TAX RECEIPTING

WHAT’S ALLOWABLE AND WHAT’S NOT

THE LATEST DEFINITION

Presented by: Dale C Tinkham, FCA, CMC

Philosophy of Philanthropy

Donor prime focus should be on Philanthropy Donor will be impoverished as a result of the

charitable donation The task is one of redirecting tax dollars to

charity

The Charitable Sector

2004: more than $6.9 billion in charitable donations were claimed by individuals

Median donation was $230 More than 80,000 charities in Canada More than 3,500 applications for charitable

status every year

Regulatory Environment Regulatory environment is strengthened considerably with all the new

and sometimes complex rules governing charities More audits of charities being conducted by Canada Revenue Agency

(CRA) Many new and graduated (progressive) penalties and sanctions ranging

from 5% for receipting deficiencies to a minimum of 105% for undue personal benefits

Higher penalties for issuing receipts for no gift or improper transfers to other charities

Increased transparency and accessibility of information More information about charities not in compliance with the rules More equity and fairness in administration of Income Tax Act (ITA) Increased public and voluntary sector confidence in the regulation of

charities

Help for Charities Professional advisors, lawyer and Chartered Accountant CRA’s user friendly website

www:cra-arc.gc.ca/tax/charities Charities Directorate Canada Revenue Agency Tower A, 320 Queen Street, Ottawa, ON K1A OL5 CRA Interpretation Bulletins CRA Information Circulars CRA Newsletters (new section for professionals soon) Websites of law and accounting firms, such as Carters.ca and Miller

Thomson.com (Susan Manwaring) CRA charity hot line 800-267-2384 E-updates from CRA

www.cra.gc.ca/eservices/maillist/subscribecharities-e.html

Charity Tax AlertNew Issues

Changes in the ITA in 2005 include Charity Return (T3010) –penalty for failure to file New disbursement quota rules New sanctions and penalties New appeal processes (internal first and then

external) New requirements for donation receipts

Information Return- T3010 File annually within 6 months of year end Penalties $500 fine

published name on CRA website as delinquent possible revocation of registration

Extended disclosure requirements, including Financial statements CRA correspondence on annulments, revocations,

denials, sanctions, and material filed in support of exemptions, special status and permissions to accumulate.

Disbursement Quota (DQ)

DQ is a calculated amount that the charity must spend each fiscal year on charitable activities or as gifts to qualified donees to keep its charitable registration.

Must spend in the following year at least 80% of the amount of the receipted charitable donations in current year.

The 80% is the disbursement quota (DQ) and must be accounted for in the T3010 and is assessed by CRA annually.

80% of transfers in from other charities must also be added to the DQ. New rule that applies to all charitable organizations, with some exceptions, and are very complex.

New DQ Calculation Rules Add 3.5% of the value of property (greater than

$25,000) that is not used in charitable activities to the DQ (4.5% if in existence on March 22,2004 until after 2008)

Investments are an example of property not used in charitable activities

Reduce the 3.5% DQ by capital gains realized on enduring property

DQ Exemptions Enduring Property

Gifts received by inheritance or bequest, including direct designation as the designated beneficiary of RRSP RRIF Life insurance proceeds

Gifts from other charities that are subject to certain trust requirements

Ten year gifts

Definition of a Gift The definition of gift is in common law, not in the ITA For there to be a gift, there must be:

A transfer of property The transfer must be voluntary without any obligation

(unless nominal) There can be no consideration or advantage to the donor or

a person selected by the donor unless nominal

Undue Benefit Gift or payment for the personal benefit of

a charity’s proprietor, member, shareholder trustee or settlor,

or a person who has contributed more than 50% of the capital of the charity,

or a person who does not deal at arm’s length with the charity

Excludes reasonable consideration or remuneration for property acquired by or services rendered to the charity

Nominal Benefit Defined Token expressions of gratitude are nominal CRA considers the benefit to a donor to be nominal if it

is less than 10% of the gift and does not exceed $75. (de minimis rule)

If the amount of the benefit cannot be determined independently, then it is not considered to be of nominal value.

If the advantage is cash or near cash items (such as redeemable gift certificates, vouchers and coupons) the de minimis exemption rule does not apply.

