17 Dec Tips for Cross-Border Philanthropy
Mélissa V. La Venia B.A., J.D.
Senior Manager – International Tax
Raymond Chabot Grant Thornton
The holiday season often brings up thoughts of charitable giving — for personal reasons or in preparation for the upcoming tax season. In 2018, Canadian families are considering more and more making donations to charitable organizations outside of Canada. However, for anyone looking to take advantage of a tax credit, an international gift could lead to an unpleasant surprise.
Income tax law generally allows individuals to claim up to 75% of their annual income in eligible charitable donations. The credits generated by an eligible charitable donation are only a portion of the donation amount, with a top limit of 33%. The portion of the donation amount available in the form of a credit depends on the person’s annual income. Eligible charitable donations include gifts to registered charities and qualified donees, among others. As a general rule, these entities must be resident in Canada. Each province has its own rules about tax credits available for donations.
Individuals are entitled to give to organizations that do not appear on the CRA’s list of charities, but donations of this kind will not generate tax credits. This limitation applies to donations made to charities outside of Canada. Before making international donations, individuals should check what protection is available in the tax treaty between Canada and the country in which the charity is located or registered.
For example, the tax treaty between Canada and the United States grants special treatment to donations made by Canadian residents to American charities. The organization must be equivalent to one that would qualify as a registered charity in Canada if it was created and located there. Individuals can take advantage of tax credits for donations to American charities up to 75% of U.S.-source income. This means that if the person does not have any U.S.-source income, he or she will not be entitled to tax credits in Canada. However, there is an exception that applies to eliminate the requirement of U.S.-source income when the American charitable organization is a college or university attended by the individual or a member of his or her family (family members are limited to parents, siblings, spouses, and descendants).
In cases where tax treaty protections do not apply, individuals may instead consider giving to Canadian organizations that have ties to related or sister organizations in the country where they wish to make a donation. They can also give to charities outside of Canada that have previously received donations from Her Majesty in right of Canada and that are registered with the CRA, to take advantage of a tax credit in Canada. These foreign charities are recognized by the CRA. In the case of a Canadian family foundation, it can seek to establish a relationship with a foreign charity or potentially create one.
Before making donations abroad, Canadian residents should consider whether they would like to obtain the tax benefit of a charitable donation. If that is the case, they should review their options in order to optimize tax benefits.