TAX RECEIPTING

1. TAX RECEIPTING WHAT’S ALLOWABLE AND WHAT’S NOT THE LATEST DEFINITION Presented by: Dale C Tinkham, FCA, CMC

2. Philosophy of Philanthropy • Donor prime focus should be on Philanthropy • Donor will be impoverished as a result of the charitable donation • The task is one of redirecting tax dollars to charity

3. The Charitable Sector • 2004: more than $6.9 billion in charitable donations were claimed by individuals • Median donation was $230 • More than 80,000 charities in Canada • More than 3,500 applications for charitable status every year

4. Regulatory Environment • Regulatory environment is strengthened considerably with all the new and sometimes complex rules governing charities • More audits of charities being conducted by Canada Revenue Agency (CRA) • Many new and graduated (progressive) penalties and sanctions ranging from 5% for receipting deficiencies to a minimum of 105% for undue personal benefits • Higher penalties for issuing receipts for no gift or improper transfers to other charities • Increased transparency and accessibility of information • More information about charities not in compliance with the rules • More equity and fairness in administration of Income Tax Act (ITA) • Increased public and voluntary sector confidence in the regulation of charities

5. Help for Charities • Professional advisors, lawyer and Chartered Accountant • CRA’s user friendly website www:cra-arc.gc.ca/tax/charities • Charities Directorate Canada Revenue Agency Tower A, 320 Queen Street, Ottawa, ON K1A OL5 • CRA Interpretation Bulletins • CRA Information Circulars • CRA Newsletters (new section for professionals soon) • Websites of law and accounting firms, such as Carters.ca and Miller Thomson.com (Susan Manwaring) • CRA charity hot line 800-267-2384 • E-updates from CRA www.cra.gc.ca/eservices/maillist/subscribecharities-e.html

6. Charity Tax AlertNew Issues • Changes in the ITA in 2005 include • Charity Return (T3010) –penalty for failure to file • New disbursement quota rules • New sanctions and penalties • New appeal processes (internal first and then external) • New requirements for donation receipts

7. Information Return- T3010 • File annually within 6 months of year end • Penalties $500 fine • published name on CRA website as delinquent • possible revocation of registration • Extended disclosure requirements, including • Financial statements • CRA correspondence on annulments, revocations, denials, sanctions, and material filed in support of exemptions, special status and permissions to accumulate.

8. Disbursement Quota (DQ) • DQ is a calculated amount that the charity must spend each fiscal year on charitable activities or as gifts to qualified donees to keep its charitable registration. • Must spend in the following year at least 80% of the amount of the receipted charitable donations in current year. • The 80% is the disbursement quota (DQ) and must be accounted for in the T3010 and is assessed by CRA annually. • 80% of transfers in from other charities must also be added to the DQ. New rule that applies to all charitable organizations, with some exceptions, and are very complex.

9. New DQ Calculation Rules • Add 3.5% of the value of property (greater than $25,000) that is not used in charitable activities to the DQ (4.5% if in existence on March 22,2004 until after 2008) • Investments are an example of property not used in charitable activities • Reduce the 3.5% DQ by capital gains realized on enduring property

10. DQ Exemptions Enduring Property • Gifts received by inheritance or bequest, including direct designation as the designated beneficiary of • RRSP • RRIF • Life insurance proceeds • Gifts from other charities that are subject to certain trust requirements • Ten year gifts

11. Definition of a Gift • The definition of gift is in common law, not in the ITA • For there to be a gift, there must be: • A transfer of property • The transfer must be voluntary without any obligation (unless nominal) • There can be no consideration or advantage to the donor or a person selected by the donor unless nominal

12. Undue Benefit • Gift or payment for the personal benefit of • a charity’s proprietor, member, shareholder trustee or settlor, • or a person who has contributed more than 50% of the capital of the charity, • or a person who does not deal at arm’s length with the charity • Excludes reasonable consideration or remuneration for property acquired by or services rendered to the charity

13. Nominal Benefit Defined • Token expressions of gratitude are nominal • CRA considers the benefit to a donor to be nominal if it is less than 10% of the gift and does not exceed $75. (de minimis rule) • If the amount of the benefit cannot be determined independently, then it is not considered to be of nominal value. • If the advantage is cash or near cash items (such as redeemable gift certificates, vouchers and coupons) the de minimis exemption rule does not apply.

