US Federal Court considers the implications for Canadian exempt organizations earning US source income through an intermediary vehicle

On August 25, 2026, the US Court of Federal Claims published its opinion in The South Saskatchewan Community Foundation Inc. v. United States¹. The Court considered an important question for Canadian exempt organizations deriving US source income and claiming benefits under Article XXI of the United States-Canada Convention with Respect to Taxes on Income and on Capital (the Treaty)²: when may a Canadian exempt organization rely on the Treaty’s fiscal transparency rules to claim Treaty benefits indirectly through an investment vehicle?

What you need to know

• In The South Saskatchewan Community Foundation Inc. v. United States, the US Court of Federal Claims held that a Canadian charity could not rely on Article IV(6) to look through a Canadian unit trust and claim Article XXI(1) benefits where the trust failed to satisfy Article XXI(3).
• While the opinion uses broad language regarding "pooled investment vehicles", viewed in context, the ruling should be limited to vehicles such as the Canadian unit trust at issue, or other entities that fall outside the clear scope of Article IV(6), and is not be expected to prevent exempt organizations from being eligible for benefits under Article XXI when investing in the United States through entities that are treated as partnerships for Canadian tax purposes.

Background

Before diving into the facts, there are three Treaty provisions that are relevant.

1. Article IV(6): Article IV(6) is the Treaty’s fiscal transparency provision. Very generally, it provides that income is considered “derived” by a resident of a contracting state if the entity through which the resident derives the income is fiscally transparent.
2. Article XXI(1): Article XXI(1) generally exempts income derived by qualifying charitable and certain other exempt organizations from tax in the other treaty country to the extent such income is also exempt from tax in the organization’s home jurisdiction.
3. Article XXI(3): Article XXI(3) contains specific rules for certain pooled investment vehicles established for exempt organizations. It extends Treaty benefits where the pooled vehicle itself satisfies specified requirements, including that it be generally exempt from income tax in its home jurisdiction and operated exclusively for qualifying exempt organizations.

Facts

The facts of the case are fairly simple.

The South Saskatchewan Community Foundation (SSCF), a Canadian registered charity, invested through the TD Greystone Global Equity Fund (the Greystone Fund), a Canadian pooled investment vehicle organized as a unit trust. A unit trust under Canadian law is a trust in which beneficiaries or unitholders own units, like shares in a fund, and those units can be redeemed by the trust.

The Greystone Fund held US equities and earned US-source dividend income, on which US withholding tax was imposed.

SSCF argued that Article IV(6) applied, such that it should be treated as deriving its allocable share of the US-source dividend income directly through a fiscally transparent entity (i.e., the Greystone Fund). If SSCF were treated as deriving the income directly, it believed that it would be entitled to the complete exemption from US withholding tax provided by Article XXI(1). The parties generally agreed that had SSCF invested directly in the US equities, the resulting dividend income would have qualified for exemption under Article XXI(1). The dispute arose solely because the investment was held indirectly through the Greystone Fund. On that basis, SSCF sought a refund of the US withholding tax imposed³.

The IRS disagreed with SSCF’s contention that it was entitled to an exemption from US withholding tax. It argued that Article XXI(3)—not Article IV(6)—specifically governs exempt organizations investing through pooled investment vehicles. Additionally, the Greystone Fund did not qualify under Article XXI(3) because, among other reasons, it was not operated exclusively for exempt investors.

The Court’s holding and analysis

The Court ruled in favor of the government and denied SSCF’s refund claim.

First, it concluded that the Greystone Fund does not satisfy the requirements of Article XXI(3) because it is neither tax exempt nor operated solely to earn income for tax-exempt organizations.

The Court viewed the case as presenting a potential conflict between the general fiscal transparency rule in Article IV(6) and the more specific rules in Article XXI(3) applicable to certain pooled investment vehicles used by exempt organizations.

Because the Greystone Fund did not satisfy the requirements of Article XXI(3), SSCF could only claim benefits under Article XXI(1) of the Treaty if it were permitted to apply Article IV(6) to look through the Greystone Trust. Accordingly, one key issue for the Court was whether the Greystone Fund was the type of entity to which Article IV(6) applies.

In considering that question, the Court examined whether the Greystone Fund constituted a fiscally transparent entity for purposes of Article IV(6). SSCF argued that the Greystone Fund satisfied the concept of fiscal transparency under the applicable Treasury Regulations. The Court, however, concluded that the Treaty itself, together with the Technical Explanation to the Fifth Protocol, controlled the analysis.

In considering the Technical Explanation to the Fifth Protocol, the Court determined that, in Canada, fiscally transparent entities covered by Article IV(6) generally are partnerships and bare trusts—not Canadian unit trusts such as the Greystone Fund. Additionally, the fact that the Greystone Fund distributed its income and could deduct its distributions, potentially satisfying certain US regulatory requirements of fiscal transparency, was not alone sufficient to bring the fund within Article IV(6). As a result, the Court concluded that the Greystone Fund fell outside the category of entities eligible for look-through treatment under Article IV(6), and, accordingly, SSCF could not rely on Article XXI(1).

One further reason the Court refused to allow SSCF to claim benefits under Article XXI(1) by virtue of Article IV(6) was that Article XXI(3) would be substantially undermined if an exempt organization could simply rely on Article IV(6) whenever a pooled investment vehicle failed to satisfy the requirements of Article XXI(3). According to the Court, Article XXI(3) was specifically intended to govern charitable investments through pooled investment vehicles such as the Greystone Fund: permitting SSCF to rely on Article IV(6) would effectively sidestep the limitations built into Article XXI(3).

The Court therefore concluded that because the Greystone Fund did not satisfy Article XXI(3), and Article IV(6) was unavailable with respect to a Canadian unit trust such as the Greystone Fund, SSCF was not entitled to the Article XXI(1) exemption for its allocable share of the dividend income earned through the fund.

Takeaways

Article XXI(3) is the intended route for exempt organizations investing through pooled investment vehicles where the intermediary is not clearly fiscally transparent for Treaty purposes.

While parts of the opinion use broad language regarding "pooled investment vehicles" and could be construed out of context as applying more broadly to any investment vehicle in which an exempt organization participates, viewed in context, the ruling in South Saskatchewan should be limited to vehicles such as the Canadian unit trust at issue in this case, or other entities that fall outside the clear scope of Article IV(6).

The references throughout the opinion to "pooled investment vehicles" are best read in the context of the Canadian unit trust before the court, rather than as a broader statement regarding all pooled investment vehicles. By contrast, partnerships are specifically identified in the Technical Explanation as fiscally transparent entities. As a result, despite its arguably broad language, this opinion is not be expected to prevent exempt organizations from being eligible for benefits under Article XXI when investing in the United States through entities that are treated as partnerships for Canadian tax purposes.

There is no indication yet as to whether an appeal will be made, and it is worth monitoring how the case develops and is interpreted in any related circumstances. Currently, where exempt organizations invest through unit trusts or other intermediary entities that are not clearly recognized as fiscally transparent under the Treaty, consideration should be given to whether the requirements of Article XXI(3) are satisfied.