Charities are often puzzled about what is and what isn't tax-deductible. This is can be made worse by listening to the advice of a lawyer or accountant who may be extraordinarily well informed about other areas, but is not up to date on the peculiarities of charity tax law. Here is a quick summary.
The comments that follow must be taken with the understanding that the author is frequently in touch with Revenue Canada on charity regulations, but is not a lawyer, accountant or tax specialist. For expert sources of advice, see the section on More Information, at the end of this chapter.
Registered charities can give donors a receipt that can be used for a tax credit. All gifts of money are receiptable. So are most gifts of goods. Most services are not. Most purchases (such as a book, poster or tuition fees) a donor makes from a charity are not.
Memberships are deductible unless they offer a material benefit, such as free goods or services or admission that is not available to the public. Minor rewards for being a member, such as a low-cost newsletter, or invitations to special events are acceptable, and if that's all the donor gets, the full membership fee is considered a tax-deductible donation.
Gifts of goods in kind
Charities can give a tax receipt for gifts of goods.
Donations of goods are eligible for charitable tax receipts, just like cash. Services are not.
Gifts of goods of no real market value, such as used clothes, are not eligible for receipts.
Gifts of valuable goods can be receipted at fair market value. No exchange of cheques is necessary.
Base the tax receipt on current retail value, regardless of the price originally paid. A donor who bought supplies at wholesale prices can receive a tax receipt for them at full retail value. If the goods are worth more than when purchased, the donor may claim the current value. However, capital gains taxes may apply, and the donor would legally have to declare the difference between the wholesale and retail value as income.
If the goods are worth less than when purchased, the donor is only eligible for a tax receipt at the current market value.
Gifts of goods cannot be double-deducted. If a donor has already deducted the cost of the goods for business purposes, a second deduction cannot be claimed for donating them to charity.
However, it is not the charity's responsibility to determine if the donor has already claimed the goods but use your common sense says Revenue Canada. The charity may issue a tax receipt in good faith. It is the donor's responsibility to follow tax laws.
Art, antiques and unusual goods
These may be hard to evaluate for fair market value. Ask one or more licensed appraisers to determine the real current value. Certified cultural property has its value established by a cultural review board, not the recipient. This is a specialized area, and you should contact Revenue Canada.
Services are not tax-deductible
Services are never eligible for a tax-credit receipt, according to Revenue Canada.
Charities can, of course, pay the person. Then the person can give the money back to the charity and receive a receipt for tax purposes. This is perfectly legal.
While it is legal, it is seldom worth the trouble. The problem is that the person paid must declare the money as part of income, and this may increase her or his taxes. Few people find it worth the trouble to do this.
If you repay the expenses a volunteer incurs doing charitable work, these payments are not considered taxable income. The volunteer could then donate this money to the charity, and receive a tax receipt for it.
When is it a good or a service?
Determining what are services and what are goods can be confusing.
Computer programming, for example, is a service, according to Revenue Canada, and therefore not eligible for a tax receipt. However, a gift of a computer program that is sold as a commercial product comes under the heading of goods, and is eligible. For clarification, call Revenue Canada.
Donors may not need tax receipts.
Businesses do not necessarily require an official charitable tax-credit receipt.
No law requires that charities issue receipts for donations they are allowed to but not obliged to do so.
The business may, however, want a letter for their records acknowledging that the charity received the donation, even though this is not suitable for claiming a charitable tax credit.
Why wouldn't they need an official charitable tax receipt?
Whatever the reason, if no tax receipt is issued, Revenue Canada's 80/20 disbursement quota (see below) does not apply to the charity. In provinces which regulate charities, local rules must be followed, and Revenue Canada rules limiting advocacy work by charities still count.
Donors can contribute in any way they wish if no tax receipt is issued.
Registered charities can issue tax receipts.
The rules here do not apply to groups that cannot issue tax receipts.
In addition to registered charities, registered amateur athletic groups, certain arts groups, municipalities and a handful of other organizations approved by Revenue Canada can issue official tax receipts.
In-Kind Donations and Revenue Canada's 80/20 Rule
Not issuing a tax receipt gives the charity more freedom.
Revenue Canada requires a charity to spend 80% of the cash value of receipted donations on program (not administration or fundraising) in the following year.
This rule does not apply to donations for which no tax receipt is issued, although the charity must meet the criteria overall.
That means if a charity issues a tax receipt for $1,000, it must spend at least $800 on the charity's programs in the next year. This is true whether it issues the receipt for a gift of $1,000 in cash or in kind.
Don't assume, though, that a computer, for example, must always be an administrative expense. If the charity's mandate is training people how to use computers, and the computer is used exclusively for training, then it is a program expense. If the charity educates people, and the computer is used only to prepare educational materials, it is a program expense. If the charity uses it to do the bookkeeping, this is administration. If it is used for a little of each, it may be allocated proportionately.
True cost-accounting (discussed earlier in this book) calls for an appropriate share of all administration and fundraising expenses to be allocated to programs, not left separated by themselves. This is an excellent way to explain to the donors that no charity can operate without overhead it is essential, not a frill.
However, Revenue Canada requires that charities keep administration separate from programs, to prove that at least 80% of receipted income was spent on programs. So for this purpose, refer back to the line budget.
Is it necessary to be registered?
Without a charitable registration number it is a little harder to raise money. These are issued by Revenue Canada.
Foundations only give money to registered charities (with a few rare exceptions, usually focused on scholarships to attend universities which in turn are registered charities).
Businesses like to see that you are registered, because it reassures them that you are a legitimate organization. Businesses do not require a tax receipt to write off their contribution to you, however. They can deduct it as a promotional expense.
Not everyone makes use of tax receipts. Less than one out of three Canadians claimed charitable tax credits on their income tax returns in 1992. They may be lazy, sloppy, or outright opposed to tax benefits because they believe gifts should be made without material reward.
One direct mail campaign offers donors the choice of giving their funds to the advocacy side of the organization (which is not tax deductible) or to the educational side (which is). Over three quarters of the donors choose to give their money to the non-tax-deductible section. It is reasonable to assume that many of the rest would have given even if the tax receipt had not been available, but since it was, they opted for it.
If your group is not a registered charity, and a donor wants a tax receipt, you can funnel gifts through another organization which is registered. The donation must show up in their books, of course, as income, and as a project expenditure to your group. Of course the `front group' is legally responsible should there be any problem (such as your group using the money for non-charitable activities like personal gain).
More Information on Tax Deductions
Revenue Canada offers a special charity `Hot Line' service to provide official answers on questions like these. Consult them by calling toll-free to 1-800-267-2384. This free information line allows the caller to remain anonymous, unless the questions you ask are very specific.
Revenue Canada has also published a series of official Interpretation Bulletins explaining the regulations. They are free from any Tax Office.
An excellent book called Canadian Taxation of Charities and Donations, by Arthur BC Drache, QC, is updated regularly with supplements. See the resource list at the end for the publisher's address.
Thanks to Judy Torrance of the Revenue Canada Charities
This summary provides a general overview for information only. The author is not a lawyer or an accountant, and is not a representative of the government. Please consult Revenue Canada for complete and up-to-date regulations.
For more information
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|Last updated : 1998/10/16|