The most important benefit that Canadian registered charities and other qualified donees receive is the ability to issue “official donation receipts”. Unfortunately, many charities do not understand the receipting requirements and this can result in compliance problems for those charities and their directors.
The ability to issue a tax receipt is almost like having a license to print money. It is important that qualified donees issue official donation receipts according to the rules set out in the Income Tax Act (Canada) and Canada Revenue Agency’s (“CRA”) guidance. According to the CRA, when they audit charities they find that approximately 89% of charities are not issuing receipts appropriately. Receipting is probably the #1 reason that Canadian registered charities are revoked as a result of audit. Luckily many of the most commons issues can be easily fixed if you know what to do.
On May 25, 2017, I will be doing a free webinar for CharityVillage on Charitable Receipting Do’s and Don’ts which will discuss some of these issues and others.
This article will clarify some of the common misunderstandings with charitable receipting and provide useful tips for registered charities and qualified donees:
1. Issuing charitable receipts is NOT mandatory
There is a misconception among charities that if a proper gift is made to the charity, then the charity must issue a tax receipt. This is not true. Furthermore, many charities may have administrative policies setting out the circumstances in which they will issue tax receipts. For example, many charities do not issue tax receipts for any donations below a certain threshold. Other charities may only issue receipts for cash gifts, not gifts in kind. It is vital that charities are upfront with donors about these policies in order to maintain the public’s trust and confidence in the receipting process. As 99% of receipting problems come from 1% of receipts it is sometimes best to say no!
2. If we do not receipt the funds, the funds are no more flexible than if we do
Some charities have the misconception that if they do not issue a receipt for a donation, then they have free reign to spend the money as they wish. However, regardless of whether a receipt has been issued, Canadian registered charities can only spend funds in accordance with their objects, subject to the legislation, common law and CRA’s guidance.
3. A donation must meet the definition of a ‘gift’ under the Income Tax Act
In order for a transfer of funds or gifts in kind to be considered a “gift” to a registered charity and therefore be receiptable, it must be: 1) voluntary 2) a complete transfer 3) property, and 4) have donative intent on the part of the donor. If any one of these elements is missing then there is no gift and a no receipt should be issued.
4. Common payments that do not qualify as gifts
Some examples of payments that generally do not qualify as gifts:
- Payment of basic fees for events or programs;
- Membership fees that convey material value to the donor;
- Any payment for lottery tickets;
- Payment of tuition fees (except for certain religious school tuition fee as set out in IC 75-23); and
- Business sponsorship.
5. Mandatory information required on official donation receipts.
There are specific requirements for information that must be included on all official donations receipts. If any of this information is missing, the receipts are not being issued properly. This is one of the most common mistakes and the easiest to fix.
6. Split receipting rules
Charities need to ensure that the eligible amount of the gift on the receipt is correct. This is commonly referred to as ‘split receipting’. If a donor receives an advantage, the amount of the advantage must be deducted from the value of the gift. So when a donor gives $150 for a ticket to a gala dinner, the charity needs to work out the advantage and subtract the advantage from the gift to arrive at the eligible amount of the gift.
7. Donation of services
Donations of time, skill and effort are considered ‘services’ and not property and therefore do not qualify as ‘gifts’ for receipting purposes. Examples of donations of services that would not qualify as gifts are:
- professional advice by a lawyer, accountant or other volunteer;
- a local contractor building a shed for the charity;
- lending a piece of equipment to a charity; or
- allowing the charity to use a time-share or apartment.
The charity can issue a receipt for services provided 1) the charity is billed and pays for the services. 2) Then, without any obligation to do so, the person who provided the service can make a donation to the charity of X amount of dollars, 3) and the charity then issues to the person a receipt for X amount of dollars. This “cheque exchange” is very different than just issuing a receipt. When this person is paid by the charity, they must include this in their income which increases their taxes. The receipt issued to this person offsets the increase in their taxes and therefore there is no real advantage for the charity or donor doing a cheque exchange. The cheque exchange can work for both donations of time and lending of property.
8. Establish who the donor is
It is important to determine who has made the donation so the charity can provide the receipt to the correct donor. If in doubt, a charity can ask a person or corporation to provide a declaration as to who the donor is. If you cannot determine the real donor then don’t receipt.
9. Keep copies of official donations receipts and other books/records
CRA has requirements for charities to keep copies of tax receipts for a minimum of two years from the end of the calendar year in which the donations were made. Most other records are required to be kept for seven years. It is advisable to keep copies of official donation receipts for longer than two years in case they are ever needed by the donor or CRA. Also, official donation receipts that are produced electronically must have a printed copy or be kept in an unalterable format, such as a CD.
10. Charity must not act as a ‘conduit’
Charities are sometimes approached by people who are interested in contributing to a foreign charity or Canadian non-profit that is not a registered charity, but they wish to flow their funds through the Canadian charity in order to obtain a tax receipt. This may be considered a conduit situation or “lending” of charitable registration, which is inappropriate and can result in revocation. Canadian charities are allowed to conduct foreign activities and work with non-profits in Canada, but they need to do so in accordance with the rules dealing with direction and control.
In the webinar we will discuss other receipting concerns and suggestions for avoiding inappropriate concerns.
One of the most valuable privileges that a registered charity has is the ability to issue official donation receipts. The issuance of such receipts costs the Federal and Provincial government significant lost tax revenues and in recent years there has been much greater scrutiny of charities and their receipting practices. Fortunately for charities, there is now a large amount of information available to the public on appropriate receipting of which charities and their advisors should be aware.
Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario. He can be contacted at email@example.com or at 416-361-1982. To find out more about legal services that Blumbergs provides to Canadian charities and nonprofits please visit www.canadiancharitylaw.ca, www.globalphilanthropy.ca, www.smartgiving.ca and www.charitydata.ca.
This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.