An Advantage, You Say Gifts that have an advantage to the donor

are defined in the ITA to be “deemed gifts” If any advantage received, it must be clearly

ascertainable and the advantage reported on the charitable donation receipt

If advantage is not ascertainable or advantage is more than 80% of gift, no charitable donation receipt can be issued (usually)

What’s an Advantage An advantage reduces the eligible amount An advantage is defined to be the value of “any

property, service, compensation or other benefit that the donor has received, obtained, enjoyed, or is entitled to receive and enjoy that is consideration of, in gratitude of or in any other way related to the gift.

No advantage if nominal Wide definition of advantage covering time periods,

before and after, or if the gift is in some way, directly or indirectly related to another transaction

Directed Donations No official receipt if the donor directs the charity to give

funds or structures a gift to benefit a donor or someone the donor has an interest in or a specified person or family

Donations subject to a general direction to be used in a particular program are acceptable, provided the charity decides how the donation will be used within the program

Conditions Precedent and Subsequent Donor can attach 2 kinds of conditions Condition precedent takes effect before the gift is made

and the receipt is issued only after the condition precedent is made

Condition subsequent, if it fails, would result in a gift reverting back to the donor and CRA should be advised. The donation will be returned with the attendant consequences met

Donations In-Kind Donations In-Kind include

Capital property Depreciable property Personal use property A residual interest, right of any kind, licence or

share Inventory of a business

Tax Receipting In-Kind Donations The amount recorded on the receipt is the fair market

value on the date of donation FMV is defined to be the standard definition used by

accredited appraisers. FMV excludes commissions payable on the sale, GST,

PST Gifts of inventory if there is a benefit back to the business

such as advertising or promotion are not eligible

Gifts of Publicly Traded Securities

The May 2, 2006 budget reduced the inclusion rate to zero (from 25%) arising on the donation of publicly traded securities.

The donation receipt is issued for the FMV of the security on the date of donation

Donation of Publicly Traded Securities-An Example Assume $1,000 fair market value, zero cost base to donor and top

marginal rate of tax of 46%

Cash Securities

Donation amount $1,000 $1,000

Tax credit $460 $460Tax saving NIL $230

Tax assistance $460 $690

Cost to donor $540 $310

Publicly Traded Securities Donated by Private Holding Companies Company receives a deduction (not a tax credit) for the

fair value of the gift Proceeds are fair market value Capital gain is exempt and allocated to the CDA which

may be paid tax free to the shareholders If the usual and normal procedure is to thank donors

publicly, shareholders of these holding companies may be able to have some public credit for the donation with any undue benefit being attributed

Stock Options Eligible amount is equal to fair market value

of options when donated Complex rules for calculating donor’s cost

basis.

Non Qualifying Securities Non qualifying shares are:

Not traded on a prescribed exchange Shares in a business you control or debts you own between

yourself and a company you or someone related to you control.

Charities cannot own more than 10% interest in a business for longer than 7 years.

If the charity owns more than 50% of the business, there may be reporting obligations to the Public Guardian and Trustee (PGT)

Charitable foundation controls a corporation, there is a penalty of 5%of the dividend with escalating penalties for repeat infractions

Gifts of Non Qualifying Securities- Some Considerations Preference or special shares issued in an estate freeze

situation need to be held for at least three years at a minimum before gifting

Deemed fair market value equal to cost if preference shares created for gifting

If founder created shares of private company in his estate plan for purpose of making charitable donation on death, but instead decides to gift shares while alive, deeming provisions apply to reduce eligible amount to donor’s cost basis

Gifts of Depreciable Property Donors of depreciable property suffer tax on the

recaptured depreciation The donor’s claim for a charitable donation is

the usual 75% of net income limit plus another 25% of the recaptured depreciation.

Gifts of Capital property Gifts of capital property are eligible for receipts

equal to fair market value If there is a capital gain arising on the

donation, the donor may increase the 75% of net income limit by 25% of the capital gain.

Cultural Property Donors of gifts of cultural property certified by

the Canadian Cultural Export review Board may claim up to 100% of the donor’s net income (usually restricted to 75%)

Capital gains arising on the donation are not taxable

Ecological Gifts Ecological gifts certified by the Minister of the Environment or

to a Canadian municipality may be receipted at their appraised values on the date of the donation and the donation may be claimed up to 100% of the donor’s net income.

