How to get a tax deduction for donations to U.S. charities
Our tax system offers generous benefits to donors who choose to make gifts to registered charities. Individuals can claim both federal and provincial tax credits worth up to 50 per cent of the amount donated, depending on your province of residence. Corporations can claim a deduction from their taxable income for qualifying donations. In both cases, the amount that can be claimed is limited to 75 per cent of net income for the year.
So, what exactly constitutes a valid donation?
Well for starters, the gift must be made to a registered charity, which is defined as a charitable organization, public or private foundation that is resident in Canada and that has obtained official Canada Revenue Agency registered status. As of this week, there are 85,881 registered charities in Canada.
You can find out whether the charity you wish to benefit is registered by visiting the CRA's website (cra-arc.gc.ca) and on the "Charities and giving" page, going to the "Charities Search" box.
But what if you make a donation to a U.S. charity?
You're in luck, since the tax treaty between Canada and the U.S. does provide some limited tax relief for gifts made by Canadian residents and corporations to U.S. charitable organizations, but the rules are slightly complicated.
In a nutshell, if your tax return includes some U.S. source income, such as U.S. dividends for example, you can claim your gifts to U.S. charities up to 75 per cent of the net U.S. income you reported on your Canadian return. In a couple of cases, however, you may be able to claim your U.S. gifts up to 75 per cent of your worldwide net income. The first situation is if you live in Canada, but near the U.S. border, throughout the year and commute to your principal workplace or business in the U.S., provided that U.S. employment or business was your main source of income for the year. Secondly, your U.S. donation claim won't be limited to only your net U.S. income if your gift was made to a U.S. college or university at which you or a family member either is or was enrolled, or if your gift is to a prescribed U.S. university "the student body of which ordinarily includes students from Canada."
A recent decision from the Court of Quebec, however, spells trouble for Quebec donors looking to donate money to U.S. charities. The court ruled that a Quebec manufacturing company was precluded from claiming nearly $500,000 worth of U.S. donations on its Quebec return against its U.S. source income, finding that the section of the Canada-U.S. tax treaty that would otherwise allow the claim doesn't apply to Quebec since Quebec is not a party to the Treaty.
Troy McEachren, a tax partner with Miller Thomson LLP in Montreal, called the court's interpretation "problematic" in a case comment issued this week. He argues that the interpretation is "overly technical and ignores the purpose of the provision, which is to permit the application to Quebec's fiscal legislation of the effects of tax treaties entered into by Canada."
Fortunately for Quebec donors, the company has appealed the decision to the Court of Appeal of Quebec. So, stay tuned, but in the meantime, Quebec donors may wish to tread cautiously.