Qualified Charitable Distributions – Tax Savings for Canadian Residents

Canadian residents that hold certain U.S. retirement plans may have an unusual tax savings opportunity when making charitable contributions. Where they meet the requirements they can make a distribution from their U.S. retirement plan without recognizing taxable income for either U.S. or Canadian tax purposes and get a charitable contribution deduction for Canadian tax purposes. This is as close to “double-dipping” as most taxpayers may get.

Qualified Charitable Contributions

Qualified Charitable Contributions can be made from certain U.S. retirement plans to qualifying charitable organizations.  These contributions are made directly from the U.S. retirement plan to the charitable organization. Any organization that qualifies to receive deductible charitable contributions under U.S. tax law would generally qualify, including those formed in the U.S. and qualifying under IRC Sec. 501(c)(3). The Canada-U.S. tax treaty expands qualifying organizations to those formed in Canada.

The U.S. tax results of the Qualified Charitable Distributions are as might be expected. The amounts distributed by the retirement plan to the charitable organization are neither U.S. taxable income nor are they deductible for U.S. tax purposes. Absent the qualified charitable distribution rules, the income would be taxable to the beneficiary and the contribution would be deductible. 

The advantage for U.S. tax purposes of the Qualified Charitable Distribution rules is that the beneficiary avoids recognition of taxable income under U.S. tax law and in return gives up the associated tax deduction. Under the expanded standard deduction beginning in 2018 (US$24,000 for married taxpayers filing jointly), it will no longer be advantageous to itemize their deductions. Using the Qualified Charitable Distribution, they get both. In addition, the distribution may also be claimed as part of the required minimum distributions after age 70½.

The big win here is for Canadian tax purposes. Because the Qualified Charitable Distribution is not taxable in the U.S., the tax treaty also eliminates it from being taxable in Canada. However, unlike the U.S., the distribution to a charitable organization can still be claimed as a deduction for Canadian tax purposes. They get both the tax deduction and don’t have to have pay tax on the amount distributed. Where the distribution is made to a charitable organization in the U.S. or outside Canada, it will be subject to Canadian tax deduction limits of the applicable tax treaty. Distributions to Canadian charities would be subject only to the limits under Canadian tax law.

Individuals who have U.S. retirement plans, reside in Canada and want to make charitable contributions, can get a double win with Qualified Charitable Distributions.

Interested in learning more about how to maximize the benefits of your charitable contributions? We invite you to contact us to discuss your goals.