Your love may not come with strings attached, but gifts to charities and other "qualified donees" often do. A gift may be directed to the employment of a specific individual, for a specific program of the charity, or to a specific end which may or may not fall within the charity's purposes. This poses a real question as to whether donations such as these qualify as "gifts" for the purposes of the Income Tax Act (Canada) (the "ITA"), allowing the charity to issue a charitable gift receipt and the donor to claim a tax credit.
From me to you
The courts have defined a "gift" as "a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor". The Canada Revenue Agency (the "CRA") has said that generally a gift is made if three conditions are satisfied:
- Some property—usually cash—is transferred by a donor to a charity;
- The transfer is voluntary; and
- The transfer is made without expectation of return. No benefit of any kind may be provided to the donor or to anyone designated by the donor, except where the benefit is of nominal value.
Typically, the first two qualifications are clear, but where there are strings attached to a certain gift, this gives rise to a question as to whether a "benefit of any kind" has been provided to the donor "or anyone designated by the donor".
Consider the case of a donation of cash which the donor directs to be paid to a specific employee or volunteer of the charity who happens to be fund-raising her own wages for a particular program or mission of the charity. In such circumstances the result is clearly that a benefit is being provided to an individual designated by the donor, and the CRA would thus, according to their guidelines, deny the tax credit to the donor on the basis that it is not charitable to provide a private benefit to a particular person.
A better approach in such circumstances would be for the charity to require the employee to fund-raise for a particular charitable program instead of for the employee herself, and to inform the employee that she will receive her wages from the amount received. Though some donors may be unwilling to run the risk that the charity may put the funds to another use than direct payment to the employee, such action is necessary to keep the donation, and the charity itself, on-side CRA guidance and case law so that the donor will receive a tax credit and the charity will not have issued an improper receipt.
Another possible scenario is where a donation is made subject to the amount or property being used for a particular program or purpose. Where the program specified is within the charity's objects, such as the direct activities of a charity or a charity's "related business" (a business substantially run by volunteers and/or linked and subordinate to a charity's purposes), earmarking funds or property for these specific projects will pose no issue. However, where the purpose is outside a charity's objects—or worse, not a charitable purpose at all—then this is clearly offside. Examples of this include donations intended to be directed to political activities or an unrelated business.
Additionally, if requiring a particular purpose for a property would reduce the value of the donated property, such as requiring that a donated building be only used as a soup kitchen for example, then this would reduce the amount that the charity could issue as a receipt to the fair market value of the donated property would be reduced due to the conditions placed on its use.
Too much monkey business
Less clear are those instances where a gift for a certain purpose conveys some type of advantage to the donor. A recent case involving donation arrangements to Trinity Western University involved donors giving certain amounts to the school, and the donors' children receiving back, at times, up to 100% of the amounts donated by their parents as bursaries. This plan resulted in the parents of these students essentially receiving tax receipts for the value of their children's tuition.
This type of situation is a clear example of a gift for a certain purpose conveying a private advantage to the donor. In the Trinity Western University case, the donors could not (and did not) earmark their donations for their children's tuition, but the effect was the same as if they had.
In those circumstances where a donation has been given for which the donor is receiving back something of value, the ITA allows for the "split receipting" of the gift—that is, allowing for a part of the donation to still qualify as a gift, despite the existence of an advantage to the donor. Common examples in this category are fundraising dinners or charity auctions, where the amount given is well above the value of the meal or property received in exchange.
The CRA's position on the matter is that where:
- the advantage received by the donor or a person not dealing at arm's length with the donor, such as his child or spouse, is "clearly identified and its value ascertainable"; and
- where there is a clear intent to enrich the charity, which is shown by the amount of the advantage not exceeding 80% of the value of the property transferred to the charity,
then the amount qualifying as a gift will be the amount donated, minus the value of the advantage provided to the donor.
Can't buy me love
Ensuring that charitable gifts are indeed gifts at law is important, both to ensure donors get the tax credits for their donation as well as to avoid the risk of sanction to your charity or qualified donee, or, in more egregious cases, revocation of the registration of your charity or qualified donee. If you are interested in receiving advice on gifts or other matters relating to gifts to charities or qualified donees, our Charities and Tax-Exempt Organizations group would be pleased to assist you.
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.