Philanthropy can strengthen one’s estate plan. In Canada, an estate plan may integrate charitable donations to leave a legacy to our community while taking advantage of the associated tax benefits. Such strategy can be implemented during the donor’s lifetime or upon the donor’s death.

If the donor is a U.S. citizen living in Canada (hereinafter referred as a “U.S. donor“), does the strategy work?

U.S. donor & U.S. Tax Filings

U.S. donors are entitled to a deduction for charitable donations to charitable organizations that are organized in the U.S. and that meet specific criteria.[1]  Interestingly, charitable donations to foreign organizations are not deductible unless an exemption applies; this is where the relevancy of the Canada-U.S. Tax Treaty[2] (the “Treaty“) is important.

The Treaty provides an exception where U.S. donors are entitled to a deduction on their U.S. tax return for their charitable donations to Canadian charities with some limitations:

• The Canadian charity must be recognized by the Canada Revenue Agency (which indirectly means it meets the criteria of a U.S. charity under U.S. law),
• The deduction can only apply to the donor’s Canadian sourced income for that tax year and the donation must be within the donor’s adjusted gross income percentage limit from Canadian source income,[3] and
• Any excess contribution that was not deductible (referred as the “carryover”) may be carried forward and deductible, subject to some limitation.

A U.S. donor claiming the Treaty exemption for a charitable donation deduction for a contribution to a Canadian charity must enclosed Form 8833 with their U.S. tax return.

Canadian Private Foundations and Canadian Donor Advised Funds

Canadian private foundations (“PF“) and Canadian donor advised funds (“DAF“) may require some additional scrutiny during the planning stage to ensure compliance with the U.S. rules.

A U.S. donor is allowed a deduction for donations to a Canadian DAF that is a Canadian registered charity that qualifies under U.S. law. The deduction is also limited to a donor’s adjusted gross income percentage from Canadian source income. For donations to a Canadian DAF, the donor must ensure that the DAF’s sponsoring organizations are also Canadian charities, and the donation is not for non-charitable purposes (of the U.S.).

For donations to a Canadian PF, there is a deduction limit of thirty percent (30%) of Canadian source income and the U.S. donor may have an additional specific disclosure to provide additional information when filing its U.S. tax return.

Lastly if the U.S. donor has any signing authority, financial interest or other authority over the Canadian PF or DAF financial account, there may be a requirement to disclose the PF or DAF’s account when submitting the donor’s FinCen Form 114 (referred as the “FBAR“). This FBAR obligation can easily be overlooked.

Conclusion

Canadian professional advisors ought to be cautious when advising U.S. donors.  Although most charitable donations to Canadian charities are likely allowed as a deduction for U.S. tax purposes, it comes with some limitations; notably, the deduction is only applied for Canadian source income and only if the Canadian registered charity meets the U.S. requirements of a qualified charity.

Lastly, what if the Canadian charity (or private foundation) loses its charity status? Thus, the importance of careful and cautious planning when involving U.S. donors…

[1] See §170(c)

[2] Article XXI of the Treaty.

[3] There is an exception for donations to a college or university at which the U.S. donor, or a family member, is or was enrolled.