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