For Canadian registered charities, the idea of entering the expansive U.S. philanthropic market may seem ambitious. However, the legal framework that enables this cross-border engagement is already well established. The Canada–U.S. Income Tax Convention, particularly Article XXI, offers Canadian charities reciprocal tax-exempt recognition in the United States. Although this provision remains unfamiliar to many nonprofit leaders in Canada, it presents a direct and efficient pathway to connect with American donors and institutions.

The Canada Revenue Agency, or CRA, serves as the certifying authority for charities in Canada. Once an organization is registered with the CRA, the U.S. Internal Revenue Service, or IRS, automatically recognizes it as a section 501(c)(3) entity under U.S. federal law. This means Canadian charities are not required to file Form 1023, the complex and often time-consuming application that American nonprofits must complete to obtain their 501(c)(3) status. The advantage is substantial. Canadian organizations can operate as tax-exempt entities in the United States without the need for separate incorporation or additional filings. Still, there is an important caveat. Under U.S. tax law, any foreign charity recognized through Article XXI is, by default, classified as a private foundation. This designation carries meaningful implications for how American donors interact with Canadian charities, particularly in terms of deductibility limits and regulatory oversight.

Automatic IRS Recognition under Article XXI

Article XXI of the Canada–U.S. Tax Treaty provides a powerful mechanism for cross-border charitable engagement. It stipulates that a charity organized and operated exclusively for charitable, religious, scientific, literary, or educational purposes in one country shall be exempt from taxation in the other, to the same extent as if it were a domestic entity. The U.S. Internal Revenue Service formalized this provision through Notice 99-47, which confirms that Canadian charities registered with the Canada Revenue Agency are automatically recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code. This automatic recognition eliminates the need for Canadian charities to navigate the complex Form 1023 application process. By virtue of their CRA registration, these organizations are treated as tax-exempt for U.S. federal purposes.

As a result, American donors may treat their contributions as deductible under Internal Revenue Code section 170(c), provided certain conditions are met. However, this recognition is not without limitations. Donors must be able to verify that the recipient organization is a registered Canadian charity, typically by referencing its CRA registration number. More importantly, the deductibility of such contributions is generally capped by the donor’s Canadian-source income. In practical terms, this means that a U.S. taxpayer who earns income from Canadian investments or business activities may deduct charitable contributions to Canadian organizations only up to the amount of that income. For instance, an individual with CAD 20,000 in Canadian investment income may deduct up to CAD 20,000 in donations made to a qualifying Canadian charity. This framework is commonly referred to as dual recognition. It reflects the reciprocal nature of the tax treaty, acknowledging the legitimacy of charitable entities across borders while placing clear boundaries on the scope of U.S. tax benefits. For Canadian organizations seeking to cultivate support from a broader base of American donors—particularly those without Canadian-source income—additional legal and structural steps may be necessary to unlock full deductibility.

Private Foundation vs. Public Charity Status

The default classification of foreign charities as private foundations under Internal Revenue Code section 509(a) carries significant implications for fundraising. Under U.S. tax law, contributions to public charities are deductible up to 50 percent of a donor’s adjusted gross income, while donations to private foundations are generally limited to 30 percent. This distinction affects both the generosity and frequency of donor support. The IRS clarified this position in Notice 99-47, where it stated that Canadian charities are presumed to be private foundations unless they provide evidence to the contrary. For donors, this presumption introduces a structural disincentive. The lower deduction ceiling can discourage larger gifts, particularly from high-net-worth individuals or institutional funders. Advisory groups such as CAF America emphasize that without formal documentation submitted to the IRS, Canadian charities remain subject to these more restrictive rules.

Rebutting the Presumption

Canadian charities are not locked into private foundation status. The IRS allows them to seek recognition as public charities by demonstrating compliance with one of the public-support tests outlined in IRS Publication 557. To qualify, the organization must submit a written request, proof of CRA registration, and financial records showing that at least one-third of its total support comes from broad-based sources, such as individual donors or government grants.

