The South Saskatchewan Community Foundation Inc. v. United States, No. 24-1391T (Fed. Cl. Aug. 25, 2026)

For tax professionals advising cross-border tax-exempt organizations, navigating the interplay between general treaty residency rules and specific exemption provisions is a recurring challenge. On August 25, 2026, the United States Court of Federal Claims issued its highly anticipated decision in The South Saskatchewan Community Foundation Inc. v. United States. The court addressed a critical question: Can a Canadian registered charity utilize the general “fiscal transparency” provisions of Article IV(6) of the United States-Canada Income Tax Treaty to claim a reciprocal tax exemption on U.S.-source dividend income received through a Canadian unit trust that does not otherwise qualify under the specific exempt organization pooled-investment rules of Article XXI(3)?

In an opinion authored by Judge Richard A. Hertling, the court granted summary judgment for the United States, concluding that the treaty’s specific pooled-investment provisions under Article XXI(3) are exclusive. Consequently, charities investing through collective investment vehicles that are not restricted solely to tax-exempt entities cannot obtain reciprocal tax exemptions by claiming the vehicle is “fiscally transparent” under Article IV(6). This article provides a technical analysis of the case facts, the legal framework, the court’s multi-layered interpretive analysis, and the broader planning implications for practitioners.

Case Background and Factual History

The plaintiff, South Saskatchewan Community Foundation Inc. (“SSCF”), is a not-for-profit corporation and registered charity organized under the laws of Saskatchewan, Canada. SSCF manages, invests, and distributes endowments and donor-advised funds to charities in the southern region of Saskatchewan. Under the tax laws of Canada, specifically Article 149(1) of the Canadian Income Tax Act (“ITA”), SSCF is generally exempt from Canadian income taxation on its earnings, including dividend income from invested assets. As of December 31, 2020, SSCF managed an endowment of approximately CAD 90 million.

To manage a portion of its endowment, SSCF invested in the TD Greystone Global Equity Fund (the “Greystone Fund”), a pooled investment vehicle organized under the laws of Ontario as a “unit trust.” Under Canadian law, a unit trust is defined as a trust in which beneficiaries or unitholders own units, similar to shares in a fund, which can be redeemed with the trust under ITA § 108(2). The Greystone Fund was managed by Toronto Dominion Asset Management. Crucially, unlike the plaintiff, the Greystone Fund itself is not a charity and is not generally exempt from taxation under the laws of Canada.

Among its global assets, the Greystone Fund held a portfolio of U.S. equities. Because the Greystone Fund is a Canadian entity, U.S. withholding tax rules required its qualified intermediary, CIBC Mellon, to withhold and remit federal income taxes on all U.S.-source dividend income generated by these holdings, including the dividends allocable to SSCF’s unitholding interest. During the tax years ending December 31, 2019, and December 31, 2020, CIBC Mellon withheld and remitted taxes on this dividend income, generally at a standard withholding rate of 15% of the gross amount of U.S.-source income, and up to 30% for certain other items of income.

In September 2021, SSCF filed U.S. Federal Income Tax Returns for Foreign Corporations (Form 1120-F) for the 2019 and 2020 tax years. On these returns, SSCF sought a refund of its pro rata share of the withheld taxes, which it estimated to be $15,381.29 for 2019 and $45,353.89 for 2020, representing a total requested refund of $60,735.18. The basis of the refund request was that under the United States-Canada Income Tax Treaty, SSCF, as a registered Canadian charity, was exempt from U.S. income tax, and that the Greystone Fund functioned as a “flow-through” or fiscally transparent entity, allowing the charity to claim the exemption on U.S.-source income earned through the fund.

The IRS did not issue a refund or respond to the claims with a notice of disallowance. Subsequently, SSCF and 17 other Canadian tax-exempt entities initiated the Mutual Agreement Procedure (“MAP”) under Article XXVI(1) of the Tax Treaty. The MAP requires the competent authorities of the United States and Canada to attempt to resolve treaty interpretation issues. Despite active communication, the competent authorities were unable to reach an agreement. In a letter dated December 18, 2024, the Canada Revenue Agency (“CRA”) expressed support for the taxpayers, stating:

“The Canadian competent authority finds that the Taxpayers’ position has merit and that they should receive the benefit available under Article XXI.”

With the 18 MAP requests held in abeyance pending litigation, SSCF filed its complaint in the Court of Federal Claims. The parties filed cross-motions for summary judgment under Rule 56 of the Rules of the Court of Federal Claims (“RCFC”), agreeing that no material facts were in dispute and that the issue could be resolved strictly as a matter of treaty interpretation.

