Quebec Court of Appeal confirms that the Canada-U.S. Tax Convention not Applicable to Quebec Residents

November 29, 2016 | Troy McEachren

Disponible en français : La Cour d’appel du Québec confirme que la Convention fiscale entre le Canada et les États-Unis ne s’applique pas aux résidents du Québec

In our July 2015 Newsletter, we wrote about a decision of the Court of Quebec in Emballages Starflex Inc. v. Agence du Revenu du Québec (“Starflex”) in which the court held that donations made by residents of Quebec to U.S. charities do not qualify for the benefit afforded by Article XXI(7) Canada-U.S. Tax Convention (the “Treaty”) under the Taxation Act (Quebec) (the “Tax Act”).  Article XXI(7) of the Treaty provides that where a Canadian donor makes a donation to a U.S. charity, the donor is entitled to claim a donation tax credit or deduction against the donor’s U.S.-sourced income when filing Canadian income tax returns.  Although section 488 of the Tax Act permits residents of Quebec to exclude from their income amounts that are exempt by virtue of a tax treaty, the court concluded that section 488 did not apply to Article XXI(7) of the Treaty because Article XXI(7) provided “relief from taxation” and not “exemption from taxation” (as is required by section 488 of the Tax Act).  As the decision in Starflex goes against the legislative intent of section 488, we had hoped that the Quebec Court of Appeal would correct the lower court’s ruling on appeal.

On November 17, 2016, the Quebec Court of Appeal released its decision. Unfortunately, Emballages Starflex Inc. (the “Appellant”) appears to have appealed only on an issue unrelated to the interpretation of section 488 of the Tax Act. Specifically, the Appellant argued that if its  donations to the U.S. charities did not qualify as donations under the Tax Act, then, alternatively, its donations should be considered expenses incurred to increase sales in the U.S. The Court of Appeal rejected this alternate argument as it was raised late and was not supported by sufficient proof before the lower court.  Accordingly, the Court of Appeal held that the Appellant did not meet the burden of proof for a finding that Revenu Québec’s tax assessment was inaccurate.

The impact of the Court of Appeal’s decision is that the Treaty benefit provided to all other Canadians making donations to U.S. charities is not available to residents of Quebec.  The court’s decision might be technically correct because a deduction or a credit for a charitable donation is not an exemption from taxation.  However, it is not clear that the Quebec legislature intended this consequence when section 488 was introduced.  Canada only has one tax treaty in force with the U.S. that extends benefits to U.S. foreign charities. Therefore, it is arguable that when section 488 was introduced, the limiting nature of the provision, in the context of Article XXI(7) of the Treaty, was not contemplated. We have contacted the Quebec Department of Finance to enquire if it intends to amend section 488 of the Tax Act. We will update you on any developments.

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