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 donations.
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 donees?
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 registration.
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 project.
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 return donations?
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 well.
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.
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