The Taxpayer’s Request for Relief and Technical Positions

The taxpayer’s core position relied on a two-step reading of the Tax Treaty and Treasury Regulations:

First, under Article XXI(1) of the Tax Treaty, “income derived by a religious, scientific, literary, educational or charitable organization shall be exempt from tax in a Contracting State if it is resident in the other Contracting State but only to the extent that such income is exempt from tax in that other State.” The parties agreed that had SSCF invested directly in the U.S. equities, its dividend income would have been completely exempt from U.S. withholding tax under Article XXI(1).

Second, because the income was earned indirectly through the Greystone Fund, SSCF sought to establish that it “derived” the income for treaty purposes by invoking Article IV(6). Article IV(6) provides:

“An amount of income, profit or gain shall be considered to be derived by a person who is a resident of a Contracting State where: (a) the person is considered under the taxation law of that State to have derived the amount through an entity (other than an entity that is a resident of the other Contracting State); and (b) by reason of the entity being treated as fiscally transparent under the laws of the first-mentioned State, the treatment of the amount under the taxation law of that State is the same as its treatment would be if that amount had been derived directly by that person.”

To define “fiscally transparent” under Article IV(6)(b), both parties agreed that under Article III(2)—which governs undefined terms—U.S. law controls when U.S. taxes are at issue. Thus, the parties applied the definition of fiscal transparency set forth in Treasury Regulation § 1.894-1(d)(3)(iii).

Under Treas. Reg. § 1.894-1(d)(3)(iii), an entity is treated as fiscally transparent in the interest holder’s jurisdiction if the interest holder is required to separately take into account on a current basis its share of the entity’s income, “whether or not distributed,” (the “income inclusion rule”) and the character and source of the item are determined as if realized directly (the “character and source rule”) or would result in the same tax treatment (the “same treatment rule”). The government conceded that SSCF satisfied the “same treatment rule” due to its tax-exempt status in Canada. Thus, the dispute under the Treasury Regulation centered on whether SSCF satisfied the “income inclusion rule.”

SSCF argued that Canadian tax law forced it to include its share of the Greystone Fund’s U.S.-source dividends in its income currently under ITA §§ 104(13) and 104(24). ITA § 104(13)(a) requires a beneficiary to include in its income the portion of a trust’s income that “became payable” to the beneficiary during the year. Under ITA § 104(24), an amount is “payable” if it is actually paid in the year or the beneficiary is entitled in that year to enforce payment.

SSCF argued that under Article 6.1 of the TD Greystone Pooled Funds Trust Agreement, the trustee was contractually obligated to make sufficient net income and realized taxable capital gains “payable” to unitholders each year to ensure the trust itself incurred no income tax liability. SSCF maintained that this contractual obligation, paired with the trustee’s statutory obligation under Ontario’s Trustee Act to administer the trust in accordance with the trust instrument, gave SSCF a present, legally enforceable right to demand payment every year. Consequently, because Canadian law required SSCF to include this “payable” income in its current-year income computation—regardless of whether the cash was actually distributed or retained in the trust—SSCF argued the Greystone Fund was fiscally transparent under the Treasury Regulation.

The Government’s Opposition and Defense

The government opposed SSCF’s position on two primary fronts:

First, the government argued that the Treasury Regulation need not be considered because the plain text of the Tax Treaty itself resolves the case and forecloses SSCF’s arguments. The government asserted that the treaty partners did not intend for Article IV(6) to apply to charities’ pooled investments, but rather that the treaty partners specifically negotiated Article XXI(3) as the exclusive avenue for tax-exempt entities to obtain tax benefits when investing through pooled investment vehicles. Article XXI(3) exempts dividend and interest income derived by a pooled fund only if the fund itself is generally exempt from income tax in its home country and is operated exclusively to earn income for tax-exempt organizations. Because the Greystone Fund had non-exempt investors, it failed to meet the exclusivity requirement of Article XXI(3).

Second, the government relied on the official Treasury Technical Explanation to the Fifth Protocol (the “Technical Explanation”), which Canada formally reviewed and endorsed. The Technical Explanation specifies:

“Entities falling within this description in Canada are (except to the extent the law provides otherwise) partnerships and what are known as ‘bare’ trusts.”