Inclusion rate on the capital gain is now zero Conservation easements, covenant or servitude, the tax receipt

will be the greater of the fair market value of the restriction or the reduction in the land’s fair market value caused by the restriction (for example, no build). Rely on a qualified appraiser (or 2) and competent opinions for valuations.

Art Donation Type Schemes Donor buys an item for a specified price, but it is

appraised at a higher amount. Donor receives a charitable donation receipt for the

appraised value. Charity sells the item at a charity auction for less than

the appraised value. Donor gets a large refund of income taxes due to large

charitable donation receipt.

Consequences/Concerns to Charity of Art Donation Schemes

Charity’s DQ increases based on the issuance of the charitable donation receipt

Charity does not raise sufficient cash to meet its DQ requirements in the subsequent year.

Charity needs to be concerned about the appraiser’s independence, competence, qualifications and assumptions in the appraisal report and if the charity knows or should have reasonably known the appraisal value was incorrect, it will be subject to civil penalties, based on the income tax evaded and loss of charitable status

Appraisal fees are paid by the donor

Taxpayer/Donor Alert CRA issued taxpayer alerts in November 2003, 2004 and again

in 2005. Alerts caution taxpayers about certain tax shelter donation

arrangements, leveraged cash donations, and buy low-donate high arrangements.

Just because CRA issues tax shelter numbers to these programs does not guarantee the donor will receive the advertised benefits. It only allows CRA to identify them only for a probable audit of the charity sponsor and the donor.

Donors should seek independent legal and tax advice

Deeming Provision December 2003 amendments restrict donation receipts issued to

the lower of fair market value and the ACB immediately before the gift was made (deeming provision).

Gifts of inventory, real property, certified cultural property publicly traded shares and ecological gifts excluded from the deeming provision

Deeming provision applies under another section of the ITA to gifts acquired by donors within 3 years of the donation or if the property was acquired through a “gifting arrangement” ( tax shelter arrangement) where the donation would generate benefits that exceed the cost of acquiring the property, regardless of the holding period. This provision does not apply on death

Any donated property acquired within 10 years may be subject to the deeming rule if it is “reasonable to conclude” that one of the reasons for the acquisition was for the purpose of making the donation.

What is a Tax Shelter Where the donor can claim deductions or credits within 4

years that equal or exceed the original investment If you promise a net return on the investment, you need

to register with CRA as a tax shelter Includes buy low, donate high schemes Antidote is the new deeming provisions that deem fair

value to be the donor’s cost

Tax Shelter Donations Involving Limited Recourse Debt

Referred to as leveraged donation shelters (money borrowed but not repaid by borrower)

Donor borrows money and donates proceeds to charity for receipt, and pays a fee or amount to promoter who makes an investment that generates sufficient funds to retire the debt over time.

Limited recourse debt is deducted from the gift amount. Debt may be deemed to be Limited Recourse Debt Debt not limited recourse if bona fide arrangements to

repay within 10 years and pay interest by February 28 in the year following at the CRA prescribed rate when issued.

Advisories to Charities For Donations in Kind, Charities should have written confirmation of

acquisition date, and if less than 3 years, issue a receipt for the lessor of the fair market value and the Donor’s ACB.

Donor intent on acquisition of property should be ascertained by charity.

If acquired for donation purposes within last 3-10 years, deeming provisions may apply. Otherwise, may be eligible for receipt at fair market value. Onus on Donor, but charity in difficult position. Seek legal advice.

Any gift over $5,000 whether in cash or in kind, enquire about the conditions around the gift including: Any advantage Whether from a tax shelter When acquired within the last ten years and If the purpose of the acquisition was to make the gift

Guidelines to Tax Receipting Fund raising dinners Charity auctions Lotteries Concerts shows, sporting events Golf tournaments Membership fees Charitable annuities Mortgaged property

General Guidelines for Tax Receipting Attendance of celebrities at fund raising events is not an

advantage generally, however, an amount paid to participate in an event with a celebrity (golf, dinner) would not be a gift

The value of complimentary benefits such as door prizes for which all attendees are eligible by virtue of attendance, will be an advantage unless it meets the de minimis rule. The basis of calculation will be the total value divided by the attendees.

Fund Raising Dinners

The value of a comparable meal at a comparable facility based on group rates or banquet pricing will be deducted from the donation to determine the amount that can be receipted.