There is no user fee for this process. The standard fee of USD 600, which normally applies to U.S. charities filing IRS Form 1023 to obtain 501(c)(3) status, is waived for Canadian registered charities seeking classification under Article XXI of the Canada–U.S. Tax Treaty. However, the charity must still file IRS Form 8833 to formally disclose that it is claiming treaty-based benefits. Once approved, the organization will appear in the IRS’s searchable database of exempt entities, formerly known as Publication 78. This public listing provides assurance to American donors and foundations that their contributions are deductible at the higher 50 percent limit. It also places Canadian charities on equal footing with their U.S. counterparts, enhancing both credibility and fundraising potential across borders.

Filing Requirements and Ongoing Compliance

It is a common misconception that once recognized under Article XXI, Canadian charities have no further obligations in the United States. While they are not required to file Form 1023, treaty-based recognition does come with specific reporting responsibilities. According to Revenue Procedure 94-17, Canadian charities that are classified as something other than private foundations are exempt from filing Form 990, provided they have no significant activities in the United States and receive no more than USD 25,000 annually in U.S.-source gross receipts. In these cases, smaller organizations may avoid annual U.S. reporting altogether. However, once receipts exceed this threshold, or if the charity is treated as a private foundation, it must file either Form 990 or Form 990-PF each year.

In addition, any Canadian charity invoking treaty benefits must attach Form 8833 to its first U.S. return to disclose reliance on Article XXI. Failure to comply with this requirement can result in penalties and may jeopardize the charity’s continued recognition under U.S. tax law. This compliance framework highlights the importance of monitoring U.S. fundraising activity with care. As contributions from American donors grow, Canadian organizations must be prepared to meet U.S. filing obligations with the same diligence they apply to CRA requirements.

Maximizing the U.S. Donor Base

The United States remains the largest philanthropic economy in the world, with annual charitable giving surpassing USD 500 billion. For Canadian charities, recognition under Article XXI offers more than regulatory convenience; it opens the door to a vast and dynamic pool of potential funding. Even without reclassification as a public charity, the treaty’s dual recognition provision allows U.S. taxpayers with Canadian-source income to deduct gifts made to Canadian organizations. However, this is a limited segment of the donor population. To reach the broader American market, where most donors do not earn Canadian income, Canadian charities should pursue public charity status.

Achieving this designation ensures that contributions are deductible at the more favorable 50 percent adjusted gross income limit, removing a key barrier to major gifts. It also enhances institutional credibility. Many U.S. foundations, corporations, and grant-making bodies require their grantees to hold public charity status. For Canadian organizations, securing this recognition is not just a matter of compliance, it is a strategic move to unlock deeper partnerships and long-term funding opportunities.

Conclusion

Article XXI of the Canada–U.S. Tax Treaty offers Canadian registered charities a distinct structural advantage: automatic recognition as 501(c)(3) organizations under U.S. federal law. While the default classification as a private foundation provides access to the American philanthropic system, it also imposes limitations that can restrict donor engagement and fundraising growth. By actively pursuing public charity status, Canadian nonprofits can broaden their donor base, align with U.S. institutional funders, and unlock the full spectrum of tax benefits available to American supporters.

With thoughtful compliance, clear donor communication, and strategic outreach, Canadian charities can approach the U.S. market not as unfamiliar territory, but as a natural extension of their fundraising efforts. In this context, Article XXI becomes more than a legal mechanism, it serves as a foundation for sustainable, cross-border philanthropic partnerships. As part of our ongoing capacity-building work, Refugee Pathways and Integration Canada Inc. (RefPIC) is dedicated to supporting charities and civil society organizations in navigating this complex but rewarding landscape. Our team of volunteer professionals; including lawyers, accountants, economists, and nonprofit leaders is available to provide guidance on both the technical requirements and strategic considerations of U.S. tax-exempt recognition. For further assistance, please contact us at admin@refugeecanada.org or by phone at (437) 566-2789.

By Jimmy Patricks Unzi, Ch.E 

Executive Director

Refugee Pathways and Integration Canada Inc. (RefPIC)

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Refugee Pathways and Integration Canada Inc. is a federally incorporated nonprofit and registered Canadian charity advancing education, counselling, and broad support for refugees and displaced persons. In Canada, we assist with immigration, integration, and access to opportunity. Globally, we respond to displacement with services rooted in dignity and protection. Join us to help transform lives and build lasting pathways to belonging.