Cross-border philanthropy is a growing area of interest for donors in Canada and the U.S., but navigating the tax rules, compliance requirements, and charitable structures can be challenging. Here’s a guide to the essential aspects of cross-border philanthropy, including the Canada-U.S. tax treaty, dual-qualified charities, and compliance considerations.
1. Canada-U.S. Tax Treaty and Philanthropy
The Canada-U.S. Tax Treaty provides a framework that allows some flexibility for cross-border charitable donations, helping to avoid double taxation and enabling limited deductions for cross-border gifts. However, tax benefits are typically limited to income from the country in which the donation is made:
- For U.S. Residents Donating to Canadian Charities
- U.S. donors can receive a tax deduction against Canadian-sourced income for donations to Canadian charities, as long as the charity qualifies under U.S. standards.
- For U.S. residents, only donations to specific Canadian institutions, like certain universities attended by the donor or a family member, qualify for deductions against U.S. income.
- For Canadian Residents Donating to U.S. Charities:
- Canadian donors can claim a tax credit against U.S.-sourced income for donations to U.S. charities. However, donations without U.S.-source income to U.S. charities are not eligible for Canadian tax credits.
2. Charitable Structures for Cross-Border Giving
Both Canada and the U.S. allow for several philanthropic structures, each with its own tax implications and compliance requirements:
- Private Foundations: Common in both countries, private foundations allow donors more control but require significant administrative effort and compliance. In Canada, private foundations face limitations on business activities, while in the U.S., private foundations must meet minimum distribution requirements and can incur penalties if these are not met.
- Donor-Advised Funds (DAFs): DAFs are increasingly popular in both Canada and the U.S. These funds allow donors to contribute, receive an immediate tax deduction, and then recommend grants over time. However, DAFs must comply with specific CRA and IRS regulations, and if set up in the U.S., the U.S. sponsor foundation must approve grants to foreign charities, ensuring they meet regulatory standards.
- Example: A Canadian donor using a DAF in the U.S. can recommend grants to Canadian or U.S. charities, provided the Canadian charity meets the definition of a “qualified donee” in Canada. This structure can help Canadian donors interested in supporting causes in the U.S., while maintaining compliance with CRA regulations.
- Dual-Recognized Charities: Some charities qualify for tax exemption in both Canada and the U.S., allowing donors in both countries to receive tax benefits for donations. The Canada-U.S. Tax Treaty allows donations to dual-recognized charities to be eligible for tax benefits against income in both countries.
3. Using “Friends Of” Organizations for Cross-Border Donations
One strategy for simplifying cross-border philanthropy is to use a “Friends Of” organization. These are domestic charities established to support foreign charities, such as “American Friends of [Foreign Charity].” These organizations raise funds in one country and grant them to a specific foreign charity. For instance, this is how these donations are structured for Canadians who enjoy watching and donate to the U.S. Public Broadcasting Systems (PBS) channels for stations close to the Canadian border,
How It Works: Friends Of organizations provide tax deductions to donors by avoiding direct donations to foreign charities that are often ineligible for tax benefits. By routing contributions through these organizations, donors can support international causes while complying with local tax regulations.
Example: If a U.S.-based donor wants to support a Canadian conservation project, they could donate to an “American Friends of Canadian Conservation” organization. This ensures that the donation is eligible for a U.S. tax deduction, and the funds can be effectively directed toward the Canadian project.
4. Umbrella Organizations and Compliance in Cross-Border Giving
For donors interested in global causes, umbrella organizations like the Red Cross can be an effective option. These organizations are registered charities in multiple countries and work on international causes, providing donors with tax benefits in their home country.
New Canadian rules allow charities to partner with “qualifying intermediaries,” enabling Canadian charities to fund projects with non-Canadian entities under strict agreements. This provides Canadian donors with tax-efficient ways to support international causes without jeopardizing their tax deductions.
Example: A Canadian charity can partner with a U.S.-based intermediary to fund disaster relief in a third country, ensuring that funds are used appropriately while meeting CRA compliance requirements.
5. Expenditure Responsibility and Equivalency Determinations
For U.S. private foundations making cross-border grants, compliance is essential to avoid penalties. Two key methods are used:
- Equivalency Determination (ED): An ED confirms that a foreign organization operates similarly to a U.S. public charity. A U.S. private foundation must obtain an opinion from a qualified tax practitioner to prove equivalency.
- Expenditure Responsibility (ER): If an ED cannot be obtained, the foundation must exercise ER, which involves maintaining oversight of how the grant is used. ER includes a pre-grant inquiry, a written grant agreement, and regular follow-up reporting to ensure funds are used for the intended charitable purpose.
Example: A U.S. foundation wanting to support a non-U.S. charity without an ED can use ER. This involves setting up a grant agreement, requiring annual reports, and monitoring the use of funds to comply with IRS standards. This certainly adds to the already increased complexity of using a private foundation.
6. Valuation and In-Kind Donations for Cross-Border Gifts
Non-cash or in-kind donations, such as artwork or property, present unique challenges in cross-border philanthropy. Tax treatment varies depending on the asset type, the donor’s tax residency, and the charity’s country of registration.
- In the U.S.: The IRS limits deductions for in-kind donations based on the asset type and its use by the receiving charity. For example, artwork donated to a museum is typically deductible at fair market value (FMV) if it is related to the charity’s purpose.
- In Canada: Similar rules apply, with the CRA requiring certified valuations for gifts exceeding CAD $1,000 and specific documentation if donated to foreign institutions or through cross-border intermediary structures.
7. General Compliance Considerations for Cross-Border Philanthropy
Both U.S. and Canadian donors face stringent compliance requirements, particularly with respect to anti-terrorism and anti-money laundering regulations. Performing due diligence on the foreign recipient charity is crucial to avoid penalties.
OFAC and Sanctions: U.S. charities must ensure that foreign donations do not go to sanctioned organizations or individuals. This includes maintaining records and vetting recipient organizations against the Office of Foreign Assets Control (OFAC) list.
Due Diligence for Donors: For high-net-worth donors, especially those contributing substantial funds to foreign organizations, consulting with legal and tax professionals is recommended to ensure compliance with local and international laws.
8. Likelihood of Greater CRA Review Scrutiny
As part of the CRA Review process, after the assessment of your tax return, it is very common for the CRA to require documentation to support any cross-border gifts or donations that are made. Therefore, it is important that you maintain adequate records to support the donations.
Final Thoughts: Maximizing Impact Through Cross-Border Philanthropy
Cross-border philanthropy offers significant potential to make a global impact, but requires careful planning and adherence to both U.S. and Canadian regulations. Whether utilizing dual-qualified charities, Friends Of organizations, or donor-advised funds, understanding the tax and compliance implications is essential to ensure that cross-border donations achieve their intended impact while providing the best possible tax benefits. Working with legal, financial, and tax professionals familiar with cross-border philanthropy can help donors navigate these complexities, ensuring both compliance and effective support for international causes. Please contact Cardinal Point to discuss your unique situation.