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Federal Tax - Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. Priority Foundation v. Canada (National Revenue)
In Priority Foundation v. Canada (National Revenue) (Fed CA, 2025) the Federal Court of Appeal dismissed the appellant's appeal, here brought against "a notice of intention to revoke its registration as a charity":[1] Priority Foundation appeals to this Court, pursuant to paragraph 172(3)(a.1) of the Income Tax Act, R.S.C. 1985, c. 1, 5th Supp. (ITA), in respect of a notice of intention to revoke its registration as a charity. The notice was issued on November 10, 2022, by the Minister of National Revenue (or the Canada Revenue Agency (CRA) acting on the Minister’s behalf) pursuant to subsections 149.1(3) and 168(1) of the ITA. The revocation took effect on January 14, 2023, when a copy of the notice was published in the Canada Gazette.
[2] The Minister’s decision to revoke Priority’s status as a registered charity was based on the Minister’s opinion that Priority failed to comply with the requirements of the ITA by making gifts to non-qualified donees. At issue are gifts made by Priority to charities in the United States.
[3] Priority submits that, by operation of article XXI(7) of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, September 26, 1980, Can. T.S. 1984 No. 15 (Tax Convention), a gift to a U.S. charity is to be treated, for the purposes of Canadian taxation, as a gift to a registered charity under the ITA (Gift Provision). Since a registered charity is a "“qualified donee”" under the ITA, the Minister had no grounds to revoke its charitable status.
[4] This is not the first time the interpretation of article XXI(7) of the Tax Convention has been raised in this Court (see Prescient Foundation v. Canada (National Revenue), 2013 FCA 120 and Public Television Association of Quebec v. Canada (National Revenue), 2015 FCA 170). However, in both cases, this Court was able to resolve the appeals without interpreting the Gift Provision in the Tax Convention.
[5] The parties agree that the interpretation of article XXI(7) of the Tax Convention will resolve the outstanding issues between them.
....
[19] Priority now appeals to this Court under paragraph 172(3)(a.1) of the ITA from the Minister’s failure to confirm or vacate the notice of intention to revoke within 90 days of Priority having served its notice of objection. Priority submits that the Minister’s interpretation of article XXI(7) of the Tax Convention is wrong in law.
III. Issues
[20] The issue in this appeal is whether the Minister erred in revoking Priority’s charitable registration on the basis that Priority made gifts to non-qualified donees. The determination of this question involves the interpretation of article XXI(7) of the Tax Convention and its impact on the definition of "“qualified donee”" in subsection 149.1(1) of the ITA. Put differently, I must decide whether article XXI(7) of the Tax Convention permitted Priority to maintain its eligibility for charitable registration by making gifts to U.S. 501(c)(3) entities.
IV. Analysis
A. Standard of review
[21] Decisions that are subject to statutory appeals under paragraph 172(3)(a.1) of the ITA are to be reviewed on appellate standards. Questions of law, including questions of treaty interpretation, are reviewed on a standard of correctness. For questions of fact or mixed fact and law where the legal principle is not readily extricable, the standard of review is palpable and overriding error (Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 at para. 37; Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 at para. 50; Athletes 4 Athletes Foundation v. Canada (National Revenue), 2021 FCA 145 at para. 16).
....
B. Legislative Framework
[23] Before turning to the interpretation of article XXI(7) of the Tax Convention, I find it useful to provide a brief and high-level overview of the way in which the ITA applies to charitable gifts. Although some of the provisions of the ITA have been amended over the years at issue, except as otherwise noted, the changes are not relevant for the purposes of Priority’s appeal.
[24] Generally, when a corporation makes a charitable gift to a qualified donee, the corporation is entitled to claim a deduction of the amount of the gift in computing its taxable income (paragraph 110.1(1)(a) of the ITA). An individual donor, on the other hand, is entitled to claim a tax credit in the computation of their tax payable for a taxation year (subsections 118.1(1) and (3) of the ITA). Eligible charitable gifts that may be claimed in a taxation year are generally limited to a percentage of the donor’s net income for that taxation year. Unused eligible charitable gifts may be carried forward for up to 5 years.
[25] Throughout most of the audit period, subsection 149.1(1) of the ITA defined a "“qualified donee”" as follows:qualified donee, at any time, means a person that is
donataire reconnu Sont des donataires reconnus à un moment donné :
(a) registered by the Minister and that is
a) toute personne enregistrée à ce titre par le ministre qui est :
(i) a housing corporation resident in Canada and exempt from tax under this Part because of paragraph 149(1)(i) that has applied for registration,
(i) une société d’habitation résidant au Canada et exonérée de l’impôt prévu à la présente partie par l’effet de l’alinéa 149(1)i) qui a présenté une demande d’enregistrement,
(ii) a municipality in Canada,
(ii) une municipalité du Canada,
(iii) a municipal or public body performing a function of government in Canada that has applied for registration,
(iii) un organisme municipal ou public remplissant une fonction gouvernementale au Canada qui a présenté une demande d’enregistrement,
(iv) a university outside Canada that is prescribed to be a university the student body of which ordinarily includes students from Canada, or
(iv) une université située à l’étranger, visée par règlement, qui compte d’ordinaire parmi ses étudiants des étudiants venant du Canada,
(v) a foreign charity that has applied to the Minister for registration under subsection (26),
(v) un organisme de bienfaisance étranger qui a présenté au ministre une demande d’enregistrement en vertu du paragraphe (26);
(b) a registered charity,
b) tout organisme de bienfaisance enregistré;
(c) a registered Canadian amateur athletic association, or
c) toute association canadienne enregistrée de sport amateur;
(d) Her Majesty in right of Canada or a province, the United Nations or an agency of the United Nations;
d) Sa Majesté du chef du Canada ou d’une province, l’Organisation des Nations Unies ou une institution reliée à cette dernière. [26] For the purposes of my analysis below, the relevant qualified donees include a registered charity, a university outside of Canada whose student body ordinarily includes students from Canada and that has been registered by the Minister, and a foreign charity that has successfully applied for registration to the Minister under subsection 149.1(26) of the ITA.
