United States court limits charity pooled-fund tax break

The United States Court of Federal Claims ruled that Canadian charities cannot use general fiscal-transparency treaty rules to reclaim U.S. withholding tax on dividends earned through mixed pooled funds. Only the treaty's stricter Article XXI(3) pooled-investment path applies, so funds open to non-exempt investors do not qualify for reciprocal exemption.

On August 25, 2026, Judge Richard A. Hertling of the United States Court of Federal Claims granted summary judgment for the government in South Saskatchewan Community Foundation Inc. v. United States. The ruling matters for anyone chasing tax-efficient passive income through cross-border endowments, donor-advised funds, or charity-only pools that hold U.S. equities.

The fight was not about whether a Canadian charity can be exempt when it invests directly. Both sides agreed that, under Article XXI(1) of the United States-Canada Income Tax Treaty, South Saskatchewan Community Foundation Inc. (SSCF) would have faced no U.S. withholding if it had owned the shares outright. The dispute was whether that same exemption could travel through a commercial Canadian unit trust.

Key Takeaways

• The United States court treated Article XXI(3) as the exclusive route for charities investing through pooled vehicles.
• General fiscal-transparency rules in Article IV(6) cannot bypass that negotiated path.
• Mixed unit trusts that admit non-exempt investors fail Article XXI(3) exclusivity.
• Direct U.S. equity ownership, or charity-only / pension-only pools that meet Article XXI(3), remain the safer structures.
• Canada Revenue Agency support in MAP talks did not override the bilateral Technical Explanation endorsed when the Fifth Protocol was adopted.

What happened in the South Saskatchewan case?

SSCF is a Saskatchewan registered charity that manages endowments and donor-advised funds. As of December 31, 2020, it oversaw about CAD 90 million. Part of that capital sat in the TD Greystone Global Equity Fund, an Ontario unit trust managed by Toronto Dominion Asset Management.

Unlike SSCF, the Greystone Fund is not a charity and is not generally tax-exempt in Canada. It held U.S. equities, and its qualified intermediary, CIBC Mellon, withheld U.S. tax on dividends allocable to SSCF—generally at 15%, and up to 30% on some other income—for the years ending December 31, 2019 and 2020.

In September 2021, SSCF filed Forms 1120-F seeking refunds of about $15,381.29 for 2019 and $45,353.89 for 2020, totaling $60,735.18. It argued the fund was fiscally transparent under Article IV(6), so the charity “derived” the dividends and could claim the Article XXI(1) exemption.

The IRS did not refund the amounts. SSCF and 17 other Canadian tax-exempt entities opened Mutual Agreement Procedure talks under Article XXVI(1). Competent authorities did not settle the issue. The CRA later said the taxpayers’ Article XXI position had merit, but litigation proceeded while MAP requests sat in abeyance.

Why did the United States argue Article XXI(3) controls?

The government said the treaty partners specifically wrote Article XXI(3) for exempt organizations investing through pooled vehicles. That provision exempts dividend and interest income of a pooled fund only if the fund itself is generally exempt at home and is operated exclusively to earn income for tax-exempt organizations.

Greystone failed that test because it had non-exempt investors. Allowing Article IV(6) to reopen the door, the United States argued, would erase those bargained limits. The Treasury Technical Explanation to the Fifth Protocol—formally reviewed and endorsed by Canada—states that Canadian fiscally transparent entities “are (except to the extent the law provides otherwise) partnerships and what are known as ‘bare’ trusts.” A commercial unit trust is neither.

SSCF countered that Canadian law required current inclusion of trust income made “payable” under the fund’s trust agreement and Ontario’s Trustee Act, satisfying the income-inclusion rule in Treas. Reg. § 1.894-1(d)(3)(iii). On that narrow regulatory point, the court agreed the fund looked fiscally transparent. But treaty text, structure, and history still controlled the claim.

How did the court read the treaty text?

Applying lex specialis, the court held the specific charity pooled-investment rule prevails over the general transparency rule. Reading the Fifth Protocol provisions in pari materia, it noted Article XXI(3) was expanded in 2007 to cover charities—while keeping strict guardrails that the vehicle be home-country exempt and exclusive to exempt beneficiaries.

Judge Hertling wrote that if mandatory distributions alone made a fund transparent under Article IV(6), Article XXI(3) would have been unnecessary. “It is inconceivable,” the opinion said, that drafters would lock in that restriction only to open a wide exception through Article IV(6).

Extrinsic evidence reinforced the result. The Technical Explanation’s definitive “are” for Canadian transparent entities carried “considerable weight” as shared bilateral intent. A 2007 Joint Committee on Taxation report likewise framed Article XXI(3) as the designated route for indirect charitable investing. Post-dispute MAP support from Canada did not rewrite that earlier understanding.

What should cross-border charities do now?

According to analysis from Current Federal Tax Developments, advisers should treat Article XXI(3) as the exclusive pathway when tax-exempts hold U.S. securities through intermediaries. Commercial mutual funds or unit trusts that accept retail or corporate investors jeopardize the U.S. dividend exemption, even if the trust agreement forces annual payouts to zero out entity-level tax.

Practical options remain clear. Use dedicated closed pools limited to pensions or charities that satisfy Article XXI(3), or buy U.S. equities directly to preserve Article XXI(1). For wealth planners and endowment boards watching after-tax yield, structure now beats creative treaty stacking later.

The court granted the United States’ cross-motion for summary judgment and denied SSCF’s motion. Because Greystone was not operated exclusively for tax-exempt unitholders, and Article IV(6) did not supply an alternative route, the refund claim failed.