The government emphasized that the Technical Explanation uses the illustrative term “include” when listing U.S. fiscally transparent entities, but uses the restrictive, definitive verb “are” when identifying Canadian transparent entities. Because Canadian unit trusts were not listed, the government contended they were excluded from Article IV(6).

Alternatively, the government argued that even under the Treasury Regulation, the income inclusion rule was not satisfied. The government characterized trust distributions under ITA § 104(6) as permissive (“may be deducted”) and argued that a private trust agreement cannot establish a general requirement of “jurisdictional law.” It also contended that a present right to demand payment is constructively a distribution, meaning SSCF had not shown it was taxed on income “whether or not distributed.”

The Court’s Analysis: The Treasury Regulation and Fiscal Transparency

The court began its legal analysis by addressing the application of the Treasury Regulation, ruling in favor of the taxpayer on this specific sub-issue. The court rejected the government’s constructive distribution argument under 26 C.F.R. § 1.301-1(c) and ruled that, under the Treasury Regulation’s ordinary meaning, the core inquiry is whether the interest holder must include the income in its current taxable income even if the physical funds remain in the trust.

Under Canadian law, the Trust Agreement’s mandatory distribution clause, combined with Ontario’s Trustee Act, gave SSCF a present enforceable legal right to demand payment. Under ITA § 104(13)(a) and § 104(24), this enforceable right made the income “payable” as a matter of Canadian law. The court held that:

“The Trust Agreement makes the Greystone Trust’s income ‘payable,’ and Canadian law requires SSCF to include in its income for each taxation year all ‘payable’ income on a current basis. Thus, SSCF satisfies the income-inclusion rule.”

The court concluded that:

“If the plaintiff were correct in its interpretation of the Tax Treaty, it would prevail as it meets the definition of fiscally transparent under the Treasury Regulation...”

However, the court emphasized that the Treasury Regulation is not decisive because a treaty-based claim must ultimately be resolved by the text, structure, and history of the Tax Treaty itself, which overrides the general application of the Treasury Regulation.

Treaty Interpretation: The Exclusivity of Article XXI(3) and Canons of Construction

To resolve the tension between the general fiscal transparency rule of Article IV(6) and the specific pooled-investment charity exemption of Article XXI(3), the court turned to established principles of treaty interpretation and federal canons of construction.

Under federal jurisprudence, the interpretation of a treaty begins with its plain text and structure, aimed at giving effect to the intent and expectations of the signatories (Xerox Corp. v. United States, 41 F.3d 647, 652 (Fed. Cir. 1994)). When treaty terms are ambiguous, courts look to drafting history, negotiations, and the practical post-ratification construction adopted by the parties (Water Splash, Inc. v. Menon, 581 U.S. 271, 280 (2017); GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 590 U.S. 432, 441 (2020)).

The court applied two powerful canons of construction to the treaty text:

Lex Specialis Derogat Legi Generali

The standard canon of construction dictating that a specific provision prevails over a more general one is highly recognized in international treaty law (Bulova Watch Co. v. United States, 365 U.S. 753, 758 (1961); D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204 (1932)).

The court noted that Article IV(6) is a general provision addressing when any investor is deemed to derive income through an entity treated as fiscally transparent. By contrast, Article XXI(3) is a highly specific provision designed to govern the exact scenario of tax-exempt organizations investing through pooled-investment vehicles. Applying the lex specialis canon, the court determined that the specific pooled-investment parameters of Article XXI(3) must govern over the general transparency rules of Article IV(6).

In Pari Materia

Because both Article IV(6) and Article XXI(3) were adopted simultaneously through the Fifth Protocol to the Tax Treaty in 2007, the court ruled they must be read in pari materia—as part of a single, unified legislative scheme (Erlenbaugh v. United States, 409 U.S. 239, 243 (1972)).

Reading the provisions together, the court observed that Article XXI(3) was specifically amended to expand treaty benefits to charities (closing a gap that had previously restricted pooled investments only to pensions). However, while expanding this benefit, the treaty signatories deliberately preserved strict guardrails: the pooled vehicle itself had to be tax-exempt in its home country and operated exclusively for tax-exempt beneficiaries.

The court reasoned that allowing a charity to bypass these negotiated guardrails by simply invoking the general transparency rules of Article IV(6) would render the limitations of Article XXI(3) entirely nugatory. Judge Hertling wrote:

“If a pooled-investment fund’s ability to distribute income and reduce its entity-level tax had been sufficient to make it fiscally transparent under Article IV(6), then there would have been no need for a separate provision specific to tax-exempt organizations, like Article XXI(3).”

