Ethics Q & A
December 19 , 2005
By Jane Garthson, Mills
Garthson & Associates
The question:
Is it ethical for a company to make a profit from a relationship with a charity?
Jane says...
It absolutely is - unless the company tries to count the same support as philanthropy.
If a company wants a tax receipt, it must involve giving a donation with no expectation of return. The Income Tax Act is clear - as mud, apparently, given how much confusion there is on this.
The policy document at Canada Revenue Agency says, in relation to giving tax receipts:
"The donor is transferring the property to the charity without expecting anything in return. No benefit of any kind may be provided to the donor or to anyone designated by the donor as a result of a gift."
And, that the following does NOT qualify for a tax receipt:
"A payment from a business for which the business receives a material advantage such as promotion or advertising in return. For taxation purposes, the business may be able to claim the contribution as an advertising expense."
A corporate logo or web site link or mention of a corporate good or service would be deemed promotion or advertising, and therefore should never be combined with a tax receipt. A thank-you to the company by corporate name (unless the corporate name includes the name of a major product) is acceptable.
However, companies do not do anything without an expectation of return on investment. Their donations are expected to build goodwill in the community, help attract and retain good employees, build relationships and otherwise eventually help the business. Note that these benefits do not involve any benefit directly provided by the charity.
Many companies give to charities without seeking or wanting a tax receipt, and then they are free to receive some advantage in return. It may even be better for their immediate bottom line to charge the cost to the marketing or advertising budget. Some companies do some of each, so the charity has to clarify each aspect of the relationship.
Companies that provide a sponsorship for an event or program or the overall organization must receive something back, over time, for their expenditure and time. They do hope for business in the short-term or they would not be involved. They usually promote specific products or services.
The most common profitable relationship between nonprofits and companies is that of supplier. The accountant, office supply store, printing house and many others routinely make a profit from their nonprofit customers. Some do offer discounts or lengthier payment terms to charities but they are usually the smallest firms with the tightest margins. No one seems to expect the telephone company to supply free or discounted services.
Additional ways of companies making a profit from nonprofit relationships are:
- Cause-Related Marketing: Most readers have likely received credit cards affiliated with a charity. These take a lot of review and negotiation for the charity and a link to a problematic company can really cost a charity supporters, but a charity can sometimes get long-terms returns without much long-term effort. The charity may get sign-up fees and ongoing small percentages; the company gets loyal customers.
- Member Discounts: A company can provide discounted services of interest to members because the nonprofit is doing the promotion through its membership forms, renewals and web site. These are more common in member service associations such as professional societies, amateur sports organizations and general interest associations than in charities, since charity members who receive benefits cannot also get tax receipts for their membership dues. Common examples are group insurance plans and car rental discounts.
- Strategic Philanthropy: Making a donation that will clearly benefit the company eventually but without a direct enough return to affect the tax receipt. A company might give scholarships to support a community college course whose graduates have the kind of skills the company expects to need
The areas described above overlap and interrelate, as innovative organizations come up with new ways to work together.
So the ethical answer is, as almost always, it depends. Companies can often make a profit from charity relationships, if they do not cross legal lines. Charities need to ask the company why they are getting involved, so they can clarify the relationship up front.
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Because nonprofit organizations are formed to do good does not mean
they always are good in their own practices. Send us your ethical questions
dealing with volunteers, staff, clients, donors, funders, sponsors, and
more. Please identify yourself and your organization so we know the questions
come from within the sector. No identifying information will appear in
this column.
To submit a dilemma for a future column, or to comment on a previous one,
please contact help@charityvillage.com. For paid professional advice about an urgent or complex situation, contact Jane directly.
Disclaimer: Advice and
recommendations are based on limited information provided and should be used as
a guideline only. Neither the author nor CharityVillage.com make any warranty, express or implied, or assume any legal liability for accuracy, completeness, or usefulness of any information provided in whole or in part within this article.
