Charities may find themselves in a predicament when faced with a
decision of whether to return donations. For example, donors may
request that donations be returned where donations cannot be
applied to the specific purpose (such as the construction of a
building) for which the donations were given, where the fundraising
target was not met. I asked my colleague Daniel Dochylo to provide
some insight on what charities need to consider before returning
Question: Can charities simply return donations?
Daniel: Generally speaking, a registered
charity cannot return a donation. The donor is considered to have
parted with the property, and the donee, being the recipient of the
donation, is considered the owner of that property. Returning a
donation has tax implications for both donees and donors.
Question: Can you elaborate on the tax implications for
Daniel: One implication is that the Income
Tax Act (Canada) provides that a charity must devote all of
its resources to charitable activities. Such activities do not
include returning donations to donors. If a charity returns monies
to donors, it may be considered to have ceased to comply with its
registration requirements. Moreover, the Minister of National
Revenue could exercise her discretion to revoke a charity's
Question: There must be situations where a charity is required
to return donations to donors?
Daniel: Yes, and the Minister does recognize
this. It will likely be under rare and unique circumstances though,
such as when a court has recognized that donations are held on a
resulting trust for donors because of a failed purpose or
Question: Can a charity transfer funds to another charity?
Daniel: Yes, provided it is to another
qualified donee. Such a transfer should not result in tax
consequences to the donor or donee.
Question: What should a charity keep in mind if it decides to
Daniel: There are a number of things, but I
will mention three related to tax. One is that a charity should be
careful not to run afoul of provisions of the Income Tax
Act with respect to making gifts to non-qualified donees, as
the Minister could determine that a charity returning a donation
has conferred an "undue benefit" upon the donor and
impose a penalty on the charity. A charity could protect itself
from such a penalty if it obtained the opinion, advice or direction
of the court to return the funds to a donor.
Second, a donee charity must inform Revenue Canada of the return
of donations and provide certain information, including the names
of the donors to whom donations are returned and the amounts.
Third, where the donee invested the donations, some portion of
income or gains likely will have to be returned to donors as
Question: Any last words on the return of donations?
Daniel: A charity's ability to return
donations is complicated and there can be more than tax issues to
consider, such as the law of trusts. In some cases the complication
may simply be the difficulty of identifying who the donors are.
Basically, anytime a charity wishes to return donations or use it
for an alternate purpose, it will need to carefully assess its
options and the consequences. There may be provincial or other
federal legislation that applies, and the case law in this area is
not that straightforward. It is a complicated area where legal
advice should be sought on a case-by-case basis.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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