Some notes on tax credits for Canadians giving to US charities

One interesting part of the Canada-US tax treaty is that it allows tax residents of Canada to get a tax credit for donating to a US charity if they have US-source income^[1]. You should avoid relying on this rule if you can, e.g. by using RC Forward which is a Canadian charity that forwards donations to foreign charities, but you might want to donate to a charity that RC Forward doesn't support and doesn't have a Canadian entity. The rule in the tax treaty is kinda complicated, so in plain language the rule is that you can treat gifts to a US entity the same way as a gift to a Canadian charity (on Schedule 9 on your tax return), for up to 75% of your net US-source income^[2], if:

• the entity is generally exempt from US income tax, and
• the entity could qualify as a registered charity^[3] in Canada (if was created/established in Canada)

The treaty doesn't define US-source income for the purpose of donations. It speaks of income "arising in the United States" but doesn't define "arising" (it defines "arising" for the purposes of other articles, but none of those definitions apply for the article about tax-exempt entities). I couldn't find any official guidance about what counts as US-source income; things like dividends from US companies probably count but it's not clear to me if e.g. business income from selling products to people in the US counts.

The requirement that the entity could qualify as a registered charity in Canada is a little complicated – Canada has different rules for what can be a charity than the US, and is largely stricter than the US. The entity doesn't need to be a 501(c)(3), but most other kinds of tax exempt entities (e.g. political parties) wouldn't qualify as a registered charity in Canada. Canada doesn't have a statutory definition for what counts as a registered charity; instead the rules are based on common-law precedents which say that the charity has to have one of four qualifying purposes (relief of poverty, advancement of education/religion, or other purposes beneficial to the community).

One thing to note is that several things that are effectively requirements for actually being a registered charity in Canada (e.g. eligibility rules for directors) aren't formally requirements. The Income Tax Act uses wording that says the government "may refuse to register" or "may... revoke the registration" in a few places, not "shall". In practice the government will refuse to register charities that don't meet those requirements, but this doesn't matter here where you only care about if it could qualify.

1. ^{^}

   The treaty also allows the opposite direction: US tax residents donating to Canadian charities can sometimes get a tax benefit for that too.

2. ^{^}

   The treaty itself doesn't include the 75% cutoff; the rule is that you can only get a tax credit as if your only income was your US-source income, and the normal rule is that you can get a credit for up to 75% of your income.

3. ^{^}

   Technically there are some other kinds of qualified donees that count too