As further elaborated on NGOsource's website, equivalency determination (ED) is a process dictated by U.S. tax law regulations that permits a U.S. private foundation or donor advised fund to make a "good faith determination" that a non-U.S. organization is the equivalent of a U.S. public charity or operating foundation. As part of the ED process, a qualified tax practitioner collects and analyzes detailed information about a non-U.S. organization's finances, structure, and operations. An organization might, however, be exempt from the financial requirements if it qualifies as a charity by the nature of its activities, such as a school, church, or hospital.
The Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital
Some foreign countries have applicable laws and regulations that are informative to NGOsource's ED evaluation process. One prominent example is the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (the "U.S.-Canada Treaty"). The U.S.-Canada Treaty was established "for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital." U.S.-Canada Treaty, preamble.
Among other tax-related guidelines, the U.S.-Canada Treaty lays out certain rules that are instrumental with respect to the ED process. Specifically, "[a] religious, scientific, literary, educational or charitable organization which is resident in Canada … shall be exempt in the United States from the United States excise taxes imposed with respect to private foundations." U.S.-Canada Treaty, Article XXI (4).
IRS Notice 99-47 provides additional specific guidance with respect to the U.S.-Canada Treaty, stating that "the U.S. will presume, in the absence of receiving certain financial information, that all Canadian registered charities are private foundations. Accordingly, if a Canadian registered charity does not provide the U.S. with the financial information needed to determine its foundation classification, the organization will be presumed to be a private foundation under U.S. law."
Religious, scientific, literary, educational, and charitable organizations in Canada are governed by the Canada Revenue Agency (CRA). The CRA offers a publicly searchable database of registered charities in Canada. See the List of Charities search portal. Pursuant to the U.S.-Canada Treaty, each of the religious, scientific, literary, educational and charitable organizations registered in CRA's list of charities is automatically deemed a 501(c)(3) private foundation for tax exemption purposes.
Moving from Private Foundation to Public Charity
As discussed in a previous post, there are notable differences between public charities and private foundations. In general, it is more desirable for an organization that seeks funding to have public charity status because this designation reduces or eliminates certain grantmaking restrictions and requirements. Therefore, additional analysis must be undertaken to determine if a Canadian charity qualifies as a public charity in the U.S.
The majority of charities in the U.S. qualify as public charities because they meet a mathematical support test demonstrating that they are "publicly supported" organizations. However, organizations can also be deemed public charities by the nature of their activities if those activities directly serve the public interest (namely, schools, churches, or hospitals).
In addition to reviewing a Canadian charity's certifications and supporting documentation, NGOsource relies on the provisions contained in the U.S.-Canada Treaty. This means that a Canadian charity need only demonstrate that it meets the public support test, or that it is a public charity by virtue of its activities, to qualify as equivalent to a 501(c)(3) public charity in the U.S.
NGOsource also reviews Canadian organizations that are not registered charities and certifies them if they meet the necessary organizational, operational, and (if applicable) financial requirements. For example, nonprofit organizations registered with the Registraire des entreprises of Quebec are subject to similar restrictions on their activities: "A non-profit legal person engages in non-profit activities that are altruistic, moral, cultural, social, philanthropic, national, patriotic, religious, charitable, scientific, artistic, professional, athletic, sporting, educational or other in nature." In other words, just because an organization is not a registered charity in Canada, does not mean that it will be ineligible for ED.
- Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital
- IRS Notice 99-47
- Exemption of Canadian Charities Under the United States-Canada Income Tax Treaty (PDF), IRS 2001 EO CPE Text
This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.