A. INTRODUCTION
This Charity Law Bulletin highlights
some key aspects of Canada Revenue Agency’s (“CRA”) Fall
2009: Registered Charities Newsletter No. 33 (“Newsletter”)
released on December 16, 2009. This issue of the Newsletter
focuses on many important topics, including proper receipting
procedure, the new fundraising guidance and tax shelter
related revocations. The full text of the Newsletter is
available at: http://www.cra-arc.gc.ca/E/pub/tg/charitiesnews-33/README.html.
B. SUMMARY OF CRA NEWSLETTER NO. 33
1.
Education: Improper Receipting
In recent years, CRA audits of charities
have uncovered many cases of improper receipting. This section
of the Newsletter highlights some issues charities need
to be aware of when issuing donation receipts. Charities
should take note of this important information to ensure
they are issuing receipts in a manner that complies with
the Income Tax Act. A charity that issues improper
receipts risks having a sanction imposed or having its charitable
status revoked.
a)
Issuing a receipt with inaccurate
or missing information
Official donation receipts must contain
all the information required by the regulations to the Income
Tax Act. The CRA notes that charities often issue receipts
with inaccurate or missing information. All official donation
receipts issued by registered charities must include the
following information:
-
a statement that it is an official receipt for income
tax purposes;
-
the name and address of the charity as on file with
the Canada Revenue Agency;
-
the charity's registration number;
-
the serial number of the receipt;
-
the place or locality where the receipt was issued;
-
the day or year donation was received;
-
the day on which the receipt was issued if it differs
from the day of donation;
-
the full name, including middle initial, and address
of the donor;
-
the amount of the gift (for cash gifts);
-
the value and description of any advantage received
by the donor;
-
(under proposed legislation) eligible amount of the
gift;
-
signature of an individual authorized by the charity
to acknowledge donations; and
-
name and Web site address of the Canada Revenue Agency
- www.cra.gc.ca/charities.
There are different requirements for
receipts issued for gifts-in-kind (non-cash gifts). In addition
to the requirements listed above, official donation receipts
for gifts-in-kind must contain the following information:
-
the day on which the donation was received (if not
already indicated);
-
a brief description of the property transferred to
the charity;
-
the name and address of the appraiser (if the property
was appraised); and
-
the deemed fair market value of the property if the
property was acquired by the donor in circumstances to which
the new deemed fair market value rules apply..
Sample official donation receipts are
available of the CRA website at: http://www.cra-arc.gc.ca/tx/chrts/pbs/rcpts-eng.html.
b)
Issuing a receipt for a transaction
that does not qualify as a gift
Before issuing receipt, a charity must
determine whether the donation qualifies as a gift. A gift
is defined as a voluntary transfer of property without valuable
consideration. Therefore, to qualify as a gift, the donation
must be given voluntarily. If the donor is obligated to
make the donation, it does not meet the definition of gift.
In addition, only gifts of property are eligible for a donation
receipt. Cash and gifts-in-kind, such as equipment or artwork
constitute property. Services do not constitute property
and, therefore, no receipt can be issued for a donation
of services.
A charity must also take into account
any advantage received by the donor in exchange for the
donation. Previously, any valuable consideration received
by the donor would disqualify the gift. However, under proposed
amendments to the Income Tax Act currently being
applied by CRA, a donor may receive some advantage in exchange
for a donation. The proposed amendments to the Income
Tax Act define the amount of the advantage as the total
value of all property, services, compensation, or other
benefits that a person is entitled to receive as partial
consideration for, in gratitude for, or is in any other
way related to the gift. If an advantage is received, the
eligible amount of the gift must be reduced accordingly.
This practice is known as “split receipting”. The eligible
amount of the gift is the amount by which the fair market
value of the gifted property exceeds the amount of an advantage
received in respect of the gift. For example, if a person
pays $100 dollars to attend a charity’s fundraising event,
but receives a meal worth $50 at the event, the charity
can only issue a donation receipt in the amount of $50.