14. An Advantage, You Say • Gifts that have an advantage to the donor are defined in the ITA to be “deemed gifts” • If any advantage received, it must be clearly ascertainable and the advantage reported on the charitable donation receipt • If advantage is not ascertainable or advantage is more than 80% of gift, no charitable donation receipt can be issued (usually)

15. What’s an Advantage • An advantage reduces the eligible amount • An advantage is defined to be the value of “any property, service, compensation or other benefit that the donor has received, obtained, enjoyed, or is entitled to receive and enjoy that is consideration of, in gratitude of or in any other way related to the gift. • No advantage if nominal • Wide definition of advantage covering time periods, before and after, or if the gift is in some way, directly or indirectly related to another transaction

16. Directed Donations • No official receipt if the donor directs the charity to give funds or structures a gift to benefit a donor or someone the donor has an interest in or a specified person or family • Donations subject to a general direction to be used in a particular program are acceptable, provided the charity decides how the donation will be used within the program

17. Conditions Precedent and Subsequent • Donor can attach 2 kinds of conditions • Condition precedent takes effect before the gift is made and the receipt is issued only after the condition precedent is made • Condition subsequent, if it fails, would result in a gift reverting back to the donor and CRA should be advised. The donation will be returned with the attendant consequences met

18. Donations In-Kind • Donations In-Kind include • Capital property • Depreciable property • Personal use property • A residual interest, right of any kind, licence or share • Inventory of a business

19. Tax Receipting In-Kind Donations • The amount recorded on the receipt is the fair market value on the date of donation • FMV is defined to be the standard definition used by accredited appraisers. • FMV excludes commissions payable on the sale, GST, PST • Gifts of inventory if there is a benefit back to the business such as advertising or promotion are not eligible

20. Gifts of Publicly Traded Securities • The May 2, 2006 budget reduced the inclusion rate to zero (from 25%) arising on the donation of publicly traded securities. • The donation receipt is issued for the FMV of the security on the date of donation

21. Donation of Publicly Traded Securities-An Example • Assume $1,000 fair market value, zero cost base to donor and top marginal rate of tax of 46% Cash Securities Donation amount $1,000 $1,000 Tax credit $460 $460 Tax saving NIL $230 Tax assistance $460 $690 Cost to donor $540 $310

22. Publicly Traded Securities Donated by Private Holding Companies • Company receives a deduction (not a tax credit) for the fair value of the gift • Proceeds are fair market value • Capital gain is exempt and allocated to the CDA which may be paid tax free to the shareholders • If the usual and normal procedure is to thank donors publicly, shareholders of these holding companies may be able to have some public credit for the donation with any undue benefit being attributed

23. Stock Options • Eligible amount is equal to fair market value of options when donated • Complex rules for calculating donor’s cost basis.

24. Non Qualifying Securities • Non qualifying shares are: • Not traded on a prescribed exchange • Shares in a business you control or debts you own between yourself and a company you or someone related to you control. • Charities cannot own more than 10% interest in a business for longer than 7 years. • If the charity owns more than 50% of the business, there may be reporting obligations to the Public Guardian and Trustee (PGT) • Charitable foundation controls a corporation, there is a penalty of 5%of the dividend with escalating penalties for repeat infractions

25. Gifts of Non Qualifying Securities- Some Considerations • Preference or special shares issued in an estate freeze situation need to be held for at least three years at a minimum before gifting • Deemed fair market value equal to cost if preference shares created for gifting • If founder created shares of private company in his estate plan for purpose of making charitable donation on death, but instead decides to gift shares while alive, deeming provisions apply to reduce eligible amount to donor’s cost basis

26. Gifts of Depreciable Property • Donors of depreciable property suffer tax on the recaptured depreciation • The donor’s claim for a charitable donation is the usual 75% of net income limit plus another 25% of the recaptured depreciation.

27. Gifts of Capital property • Gifts of capital property are eligible for receipts equal to fair market value • If there is a capital gain arising on the donation, the donor may increase the 75% of net income limit by 25% of the capital gain.

28. Cultural Property • Donors of gifts of cultural property certified by the Canadian Cultural Export review Board may claim up to 100% of the donor’s net income (usually restricted to 75%) • Capital gains arising on the donation are not taxable

29. Ecological Gifts • Ecological gifts certified by the Minister of the Environment or to a Canadian municipality may be receipted at their appraised values on the date of the donation and the donation may be claimed up to 100% of the donor’s net income. • Inclusion rate on the capital gain is now zero • Conservation easements, covenant or servitude, the tax receipt will be the greater of the fair market value of the restriction or the reduction in the land’s fair market value caused by the restriction (for example, no build). Rely on a qualified appraiser (or 2) and competent opinions for valuations.

