The Nonprofit FAQ

Are donations to Canadian organization deductible for US taxpayers?

Peter Finn asked: Can a Canadian based non profit issue tax receipts to US citizens for donations and will the tax receipts be honoured by the US IRS as a charitable donation and thus reduce their taxable income Sandy Deja (exempts@aol.com) answered July 31, 2001: This is actually a fairly common question. The IRS announced, in notice 99-47, that: 1. "...recognized religious, scientific, literary, educational, or charitable organizations that are organized under the laws of either the U.S. or Canada will automatically receive recognition of exemption without application in the other country..." and 2. "...recognized charitable organizations resident in one country will be eligible to receive deductible charitable contributions from residents of the other country..." Unfortunately, the amount of the charitable contribution deduction for US citizens is limited by the amount of the donor’s Canadian-sourced income. The IRS kindly lists the phone number of a person in Washington, D.C., to call if you need clarification - Mr. Orzel at (202) 874-1550 (not a toll-free number). In light of this, Canadian charities are sometimes interested in setting up a U.S. based charity to raise funds for them. Unfortunately again, the IRS will not recognize tax exempt status or deductibility of contributions for an organization specifically formed to support a charity located outside the U.S. That would undermine the intent of section 170(c)(2)(A) of the Internal Revenue Code, which only allows deductibility for charitable contribution made to organizations "(A) created or organized in the United States or in any possession thereof, or under the law of the United States any State, the District of Columbia, or any possession of the United States;" In Revenue Ruling 63-252 (see http://www.taxlinks.com/rulings/1963/revrul63-252.htm), the IRS describes several arrangements involving foreign charities. Example (4) in the Revenue Ruling suggests an arrangement that could work in these circumstances. The U.S. charity would have to be organized for a BROADER purpose that could encompass supporting the specific Canadian charity. Naturally, however, the U.S. charity would have to be open to supporting other charities, groups or projects as well. Channing Hillway raised a follow-up question and asked for further explanation: One must ask how the many "Friend of..." organizations in the US function to raise funds for foreign NGOs if there are restrictions on tax deductibility of contributions. Sandy Deja replied: In my earlier email, I mentioned IRS Revenue Ruling 63-252, which describes several arrangements involving foreign charities. Example 1 is as follows: "(1) In pursuance of a plan to solicit funds in this country, a foreign organization caused a domestic organization to be formed. At the time of formation, it was proposed that the domestic organization would conduct a fund-raising campaign, pay the administrative expenses from the collected fund and remit any balance to the foreign organization." The IRS concluded: "...it seems clear that the requirements of section 170(c)(2)(A) of the Code would be nullified if contributions inevitably committed to go to a foreign organization were held to be deductible solely because, in the course of transmittal to the foreign organization, they came to rest momentarily in a qualifying domestic organization. In such cases the domestic organization is only nominally the donee; the real donee is the ultimate foreign recipient. Accordingly, the Service holds that contributions to [the Example 1 organization] are not deductible." In all, the Revenue Ruling gives 5 examples. Three do not qualify, two do. I assume that "Friends of" organizations that HAVE been recognized under 501(c)(3) were structured more like the qualifying examples than like the non-qualifying examples, although it is, sadly, possible that their 501(c)(3) applications were handled by IRS agents ignorant of the law. Posted 8/4/01 -- PB