“It is inconceivable that the drafters of the Fifth Protocol would have set this restriction in Article XXI(3) only to open wide an exception to that restriction through Article IV(6).”

Consequently, the court held that the text and structural context of the treaty establish Article XXI(3) as the exclusive pathway for charities seeking tax-exempt treatment on income derived through pooled-investment vehicles.

Extrinsic Evidence: The Technical Explanation and JCT Report

The court found that the bilateral extrinsic evidence of treaty intent strongly reinforced this structural conclusion.

The Technical Explanation’s Definitive List

While unilateral agency interpretations receive limited deference, a Technical Explanation that has been formally reviewed and “subscribed to” by both signatory nations is entitled to “considerable weight” as a bilateral statement of shared intent (El Al Israel Airlines, Ltd. v. Tsui Yuan Tseng, 525 U.S. 155, 176 (1999)).

The Technical Explanation to the Fifth Protocol explicitly states that Canadian fiscally transparent entities “are (except to the extent the law provides otherwise) partnerships and what are known as ‘bare’ trusts.” The court held that the use of the word “are” for Canadian entities, in contrast to the illustrative “include” used for U.S. entities, reflects a clear, bilateral agreement to limit the scope of Canadian transparent entities to partnerships and bare trusts. Since a Canadian unit trust like the Greystone Fund is neither a partnership nor a bare trust, it is excluded from the scope of Article IV(6).

The court dismissed Canada’s post-dispute support of SSCF in the MAP, ruling that a subsequent litigation position does not override the clear bilateral understanding endorsed by Canada at the time the Fifth Protocol was executed.

The Joint Committee on Taxation (JCT) Report

The court also cited the report prepared by the JCT in 2007 in connection with the Senate’s ratification of the Fifth Protocol. JCT reports are recognized as highly persuasive extrinsic evidence of treaty understanding (Bruyea v. United States, 174 Fed. Cl. 238, 257-58 (2024)).

The JCT report explained that Article XXI(3) was specifically designed to eliminate the historical restriction that limited charities to direct investments, thereby permitting them to pool investments with other exempt entities. The JCT report’s focus on Article XXI(3) as the designated vehicle for indirect charitable investments, coupled with its adoption of the Technical Explanation’s limited definition of Canadian fiscally transparent entities, further confirmed the exclusivity of Article XXI(3).

Conclusion of the Court

The Court of Federal Claims granted the United States’ cross-motion for summary judgment and denied SSCF’s motion. The court concluded that:

“...the signatories’ intent was for charities to obtain the benefit of investing through pooled investments through the route specifically created for them in Article XXI(3). Having created and delimited that route, the signatories did not give charities the alternative option of investing through a Canadian unit trust and treating that vehicle as fiscally transparent under Article IV(6).”

Because the Greystone Fund was not operated exclusively for tax-exempt unitholders, its income could not qualify for tax exemption under Article XXI(3). Since Article IV(6) is inapplicable to charities investing through pooled vehicles and does not encompass Canadian unit trusts, SSCF’s claim for a refund of U.S. withholding tax was rejected.

Practical Tax Planning and Professional Takeaways

For CPAs and EAs advising tax-exempt organizations, the South Saskatchewan decision establishes clear boundaries regarding foreign investments in U.S. equities through collective vehicles:

Strict Exclusivity of Article XXI(3): When a tax-exempt entity invests in U.S. securities through an intermediary, the vehicle must strictly comply with Article XXI(3). This requires the investment vehicle itself to be tax-exempt in its home jurisdiction and operated exclusively for the benefit of qualifying tax-exempt entities.
Avoid Commercial Unit Trusts: Investment in standard commercial mutual funds or pooled trusts that permit non-exempt retail or corporate investors will jeopardize the cross-border tax exemption on U.S.-source dividends. Even if the fund’s governing trust agreement mandates annual distributions of all income to unitholders to achieve a zero-tax position for the fund, the fund is not fiscally transparent for treaty purposes.
Structuring Intermediary Investments: Advisers should ensure that foreign charities seeking exposure to U.S. equities utilize dedicated, closed-pool investment funds designed specifically for exempt unitholders (such as pension-only or charity-only pooled funds) that meet the strict statutory terms of Article XXI(3). Alternatively, direct investments in U.S. securities should be maintained to preserve the direct treaty exemption under Article XXI(1).

Prepared with assistance from Gemini Notebook.