To qualify as a gift, there must also be a clear donative
intent by the donor to benefit the charity. According to
the proposed amendments to the Income Tax Act, donative
intent will generally be presumed if the fair market value
of the advantage does not exceed 80% of the value of the
gift. The split receipting rules do not apply where the
advantage received does not exceed the lesser of 10% of
the value of the gift and $75.
CRA notes that charities often make
mistakes regarding the types of gifts that are receiptable.
The following are examples of transactions that do not qualify
as a “gift:
–
Pledged amounts which are not received;
–
Donation of services;
–
Payment of sponsorship fees;
–
Loans;
–
Provision of free use of property; and
–
Donations which are court ordered or otherwise compelled.
c)
Issuing a receipt on behalf
of another organization
The CRA warns that a registered charity
cannot issue donation receipts on behalf of another organization
or lend its registration number to another organization
for receipting purposes. A registered charity is responsible
for all tax receipts issued under its name and number and
must account for the corresponding donations on its annual
information return. A charity that lends its registration
number risks losing its charitable registration.
d)
Issuing a receipt for an
inflated amount
Donation receipts must accurately reflect
the value of the property a charity has received. The amount
on the receipt should be the fair market value of the property
and the onus is on the charity to ensure this value is correct.
However, CRA notes that establishing the fair market value
of a non-cash gift is often problematic for charities. If
the fair market value of the property, or an advantage received
by the donor, cannot be determined, no receipt can be issued.
If the fair market value of the property
is less than $1,000, a member of the registered charity,
or another individual, with sufficient knowledge of the
property may determine its value. However, CRA strongly
recommends that charities have donated property professionally
appraised by an independent third party if its expected
value is over $1,000. As noted above, the name and address
of the appraiser must be included on the receipt.
e)
Receipts and good governance
Charities must take steps to prevent
the unauthorized or fraudulent use of its registration number.
CRA recommends that a charity’s governing body develop a
code of conduct and administration, and follow it at all
times. In the Newsletter, CRA has provided a list of general
best practices that can be used by a charity to minimize
the risk that its official donation receipts will be used
in an inappropriate or unauthorized manner.
CRA also reminds charities of the importance
of maintaining adequate books and records. Failure to keep
adequate books and records may result in the suspension
of a registered charity's tax receipting privileges, or
the loss of its registered status. More information about
books and records is available on the CRA website at: http://www.cra-arc.gc.ca/tx/chrts/prtng/bks-eng.html.
2.
Tax Shelter Related Revocations
The Newsletter contains a list of charities
that had their charitable registration revoked in 2009 due
to tax-shelter related non-compliance.
a)
The Millennium Charitable
Foundation
The Millennium Charitable Foundation
participated in two donation tax shelter structures, the
Insured Giving Program by Insured Donations Inc. and the
Global Learning Gifting Initiative by Global Learning Group
Inc., issuing approximately $168 million worth of donation
tax receipts, but could account for only $2,200 directed
towards charitable works. Consequently, CRA concluded that
the organization had been operating to promote a tax shelter
arrangement and for the benefit of the tax shelter promoters.
b)
The Children’s Emergency
Foundation
A CRA audit concluded that the Children’s
Emergency Foundation had devoted a significant portion of
its resources to the promotion of two tax shelter donation
arrangements, an international donation arrangement and
had devoted a substantial portion of its actual cash donations
to fundraising and administrative expenses.
c)
Living Waters Ministry Trust
A CRA audit concluded that Living Waters
Ministry Trust issued in excess of $41.6 million in receipts
for cash received through a tax shelter arrangement, but
only $416,000 was actually retained for use in the Charity’s
own activities. Consequently, CRA concluded that the organization
had been operating to promote a tax shelter arrangement
and for the benefit of the tax shelter promoters.
d)
Healing and Assistance Not
Dependence Canada
Healing and Assistance not Dependence
Canada received nearly $2.8 million in cash through the
Canadian International Aid Program, a registered tax shelter.