30. Art Donation Type Schemes • Donor buys an item for a specified price, but it is appraised at a higher amount. • Donor receives a charitable donation receipt for the appraised value. • Charity sells the item at a charity auction for less than the appraised value. • Donor gets a large refund of income taxes due to large charitable donation receipt.

31. Consequences/Concerns to Charity of Art Donation Schemes • Charity’s DQ increases based on the issuance of the charitable donation receipt • Charity does not raise sufficient cash to meet its DQ requirements in the subsequent year. • Charity needs to be concerned about the appraiser’s independence, competence, qualifications and assumptions in the appraisal report and if the charity knows or should have reasonably known the appraisal value was incorrect, it will be subject to civil penalties, based on the income tax evaded and loss of charitable status • Appraisal fees are paid by the donor

32. Taxpayer/Donor Alert • CRA issued taxpayer alerts in November 2003, 2004 and again in 2005. • Alerts caution taxpayers about certain tax shelter donation arrangements, leveraged cash donations, and buy low-donate high arrangements. • Just because CRA issues tax shelter numbers to these programs does not guarantee the donor will receive the advertised benefits. It only allows CRA to identify them only for a probable audit of the charity sponsor and the donor. • Donors should seek independent legal and tax advice

33. Deeming Provision • December 2003 amendments restrict donation receipts issued to the lower of fair market value and the ACB immediately before the gift was made (deeming provision). • Gifts of inventory, real property, certified cultural property publicly traded shares and ecological gifts excluded from the deeming provision • Deeming provision applies under another section of the ITA to gifts acquired by donors within 3 years of the donation or if the property was acquired through a “gifting arrangement” ( tax shelter arrangement) where the donation would generate benefits that exceed the cost of acquiring the property, regardless of the holding period. This provision does not apply on death • Any donated property acquired within 10 years may be subject to the deeming rule if it is “reasonable to conclude” that one of the reasons for the acquisition was for the purpose of making the donation.

34. What is a Tax Shelter • Where the donor can claim deductions or credits within 4 years that equal or exceed the original investment • If you promise a net return on the investment, you need to register with CRA as a tax shelter • Includes buy low, donate high schemes • Antidote is the new deeming provisions that deem fair value to be the donor’s cost

35. Tax Shelter Donations Involving Limited Recourse Debt • Referred to as leveraged donation shelters (money borrowed but not repaid by borrower) • Donor borrows money and donates proceeds to charity for receipt, and pays a fee or amount to promoter who makes an investment that generates sufficient funds to retire the debt over time. • Limited recourse debt is deducted from the gift amount. • Debt may be deemed to be Limited Recourse Debt • Debt not limited recourse if bona fide arrangements to repay within 10 years and pay interest by February 28 in the year following at the CRA prescribed rate when issued.

36. Advisories to Charities • For Donations in Kind, Charities should have written confirmation of acquisition date, and if less than 3 years, issue a receipt for the lessor of the fair market value and the Donor’s ACB. • Donor intent on acquisition of property should be ascertained by charity. • If acquired for donation purposes within last 3-10 years, deeming provisions may apply. Otherwise, may be eligible for receipt at fair market value. Onus on Donor, but charity in difficult position. Seek legal advice. • Any gift over $5,000 whether in cash or in kind, enquire about the conditions around the gift including: • Any advantage • Whether from a tax shelter • When acquired within the last ten years and • If the purpose of the acquisition was to make the gift

37. Guidelines to Tax Receipting • Fund raising dinners • Charity auctions • Lotteries • Concerts shows, sporting events • Golf tournaments • Membership fees • Charitable annuities • Mortgaged property

38. General Guidelines for Tax Receipting • Attendance of celebrities at fund raising events is not an advantage generally, however, an amount paid to participate in an event with a celebrity (golf, dinner) would not be a gift • The value of complimentary benefits such as door prizes for which all attendees are eligible by virtue of attendance, will be an advantage unless it meets the de minimis rule. The basis of calculation will be the total value divided by the attendees.

