On March 8, 2019, the IRS reissued an Interim Guidance Memo (TEGE-07–0319–0009) to IRS Exempt Organizations Rulings and Agreements employees regarding the process requirements for handling exemption applications from Canadian charities.

Background

The latest memorandum supersedes a prior Interim Guidance Memo (TEGE-07–0317–0011) and clarifies IRS procedures for processing applications from Canadian charities registered by the Canada Revenue Agency (CRA).

The following provisions in the Internal Revenue Manual address Canadian charities seeking recognition as tax-exempt entities under the US-Canada Income Tax Convention (Treaty):

• IRM 7.20.4.4.1.1.1 — Charities registered by the CRA are automatically recognized as tax-exempt organizations under the Treaty and may submit the required information to request a ruling on foundation status and to be listed on EO Select Check.
• IRM 7.20.6.2.1.2 — Organizations indicating they will make grants or conduct activities in a foreign country, especially one in which there is war or civil unrest, generally must provide EO Determinations specialists with certain information and complete a Form 14503, Potential Terrorism Connection Checksheet.

In addition, the instructions to Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, explain that Canadian organizations holding registrations from the CRA will (1) automatically be recognized as exempt organizations under Section 501(c)(3); (2) be presumed to be private foundations; and (3) need not file Form 1023. If the Canadian organization wishes to request public charity status, however, the applicable sections of Form 1023 must be completed.

Canadian law (CRA Guidance CG-017, General Requirements for Charitable Registration) requires all charities to comply with the country's anti-terrorism legislation, in addition to ensuring operations in which individuals or groups engage are not supporting terrorist activities.

Clarification

The reissued Interim Guidance Memo clarifies that, for purposes of IRM 7.20.6.2.1.2, Canadian charities registered by CRA that request a ruling on foundation status no longer need to complete Form 14503. Organizations indicating they intend to make grants or conduct activities outside the United States, however, must still completed the form.

The clarification will be incorporated into IRM 7.20.6 by December 31, 2019.

Implications

Organizations seeking tax-exempt status by filing Form 1023 should be aware of the increased scrutiny surrounding overseas payments and the risk of providing funding (directly or indirectly) to organizations and individuals with links to terrorism.

In cases in which an organization will make foreign grants or conduct activities in foreign countries, the organization must satisfy the requirements issued by Treasury's Office of Foreign Asset Controls (OFAC). Accordingly, the EO Determinations specialist will request information from the organization to determine:

• The countries in which the organization will operate or make grants
• Whether the organization will check the OFAC Specially Designated Nationals and Blocked Persons List (SDN) for names of individuals and entities with which the organization is dealing
• Whether the organization has any other practices to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities

For organizations intending to make foreign grants, the EO Determinations specialist will also request information to determine:

• What funds or goods have been, or will be, distributed and for what purpose
• How the organization processes grant requests, including its application, review and approval process
• How the organization ensures the funds or goods are used for the intended purposes

Given this increased scrutiny, organizations that will make overseas payments should be prepared to furnish the aforementioned information as part of its Form 1023 application and should take steps to ensure that sufficient internal controls exist to minimize the risk that payments from the organization will be received by persons and entities with links to terrorism.

In issuing this Interim Guidance Memo, the IRS has recognized that the safeguards put in place by the CRA as part of its own tax-exempt application process are sufficient to obviate the need for additional scrutiny by the IRS.

Please contact your Ernst & Young LLP tax professional with any questions.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.

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