Of this amount, $1.9 million was transferred to a registered
charity and other entities participating in the tax shelter
arrangement. Of the 30% or $900,000 retained by the Charity,
it reported $543,000 was incurred for administrative costs
and $282,000 was devoted to its own charitable programs.
CRA concluded that Healing Assistance Not Dependence Canada
had completely restructured its operations in order to facilitate
entrance into a tax shelter arrangement. The Charity’s role
in the scheme was to circulate funds in a guise to add legitimacy
to the transactions and that the payments made by the Charity
to the other charities were not gifts to qualified donees.
Consequently, CRA determined that the Charity had operated
for the non-charitable purpose of promoting and participating
in a tax shelter arrangement.
e)
Jesus El Buen Pastor Spanish
Pentecostal Church of Toronto
A CRA audit revealed that Jesus El Buen
Pastor Spanish Pentecostal Church of Toronto had devoted
a significant portion of its resources to the promotion
of the Insured Giving Donation Program tax shelter gifting
arrangement. The Charity issued in excess of $18.5 million
in receipts for cash and non-cash gifts received through
this tax shelter arrangement. However, the Charity's records
failed to substantiate that the property actually existed,
that the property was in the Charity’s possession, that
the values recorded on the receipts were accurate or that
the property was distributed for charitable purposes.
f)
Funds for Canada Foundation
A CRA audit revealed that Funds for
Canada Foundation issued nearly $176.5 million in receipts
for cash received through a tax shelter arrangement. However,
only 1% of the total tax-receipted amounts were retained
by the charity for use in its own programs. Consequently,
CRA determined that the Charity had operated for the non-charitable
purpose of promoting a tax shelter arrangement and for the
private benefit of the tax shelter promoters. The Charity
had also failed to meet its Disbursement Quota.
g)
New Hope Ministries Institute
A CRA audit concluded that New Hope
Ministries Institute had issued receipts totalling in excess
of $100 million for pharmaceuticals received through the
Canadian Humanitarian Trust (CHT) tax shelter arrangement.
However, the Charity’s records failed to substantiate that
the values recorded on the receipts were accurate or that
the property was distributed for charitable purposes. For
its participation and tax-receipting abilities, the Charity
received a cash gift from another participating charity
of $1.5 million. Of this amount, the Charity paid $1.0 million
to the tax shelter promoters as fundraising fees and retained
only $500,000 for use in its own activities. As a result,
CRA determined that the Charity had operated for the non-charitable
purpose of promoting a tax shelter arrangement and for the
private benefit of the tax shelter promoters.
h)
Alberta Distribution Relief
Agency Aid Society International
A CRA audit determined that Alberta
Distribution Relief Agency Aid Society International had
participated in a tax shelter arrangement where its role
was to receive and receipt donations and then transfer 98%
of the money as per the promoters’ instructions. Consequently,
CRA determined that the Charity operated for the non-charitable
purpose of promoting a tax shelter arrangement, for the
private benefit of the tax shelter promoters and failed
to demonstrate control over its international programs.
CRA cautions that it is reviewing all
tax shelter related donation arrangements and plans to audit
every participating charity, promoter and investor. More
information about tax shelter donations schemes is available
on CRA’s website at: http://www.cra-arc.gc.ca/tx/chrts/dnrs/lrt/2-eng.html.
3.
New Fundraising Guidance
The CRA released its new guidance on
fundraising on June 11, 2009. Guidance (CPS-028), Fundraising
by Registered Charities provides information for registered
charities regarding the requirements for reporting fundraising
expenditures and CRA’s approach to determining whether a
charity’s fundraising activities comply with the Income
Tax Act. The information contained in the new guidance
is important for all charities with fundraising activities.
