Designing Donor Benefits -- Tax implications in Canada
In the long list of reasons why people give to their favourite causes, the implications of the tax benefit are down near the bottom.
Once the donor has decided to support your cause, however, especially with a major four, five or six figure gift, the astute fundraiser will be ready with the tax information. The professional development officer will also urge the donor to seek the expert advice of his own accountant, lawyer and financial advisor.
In Canada, organizations, after applying to and being accepted as a registered charity by the Canada Customs and Revenue Agency (CCRA), formerly known as Revenue Canada, are granted the right to issue receipts for income tax purposes -- receipts that can be issued for donations from individuals or corporations.
To qualify as a gift, the three following criteria must be met:
- The property is transferred to the ownership of the charity.
- The transfer is voluntary.
- No benefit is provided to the donor or the donor’s designee, unless the benefit is of nominal value.
Nominal value is clearly defined in CCRA regulations: "a benefit has a nominal value if its fair market value (FMV) is not greater than 10% of the gift, or $50CN, whichever is the lesser."
Any benefit a donor (or designee) receives must have a value established for it -- an amount that defines its FMV; otherwise the gift that engendered the benefit is not a donation. FMV is the highest price that an item would bring in an open market between a willing seller and a willing buyer. A donor of $100 can only receive a benefit with a FMV of $10; the benefit to a donor of $1,000 must have a FMV of no more than $50.
Here are three examples to illustrate the point:
- Mr Gotrocks has indicated an interest in supporting your organization’s scholarship program with a "big gift," but what he really wants is to run his donation through your organization in order to get the tax credit; you are then to send it to Ivy University for his son’s tuition. As his son is the designee of the benefit of the donor’s "gift," no tax receipt can be issued.
- The organization’s bookkeeper wants an increase in her monthly fee; the board agrees on the condition that the bookkeeper returns 25% of the monthly fee as a donation to the organization. Since this "donation" becomes a condition of employment and is not voluntary, there is no tax receipt.
- Your charity has a benefit program that gives donors the opportunity to attend your annual conference at a 15% discount and to purchase all your publications at a reduced price. Since there is no way of knowing how much of these benefits the donor will use, the FMV of the benefits cannot be assessed; no tax receipt is issued.
In the USA companion piece to this article, Gayle Gifford uses the example of donors who give $15,000 a year and who get a gift in recognition of that donation with a FMV of $1,500; in Canadian law, no tax receipt could be issued because the upper limit on FMV in this scenario is $50.
Tax credit: Individual donors receive a tax-creditable receipt for a charitable gift. This means that the appropriate percentage of the donation is deducted from the income tax payable, instead of deducting the entire amount of the donation from taxable income. Each province and the federal government establishes its own tax credit percentage. The federal tax credit is 17% of the first $200 and 29% of the remaining amount of the annual gifts.
Tax deduction: Corporate donors deduct their charitable gifts from their taxable income.
Membership fees: If your organization has a membership program, let’s say with a fee of $75, that fee is tax-creditable if the member receives only minimal benefits: an invitation to the annual meeting and a quarterly newsletter (but not a journal that would sell for $5 an issue). Free or discounted admission to events for members and a publication that has a sale price outside the organization would mean that the annual fee cannot be recognized with a tax-creditable receipt.
Gifts of publicly traded securities: these gifts are most often shares of stock in companies which must be listed on a prescribed stock exchange (five in Canada and 27 foreign stock exchanges) to be eligible, but can also include mutual funds. To attract a tax-creditable receipt, the ownership of the shares must be transferred to the charity (as opposed to selling the securities and donating the income realized from the sale to the charity). The donor is given a tax-creditable receipt for the full value of the securities. On his annual income tax return, the donor claims only 25% of the capital gains on the securities as a Tax Credit -- FMV minus the cost price. This tax credit was offered on a trial basis in an effort to encourage donations; it worked well enough that the federal government made it permanent in October 2001.
Gifts in kind: An individual donor of a tangible good can get a tax-creditable receipt for the FMV of the good. Gifts of tangible property by a business is a little more complicated. An example to illustrate: you are renovating your offices and JOHN SMITH, a local contractor, gives you ten sheets of plywood. As long as you only note the gift among the list of donors in your newsletter, the contractor is eligible for a receipt for income tax. However, if you name the office where the plywood is used the JOHN SMITH Office, the recognition and profile that this naming affords him is considered advertising and no tax receipt should be issued.
John Smith has some further reporting to make, since his gift came out of his business inventory. If the plywood he gives away has a FMV of $2,000, the tax receipt is issued for that amount, but he also has to add the $2,000 to his income, as if he had made a sale. The income is, then, somewhat offset by the tax deduction. (Remember, Mr. Smith was able to take a deduction for a $2,000 business expense when he bought the lumber in the first place.
Special event tickets: A ticket to a gala is priced at $100; it covers the cost of the dinner, complimentary wine and a silent auction. The FMV of the dinner and wine is $35 (even if the caterer gives you a break on the cost and the wine is donated); ticket buyers can get a receipt for $65. Then the committee decides it wants to add a draw for door prizes from the names of everyone who attends. The largest prize is two tickets to anywhere Air Canada flies (those were the good old days!!). In this scenario, there is no portion of the $100 that is eligible for an official tax receipt. The reason: the draw is considered a lottery since CCRA deems the balance of the ticket price as the cost of the opportunity to win the draw prize, just as if you had bought any lottery ticket. If there is a small gift at each person’s place, the FMV of that small gift must be added to the total cost of the event -- which reduces the amount of the tax credit, and is recognized in the tax receipt.
Services: your charity’s lawyer offers to do some legal work for you in exchange for an official receipt. This is contrary to CCRA regulations, since service is not a property. If he wants an official receipt, he must submit an invoice for his services, the charity pays the bill and the lawyer returns the fee to the charity in a separate transaction. The lawyer must claim the payment as income.
Unlike in the States, where it would be a deduction from income, and, therefore, a transaction with (essentially) no tax benefit, in Canada, it is a tax credit, and the donor/lawyer comes out ahead.
These regulations are outlined in a number of CCRA bulletins:
RC4108: Registered Charities and the Income Tax Act
T4063: Registering a Charity for Income Tax Purposes
RC4142: Tax advantages of Donating to Charity
IT-110R3: Gifts and Official Donation Receipts
The CCRA website is www.ccra-adrc.gc.ca where there is an abundance of information on this subject. The publications can be ordered on line.
Disclaimer: I am not a lawyer and this is not legal advice. There are special (and complicated) regulations covering the tax implications of a donation made by a Canadian citizen to a US-based charity and by a US citizen to a Canadian charity -- questions that were not addressed in this or the previous article.