The right to participate in an auction after the dinner is not an advantage.

Fund Raising Dinner An example 500 tickets sold at $200 each Comparable meal costs $90, excluding tips and taxes Door prizes are trips and jewelry valued at $3,500 Loot bags for all valued at $10 each Eligible amount is as follows:

Ticket price $200 Meal cost $ 90 (advantage) Eligible amount $110

Other calculations: De minimis test $3,500/500=$7 plus $10 loot=$17 10% of the ticket price is $20 Advantage is less than 80% of ticket price or $160. Conclusion: Issue receipt for $110

Charity Auctions Items purchased at auction are generally assumed to be at fair value

and are not eligible Where the fair value cannot be ascertained independently, for

personal items, such as a hockey jersey, right to play golf with a particular person, the value of the item will be deemed to be the successful bid price and no receipt can be issued.

Where the fair value of the item is posted at the auction, and the fair value is less than 80% of the successful bid, the tax receipt may be issued for the eligible amount. For example, if the fair value of the item (including a purchased service) posted at auction is $400 and the successful bid is $500, the eligible amount to be receipted will be $100.

If you donate to the auction, you are eligible for a receipt equal to the fair market value of the donated item.

Lotteries/Gift Certificates Cost of a lottery ticket not considered a gift and

amount not eligible Issuers of gift certificates are not eligible Where an issuer donates a gift certificate

which is transferred to a third party (at auction or by lottery) the redemption is not eligible

Eligible A third person who has purchased a transferable

gift certificate and donates it to charity The charity redeems the gift certificate for property

Concerts, Shows and Sporting Events Ticket prices to attend such events must be

clearly shown to be in excess of the usual cost of tickets.

The 80% rule applies to determine if there is an eligible amount

If ticket price is $200, and each participant receives a CD and T shirt valued in total at $35, and the usual ticket price is $100, the eligible amount is $65

Golf Tournaments Usual costs of a golf tournament are established with

reference to the usual and ordinary costs for

Greens fees (if not a member) Cart rental Meals Complimentary items Door and achievement prizes Raffle tickets if included in admission price, the value of the

prizes will be included in the value door prizes

Excluded are the cost of raffle tickets if purchased separately and the cost of hole in one prizes.

Golf Tournament An Example

Participants 100

Entrance fee $200Regular green fee $ 50Cart rental $20(incl)Comp (golf balls) $15

Meal $30Door prize ($2,000) $20Raffle tickets extraHole in one prize is a car

Entrance fee $200Less: green fees 50

: cart rental 20: comps 35: meal 30: hole in one N/A: raffle ticket N/A

$135

Eligible amount $ 65

Membership fees There may be an eligible amount associated

with the payment of membership fees The amount of the advantage needs to be

calculated If the amount of the advantage is 80% or less of

the payment, a tax receipt may be issued

Membership FeesAn Example Assume the following facts:

Promotion of cultural charity Contribution is $250 for

Recognition in the charity newsletter

Quarterly Newsletter subscription (otherwise free)

Right to attend AGM’s Monthly calendar of

performances (otherwise free) Advance invitations Pewter key chain ($10 value) Parking vouchers ($40 value) Performance ticket discount

($40 value)

Eligible amount:

Contribution $250Less: Comp items

Key chain $10Discount $40Vouchers $40

Advantage $ 90

Eligible Amount $160

Charitable Annuities Donor makes an irrevocable gift of cash, say

$50,000 Charity issues a 5 year term certain annuity

which provides a predetermined return of interest and capital, say 9%.

Annual cash flow for 5 years will be $22,500 or approximately half the gift (interest portion subject to income tax)

A charitable receipt is issued for the value of the gift less future benefits $27,500 (approximately half the gift).

Bequests

Bequests are eligible and the executor can claim the receipt in the year of death and the prior year up to 100% of the net income in that year.

Mortgaged Property Mortgaged property may be donated Value of the building should be determined without

reference to the mortgage Value of the mortgage should be determined by

reference to the interest rates, terms and conditions of the mortgage, which if representative of current market conditions, and there are no special conditions or encumbrances, the mortgage will likely be valued at the outstanding amount.

Gifts of Life Insurance Donors may take out a policy with charity the beneficiary

and donor pays charity or insurance company for annual premium and receives a charitable receipt

Donor may absolutely assign existing policy for the cash surrender value which is the eligible amount. Donor may have capital gain on assignment, depending on ACB of policy.

