Worldwide businesses are acknowledging their corporate social responsibility in addition to profit making goals. As significant corporate resources are being allocated to these new efforts, organizations need to consider different options and the related advantages and disadvantages.
When a corporation wishes to support a registered charity, it can do so by way of a gift or sponsorship. At law, a gift requires: (i) an intention to donate property; (ii) acceptance of the gift; (iii) delivery of the gift; and (iv) no corresponding benefit given in exchange for the gift. According to the Income Tax Act (Canada) ("ITA"), there is a broader definition of a charitable gift which permits the corporate client to receive a benefit in exchange for a gift provided that the 'advantage' does not exceed 80% of the fair market value of the gift. In contrast, a sponsorship (which is not defined in the ITA) means a payment by a corporate client to a charity in exchange for advertising or some other benefit.
When a corporation makes a charitable gift it is entitled to deduct from its taxable income the amount listed on the donation receipt, provided that the deduction does not exceed 75% of the corporation's taxable income and any excess amount can be carried forward for five years. If the sponsorship is a reasonable outlay or expense for the purpose of generating profit, then for Canadian income tax purposes it would qualify as a business expense that can be deducted from a corporation's taxable income. A business expense differs from charitable gifts as a business expense: (i) is not subject to the 75% limit; and (ii) cannot be carried forward for five years. Therefore from a tax perspective, charitable gifts and sponsorships have very similar tax benefits to corporations.
Gifts by corporations to charities can include gifts of gift certificates, inventory, real estate, and leasehold interests but excludes services because there must be a transfer of property for there to be a gift. The ITA has special rules regarding certain types of property that is donated to a charity: medicine, inventory, life insurance, capital property, cultural property, and ecological property.
Corporations may want to create a parallel charitable foundation for their charitable giving. A charitable foundation may assist with public perception since there will be a separate entity to collect and manage money collected from staff, customers and others and also it allows (within certain parameters) for an asset base to be built up to support ongoing charitable activities if at some point the corporate profits are down. These benefits need to be weighed against the initial and ongoing creation and maintenance costs of a separate governance structure, including bookkeeping and preparation of financial statements.
There are a number of other legal and related issues to be considered by a corporation looking at making a charitable donation:
- Do the Articles of Incorporation or other originating documents authorize the activities being considered, in addition to the corporation's view to profit?
- What level of approval is required to approve a donation/sponsorship - board approval, executive, other?
- Should a board committee or other internal group created to develop policies related to gifts/sponsorships?
- For sponsorships, is there a sponsorship agreement outlining clearly what benefits and information the corporate client is entitled to receive?
- A corporate client should also consider whether there are any risks associated with working with a particular charity or project, being mindful of: anti-terrorism laws; tax shelters rules; appropriate levels of fundraising expenses; and the activities and other policies of the charity.
Being aware of the issues may assist charities in discussions with organizations when seeking donations and/or sponsorships.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