[27] A "“registered charity”" is defined in subsection 248(1) of the ITA. It includes a charitable organization, private foundation or public foundation, that is resident in Canada and was either created or established in Canada and that has applied to the Minister for registration and that is at that time registered as a charitable organization, private foundation or public foundation. Pursuant to paragraph 149(1)(f) of the ITA, a registered charity is exempt from paying tax on its income. The registered charity may also issue receipts to donors for the gifts it receives. Where a registered charity fails to comply with the requirements of the ITA, the Minister may revoke the registered charity’s charitable registration, one effect of which will be the loss of its tax-exempt status (ITA, subsections 149.1 (2), (3), (4) and (4.1), paragraph 168(1)(b), and subsection 168(2)).
[28] Pursuant to subsection 149.1(1) of the ITA, a public foundation, like Priority, must be a charitable foundation, which is defined as a corporation or trust that is constituted and operated exclusively for "“charitable purposes”" and that is not a charitable organization. As this Court noted in Prescient, "“[a]s a general rule, charitable organizations engage in charitable activities, while charitable foundations raise money for charitable purposes”" (Prescient at para. 15).
[29] During the audit period, subsection 149.1(1) of the ITA defined "“charitable purposes”" as including "“the disbursement of funds to a qualified donee…”" [emphasis added].
[30] Given the residency and creation or establishment requirements in the subsection 248(1) definition of a "“registered charity”", a foreign charity such a U.S. 501(c)(3) entity does not meet the definition of a qualified donee under the ITA. As a result, having regard only to the provisions of the ITA, a gift made by a Canadian taxpayer to a foreign charity is ineligible for tax relief unless the Minister registers the foreign charity as a qualified donee.
[31] That said, there are situations that permit cross-border tax relief. One such situation is where a country has a bilateral agreement with another country to provide tax relief. The Tax Convention is one such agreement. Article XXI provides for limited reciprocal tax relief in certain circumstances where a resident of one country makes a gift to a tax-exempt organization that is a resident of the other country.
C. The Tax Convention
[32] The Tax Convention was signed in September 1980 and enacted into Canadian law by the Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20. It replaced the then existing tax convention between Canada and the United States dating back to 1942. Since its signature in 1980, the Tax Convention has been amended by the adoption of five protocols, the latest of which was signed in September 2007.
[33] Article XXI of the Tax Convention addresses the reciprocal recognition of tax-exempt status for certain types of organizations, as well as the treatment of cross-border gifts and contributions. At issue in this appeal is the interpretation of article XXI(7), which reads as follows:7. For the purposes of Canadian taxation, gifts by a resident of Canada to an organization that is a resident of the United States, that is generally exempt from United States tax and that could qualify in Canada as a registered charity if it were a resident of Canada and created or established in Canada, shall be treated as gifts to a registered charity; however, no relief from taxation shall be available in any taxation year with respect to such gifts (other than such gifts to a college or university at which the resident or a member of the resident's family is or was enrolled) to the extent that such relief would exceed the amount of relief that would be available under the Income Tax Act if the only income of the resident for that year were the resident's income arising in the United States. The preceding sentence shall not be interpreted to allow in any taxation year relief from taxation for gifts to registered charities in excess of the amount of relief allowed under the percentage limitations of the laws of Canada in respect of relief for gifts to registered charities.
[emphasis added]
7. Aux fins de l'imposition canadienne, les dons versés par un résident du Canada à une organisation qui est un résident des États-Unis, qui est généralement exempt de l'impôt des États-Unis et qui, au Canada, pourrait avoir le statut d'organisme de charité enregistré si elle était un résident du Canada et si elle avait été créée ou établie au Canada, sont considérés comme dons versés à un organisme de charité enregistré; toutefois, aucun allégement fiscal n'est accordé au cours d'une année d'imposition quelconque pour des dons (autres que ceux versés à un collège ou à une université auxquels le résident ou un membre de sa famille est ou était inscrit) dans la mesure où un tel allégement serait supérieur au montant de l'allégement accordé en vertu de la Loi de l'impôt sur le revenu si le seul revenu du résident pour cette année d'imposition était le revenu du résident provenant des États-Unis. La phrase précédente n'est pas interprétée comme permettant, au cours d'une année d'imposition quelconque, un allégement fiscal pour des dons à des organismes de charité enregistrés d'un montant qui excède celui accordé, en matière de plafond des pourcentages, en vertu de la législation du Canada à l'égard de l'allégement pour des dons à des organismes de charité enregistrés.
[je souligne] At paras 39-87 the court walks through the text, context and purpose elements of interpretatiing the tax treaty.
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