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Recent Tax Changes for Charities
January 19, 2004
By Glen Gilbert, Grant Thornton national
tax partner
The purpose of this communication is to provide a summary of recent changes of interest to registered charities.
Split-receipting Guidelines
One year ago, the CCRA issued guidelines to clarify the rules for donations where the donor receives a partial benefit or advantage on making the donation. These guidelines will generally apply to charitable organizations that undertake the following fundraising activities:
- Fundraising dinners
- Charity auctions
- Concerts, shows, and sporting events
- Golf tournaments
The proposed rules provide that for gifts made after December 20, 2002, charities are supposed to identify and value both the "eligible amount of the gift" and the amount of the "advantage" on any donation receipt provided to the donor. For example, your charity may have had a fundraising dinner where it charged $200 for a dinner valued at $75. In this case, the eligible amount of the gift is $125 and the amount of the advantage is $75. These rules have not yet been finalized, and we have been advised by the Charities Directorate that there is currently some uncertainty regarding the detail to be recorded on the donation receipt. For 2003 receipts, you can record both amounts (as outlined above) or record the eligible amount of the gift on the donation receipt but keep records indicating how you arrived at the amount. In some cases, you may have to obtain an independent valuation to substantiate the amount.
Other major changes include the following:
- Charities can now issue receipts for funds raised at a charity auction. As long as donative intent can be established, the amount of the gift will be the amount bid for the item in excess of its posted value. This value must be ascertainable and must be made known to all bidders in advance of the auction. In general, the CCRA accepts that there is donative intent where the posted value does not exceed 80% of the accepted bid.
- There are also new rules for determining the amount of the gift where charitable annuities are donated to a charity.
Donations in-kind
The CCRA is becoming increasingly concerned about charities that issue receipts for amounts in excess of the fair market value of the donated property. Charities that do so risk losing their registered status.
Charities can also be liable for third-party civil penalties if they knew or ought to have known that the appraised values were incorrect.
Before accepting gifts-in-kind, you should make sure that the receipted amount for the gift is representative of fair market value (or deemed fair market value - see comments below). Ensure that the property has been appraised by a qualified and independent party who is not connected to the donor or anyone promoting the donation.
Also, for gifts made after December 5, 2003, there is a new proposal that will deem the fair market value to be the lesser of the actual fair market value or the donor's cost of the property, where it is either donated within three years of acquisition OR the property was acquired by the donor through a gifting arrangement or in contemplation of making the donation. Since the rules and associated regulations are not yet finalized, it is currently unclear regarding the charity's responsibility to obtain this additional information. As a result, for any donation in-kind after December 5th, you should ask the donor when the property was originally acquired and, if applicable, the donor's cost.
Donation Tax Shelters
On December 5, 2003 the Department of Finance announced changes to the Income Tax Act designed to prevent the operation of certain tax shelter donation programs.
Applicable to gifts or monetary contributions made after February 18, 2003, it is proposed that the amount of the gift must be reduced by the amount of any limited-recourse debt or the unpaid amount of certain other indebtedness associated with the gift.
In many cases, these amounts are part of such gifting arrangements and the information should be available to the charity. Again, although there is currently no guidance as to how these rules will be administered, it is expected that it will be the charity's responsibility to ensure that the correct amount is reported on the donation receipt.
Charities which have had any degree of involvement in tax shelter donation programs should contact their professional advisors for specific advice on how this new legislation will impact them.
New Charity Return (T3010A)
The old charity return (T3010) can only be filed for years ending in 2002 and prior years. For fiscal periods ending in 2003 and subsequent years, charities must file new form T3010A. For its fiscal period ending in 2003, your charity should have been mailed a new package which would have included the new return.
The new return is shorter (reduced from 13 to 4 pages) and easier to amend. There is also a new "basic information sheet" with barcodes and labels that MUST be included as part of the filed return - you must contact the Charities Directorate directly if you require a replacement information sheet. In addition, you no longer have to calculate the disbursement quota. The CCRA will do it for you.
A less welcome change relates to the required director information. You must now attach a list of each director and like official, with their last name, first name, and initial, date of birth, complete home address, telephone number, position in the registered charity, and whether or not they are at arm's length from all other board members. With the exception of the director's name and position, the other required information is kept confidential and not disclosed to the public.
What is a Related Business?
A registered charity can lose its registration if it carries on an unrelated business. Private foundations can lose their registration if they carry on any kind of business - related or unrelated.
Earlier this year, the CCRA issued a new policy statement (What is a Related Business? CPS-019) to help clarify whether an organization is carrying on an acceptable business - i.e. a related one.
First of all, you have to determine if the charity is carrying on a business activity - is there an intention to earn profit from the activity? If so, is the only income earning activity soliciting donations or selling donated goods? If this is case, the income-earning activity is not considered a business. If not, the activity must still be carried out on a regular basis in order to be considered a business. For example, a one-time sponsorship deal would not generally be considered to represent the carrying on of a business.
Once it is determined that the charity is carrying on a business, you
must determine if it is a related business. A volunteer-run business is
considered to be related even if there is no link between the business
and the objects of the charity. If the business is not substantially run
by volunteers, it will only be related if the business activities remain
subordinate to the organization's charitable purposes. The business activities
must not overtake the charitable goals, nor should the attention and resources
devoted to it overtake the resources available for the charitable activities.
The fact that the profits of the business are applied to a charitable
purpose is not sufficient to show the necessary linkage. Instead, it is
the nature of the business, and whether it has some direct connection
to a charity's purpose, that determines whether it is a related business.
Examples include activities that supplement charitable programs - such
as hospital cafeterias and gifts shops - activities that make use of a
charity's excess capacity, and the sale of items that promote the charity
or its objects. If the business activities are not secondary to the dominant
charitable purpose, the charity is carrying on an unrelated business and
in danger of having its registration revoked.
Political Activities
Subject to certain rules, a registered charity may take part in some political activities as a way of furthering its charitable purpose(s). In general, a charity can be involved in non-partisan political activities as long as it devotes substantially all of its resources to charitable activities and the activities are connected and subordinate to the charity's purpose. A charity cannot be involved in partisan political activities. A political activity is considered partisan if it involves direct or indirect support of, or opposition to, a political party or candidate for public office.
The CCRA has recently issued a policy statement (Political Activities, CPS-022) to provide additional guidance regarding what constitutes allowable political activities, as well as the types of activities that are considered partisan.
Your charity's operations should be reviewed to ensure it is in compliance with the above.
For more information, contact Glen Gilbert, CA at ggilbert@GrantThornton.ca or visit www.GrantThornton.ca to
find a Grant Thornton office near you.
