Charities and non-profit organizations (“NPOs”) in Canada and the United States that derive income from across the border should consider the Canada-U.S. Tax Convention ( “Treaty”) and whether it may be possible to get an exemption from taxes that would otherwise apply to such income.
Charities and NPOs resident and operating in Canada are usually exempt from Canadian tax under the Income Tax Act in Canada (“ITA”). Non-resident charities and NPOs are usually subject to Canadian withholding tax on income derived from Canada.
Article XXI of the Treaty gives relief from either the Canadian or U.S. tax obligations that might otherwise apply to scientific, literary, religious, educational or charitable organizations exempt from tax under the state domestic law of which they reside. Article XXI exempts specific types of income derived from either Canada or United States from tax to the extent such income is tax-exempt in the state of residence, whether United States or Canada.
Article XXI exempts dividend and interest income from income tax, if:
• such income is derived by a trust, company, organization or other arrangement that is a resident of the either Canada or United States;
• the entity deriving such income is usually tax-exempt in its state of residence;
• the entity is operated exclusively to administer or provide pension, retirement or employee benefits; and
• such income is not derived from carrying on a trade or business or from certain related persons.
This could apply, for instance, to interest and dividend income derived from Canada by a pension or United States retirement plan resident, and administered for the benefit of a clergy of a religious order in United States
An entity seeking relief under Article XXI must apply to the relevant competent authority, such as the Canada Revenue Agency or the Internal Revenue Service for the exemption. In the application, the entity seeking relief will need to evidence the tax-exempt status in the state of residence. In Canada, the Canada Revenue Agency usually issues Letters of Exemption under the Treaty for three-year periods. An application usually takes six to eight weeks to process. Apply for the exemption and any renewals in advance to ensure tax relief is available when needed.
Federal, international, and New York state tax laws may be complicated, engage an experienced New York tax attorney to maximize tax savings.