Donations to U.S. Charities by Residents of Quebec: Court of Quebec rules that the Canada-U.S. Tax Convention not Applicable

27 juillet 2015 | Troy McEachren

( Disponible en anglais seulement )

On May 19, 2015, the Court of Quebec released its judgment in Emballages Starflex Inc. v. Agence du Revenu du Québec in which the court held that for donations made by residents of Quebec to U.S. charities, donors may not claim the taxable benefit afforded under the Canada-U.S. Tax Convention (the “Treaty”) in respect of such donations under the Taxation Act (Quebec).  The Court went on to hold that this was also the case in situations where a taxable benefit in respect of such donations could be used to reduce the income taxes owed under the federal Income Tax Act (Canada).

Emballage Starflex Inc. (“Starflex”) is a company located in Quebec that manufactures packaging equipment. For its taxation year ending on August 31, 2009, Starflex claimed a deduction from its income of $1,350,953 in respect of various charitable donations that it made throughout the year. In particular, it claimed deductions in respect of $492,575 worth of donations to charities located in the United States. Starflex claimed this deduction based on Article XXI(7) of the Treaty, which permits the taxable benefit ordinarily flowing from donations made to US registered charities to be used to reduce the income tax payable on US sourced income.

Revenu Québec rejected Starflex’s use of the US donation receipts on the grounds that Article XXI(7) of the Treaty does not apply to Quebec’s Taxation Act since Quebec it is not a party to the Treaty.

Interestingly, the Taxation Act (Quebec) recognizes certain benefits granted by tax treaties to which Canada has entered but to which Quebec is not a party. Section 488 of the Taxation Act provides an exclusion from income of amounts that are exempt from income tax in Québec or in Canada by virtue of a provision of a tax agreement entered into with a country other than Canada.

The Court concluded, however, that section 488 did not apply in the context of 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 Taxation Act. This interpretation is problematic for several reasons. First, the interpretation is overly technical and ignores the purpose of the provision, which is to permit the application to Quebec’s fiscal legislation of the effects of tax treaties entered into by Canada. Second, Article XXI(7) provides that donations made to US charities are treated as if the donations had been made to a Canadian charity. Under the Taxation Act, a donation by a corporation to a charity in Canada permits the corporation to deduct from its taxable income the value of such donations. The effect of such a deduction is that such amounts are exempt from taxation.

Fortunately, Starflex has appealed the decision to the Court of Appeal of Quebec. It is hoped that the Court of Appeal will interpret section 488 of the Taxation Act to give effect to the benefits of Article XXI(7) of the Treaty for Quebec donors. Until such time, care must be taken when making charitable donations by residents of Quebec to U.S. charities that are not recognized as qualified donees in Canada.

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