Donor may gift proceeds of life insurance to charity from estate. (directed designation)

A donor who outlives mortality tables, will receive approximately the same benefit in the estate as on an annual basis (ignoring time value of money).

Fundraising by Third Parties Fundraising contracts between the charity and

fundraiser which yield unreasonable compensation to the fundraiser may be voidable based on violation of public policy or misrepresentation.

Excessive fundraising expenses paid to a for profit organization are unreasonable payments providing an undue benefit

Seek guidance from counsel on limits and penalties that may apply if there is any doubt

May not be able to issue tax receipts

Drafting Gift Agreements Contract must have consideration, but a gift is a voluntary

transfer of property. Create an enforceable pledge through the use of nominal

consideration, such as naming rights Result will be a binding obligation with only a nominal

benefit back to donor Refer to principles in Brantford Hospital Foundation vs.

Marquis

Official Receipts Must be prepared in duplicate Signed by an authorized person Bear its own serial number If donation of property;

Fair value of property when donation made Date of gift Description of property Name and address of appraiser

Facsimile signatures may be used if: Receipts are distinctively imprinted with the name ,address and

registration number of the charity Receipts are prenumbered Unused receipts are kept at the head office in Canada

A Tax ReceiptChoice charity June 7, 2006Phone # 416-xxx-xxxx

Donation for services in the amount of $6,000Donor name: Mr. Philanthropist

Official receipt Script signature

Proper Official Receipt

See CRA sample receipts in hand outs

Cash gift (no advantage) Cash gift (with advantage) Non cash gift (no advantage) Non cash gift (with advantage)

Penalties and Sanctions Penalties vary depending on the severity and

frequency of the infractions. Tax receipting privileges may be suspended and charities required to notify potential donors

If a charity loses its registered status, it is No longer exempt from tax Cannot issue donation receipts May be subject to a revocation tax (equivalent to fair value

of charity’s assets).

Many New Sanctions Many new intermediate sanctions to

encourage Charities to comply with the new provisions in the ITA

Fines, suspension of ability to issue donation receipts up to revocation of charitable status.

Sanctions in ITA Failing to file returns Issuing incomplete or misleading receipts Failure to keep proper books and records Carrying on unauthorized business Providing undue benefits Inappropriate transfers of funds

Sanctions $500 penalty and failure to file after demand, revocation Incomplete receipts 5% of the amount of receipt, 10% thereafter False information, 125% of the receipt, and if in excess of $25,000,

suspension of tax receipting privileges 5% of the gross revenue of a prohibited business; repeat infractions, up to

100% Control a business; 5% of any dividends, repeat infractions are 100% Failure to keep proper books and records; suspension of tax receipting

privileges 105% of undue personal benefit; repeat infractions 110% and suspension

of tax receipting privileges Charity makes gifts to non qualified donees,105% of the gift amount and

110% for repeat infractions. Inter charity transfers for the purpose of delaying expenditures, 10% and

both charities may be liable

Books and Records Sanctions Many requirements for maintenance of

adequate books and records Copies of receipts containing prescribed

information so the Minister may verify the donation

Single significant failure or repeat failures can lead to a 1 year suspension of receipting privileges or revocation of the charity’s registration

Suspension and Other Penalties If a charity’s tax receipting privileges are

suspended, the charity must notify potential donors

In lieu of penalties greater than $1,000, charities may transfer amounts to eligible donees as determined by the Minister.

Internal Appeal

A charity may appeal the Minister’s decision by filing a Notice of Objection within 90 days of the mailing date of the Notice of Assessment

There is a more accessible process where a new unit in Appeals will review decisions by the Charities Directorate on matters of Denials Revocations Annulments of charitable registration Sanctions

External Appeal

If the charity is not satisfied with the results of the internal review, it may appeal a sanction to the Tax Court of Canada and denial, revocation or annulment of charitable registration to the Federal Court of Appeal.

Summary

Work with the examples for calculating eligible amounts

Learn the new rules about Deeming rules on fair market values when

receipt equal to donor cost basis Advantage more than 80% of gift (no receipt

usually) 10%/$75 for nominal benefit (receipt in full)

Seek professional advice so you understand your legal obligations under the provisions in the ITA

Questions