39. Fund Raising Dinners • The value of a comparable meal at a comparable facility based on group rates or banquet pricing will be deducted from the donation to determine the amount that can be receipted. • The right to participate in an auction after the dinner is not an advantage.

40. Fund Raising Dinner An example • 500 tickets sold at $200 each • Comparable meal costs $90, excluding tips and taxes • Door prizes are trips and jewelry valued at $3,500 • Loot bags for all valued at $10 each • Eligible amount is as follows: • Ticket price $200 • Meal cost $ 90 (advantage) • Eligible amount $110 • Other calculations: • De minimis test $3,500/500=$7 plus $10 loot=$17 • 10% of the ticket price is $20 • Advantage is less than 80% of ticket price or $160. • Conclusion: Issue receipt for $110

41. Charity Auctions • Items purchased at auction are generally assumed to be at fair value and are not eligible • Where the fair value cannot be ascertained independently, for personal items, such as a hockey jersey, right to play golf with a particular person, the value of the item will be deemed to be the successful bid price and no receipt can be issued. • Where the fair value of the item is posted at the auction, and the fair value is less than 80% of the successful bid, the tax receipt may be issued for the eligible amount. For example, if the fair value of the item (including a purchased service) posted at auction is $400 and the successful bid is $500, the eligible amount to be receipted will be $100. • If you donate to the auction, you are eligible for a receipt equal to the fair market value of the donated item.

42. Lotteries/Gift Certificates • Cost of a lottery ticket not considered a gift and amount not eligible • Issuers of gift certificates are not eligible • Where an issuer donates a gift certificate which is transferred to a third party (at auction or by lottery) the redemption is not eligible • Eligible • A third person who has purchased a transferable gift certificate and donates it to charity • The charity redeems the gift certificate for property

43. Concerts, Shows and Sporting Events • Ticket prices to attend such events must be clearly shown to be in excess of the usual cost of tickets. • The 80% rule applies to determine if there is an eligible amount • If ticket price is $200, and each participant receives a CD and T shirt valued in total at $35, and the usual ticket price is $100, the eligible amount is $65

44. Golf Tournaments • Usual costs of a golf tournament are established with reference to the usual and ordinary costs for • Greens fees (if not a member) • Cart rental • Meals • Complimentary items • Door and achievement prizes • Raffle tickets if included in admission price, the value of the prizes will be included in the value door prizes Excluded are the cost of raffle tickets if purchased separately and the cost of hole in one prizes.

45. Participants 100 Entrance fee $200 Regular green fee $ 50 Cart rental $20(incl) Comp (golf balls) $15 Meal $30 Door prize ($2,000) $20 Raffle tickets extra Hole in one prize is a car Entrance fee $200 Less: green fees 50 : cart rental 20 : comps 35 : meal 30 : hole in one N/A : raffle ticket N/A $135 Eligible amount $ 65 Golf Tournament An Example

46. Membership fees • There may be an eligible amount associated with the payment of membership fees • The amount of the advantage needs to be calculated • If the amount of the advantage is 80% or less of the payment, a tax receipt may be issued

47. Assume the following facts: Promotion of cultural charity Contribution is $250 for Recognition in the charity newsletter Quarterly Newsletter subscription (otherwise free) Right to attend AGM’s Monthly calendar of performances (otherwise free) Advance invitations Pewter key chain ($10 value) Parking vouchers ($40 value) Performance ticket discount ($40 value) Eligible amount: Contribution $250 Less: Comp items Key chain $10 Discount $40 Vouchers $40 Advantage $ 90 Eligible Amount $160 Membership FeesAn Example

48. Charitable Annuities • Donor makes an irrevocable gift of cash, say $50,000 • Charity issues a 5 year term certain annuity which provides a predetermined return of interest and capital, say 9%. • Annual cash flow for 5 years will be $22,500 or approximately half the gift (interest portion subject to income tax) • A charitable receipt is issued for the value of the gift less future benefits $27,500 (approximately half the gift).

49. Bequests • Bequests are eligible and the executor can claim the receipt in the year of death and the prior year up to 100% of the net income in that year.

50. Mortgaged Property • Mortgaged property may be donated • Value of the building should be determined without reference to the mortgage • Value of the mortgage should be determined by reference to the interest rates, terms and conditions of the mortgage, which if representative of current market conditions, and there are no special conditions or encumbrances, the mortgage will likely be valued at the outstanding amount.