The public and the charitable sector
may continue to submit comments on the guidance to CRA during
the implementation period. In April 2010, CRA will review
the guidance and consider whether revisions are necessary.
Comments can be sent by email to consultation-policy-politique@cra-arc.gc.ca
or by mail to Charities Directorate, Canada Revenue Agency,
Ottawa, Ontario K1A 0L5.
For a discussion of Guidance (CPS-028),
Fundraising by Registered Charities see Charity Law Bulletin
No. 169 available at: http://www.carters.ca/pub/bulletin/charity/2009/chylb169.htm.
4.
Small and Rural Charities
Initiative Update
The Small and Rural Charities Initiative
(SARC) began in October 2007 with a series of consultations
designed to help CRA better understand the unique needs
and challenges of small and rural charities. Small charities
are defined as registered charities with total annual revenues
under $100,000 and rural charities are defined as registered
charities that have “0” as the second character of their
postal code. As a result of these consultations, the report
Small and Rural Charities: Making a Difference for Canadians
(RC4457) was released in June 2008.
CRA reports that since the SARC report
was released, 82% or 54 of the report’s recommendations
have been completed. The Newsletter lists several new features
on the CRA website that have been developed for small and
rural charities, including a Toolbox for directors, officers
and volunteers and a resource manual on maintaining charitable
registration.
More information on the SARC initiative
is available on the CRA website at: http://www.cra-arc.gc.ca/tx/chrts/cmmnctn/src/menu-eng.html.
5.
Charities Partnership and
Outreach Program Update
In 2005, CRA initiated
the Charities Partnership and Outreach Program (“Program”),
which was designed to support education and training projects
on regulatory compliance for the charitable sector. CRA
states that the Program “is designed to provide contribution
funding to registered charities and non-profit organizations
serving the charitable sector in Canada, to assist in developing
and delivering innovative compliance-related education and
training projects for charities.”
In response to a previous
call for proposals, eight new agreements have been signed
under the Program for projects that will be carried out
before March 31, 2010. CRA launched a fifth call for proposals
in October 2009, and expects to sign agreements for new
projects in the spring of 2010. The priorities for these
proposals are:
-
educating charities on compliant
fundraising practices;
-
educating charities and/or donors
about tax shelter donation arrangements and false receipting;
and
-
promoting transparency and accountability
in the charitable sector.
More information on
the Charities Partnership and Outreach Program is available
on the CRA website at: http://www.cra-arc.gc.ca/tx/chrts/fndng/menu-eng.html.
6.
Reminders
The Newsletter contains a few important
reminders for charities.
a. A
registered charity must include a copy of the charity’s
financial statement with its T3010, Registered Charity
Information Return. CRA warns that it may revoke the
charitable registration of charities that do not include
a copy of their financial statements with their annual return.
Financial statements should at least consist of a statement
of assets and liabilities and a statement of revenue
and expenditures.
b. Private
foundations that hold more than 2% of the issued and outstanding
shares of any class of shares of a corporation at any time
during the fiscal period must complete and file Form T2081,
Excess Corporate Holdings Worksheet for Private Foundations.
The form is sent to private foundations with the Registered
Charity Information Return package. This requirement
does not apply to charitable organizations and public foundations.
c. International
Volunteer Day took place on December 5, 2009. In the Newsletter,
the Charities Directorate took the opportunity to recognize
the valuable contribution volunteers make to Canadian society.
CRA noted that according to Statistics Canada, more than
12.5 million Canadians did volunteer work in 2007.
C.
CONCLUSION
Registered Charities Newsletter No. 33
contains much useful information for charities, especially
with respect to proper receipting practices. All charities,
including board members, should give careful consideration
to the guidance CRA provides in their newsletters, available
at: http://www.cra-arc.gc.ca/tx/chrts/whtsnw/menu-eng.html.
Other summaries of recent CRA newsletters can be found at
www.charitylaw.ca.
