says the gift is treated as a gift to a registered charity; it does not say that the U.S. organization itself is deemed to be a "qualified donee" for all regulatory purposes under the ITA.
3. The ITA is the Master: Canadian registered charities must comply with the strict rules of the ITA, including the requirement to make disbursements only to "qualified donees." Since the U.S. charities were not individually registered with the CRA as qualified donees, the gifts were a breach of a key restriction under the ITA and the revocation was valid.

The Major Takeaway for Canadian Philanthropy

The Priority Foundation decision is a critical reminder for any Canadian registered charity with cross-border aspirations:

• No Direct Giving: You cannot maintain your charitable status by simply writing cheques to U.S. 501(c)(3) organizations (or any non-qualified donee). Doing so is a non-qualifying disbursement and will jeopardize your registration.
• The Right Way to Give: If your charity wishes to support work in the U.S., you must use one of the approved legal mechanisms:
  1. Granting funds to a U.S. charity that is separately registered with the CRA as a qualified donee (a rare designation).
  2. Using the older "Direction and Control" mechanism, which requires the Canadian charity to supervise the foreign spending as its own activity.
  3. Using the new "Qualifying Disbursement" rules (in force since 2023), which allow grants to non-qualified donees (including US charities), provided the Canadian charity meets new due diligence and reporting requirements for the grant.

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