In a technical interpretation released on July 26, 2012, CRA commented on the tax treatment of income earned abroad by employees of a charity that is transferred to the charity pursuant to an employment requirement.
In the situation addressed in the technical interpretation, an individual who is resident in Canada is employed by a Canadian registered charity (“Canadian Charity”) to provide teaching services overseas. While working overseas for the Canadian Charity, the employee becomes engaged in a contract to provide teaching services for another company (second contract) and is required to transfer all amounts received under the second contract to the Canadian Charity. This requirement is stated in the Guiding Rules of Canadian Charity.
CRA was asked to consider whether the transferred income should be reported as income on the employee’s tax returns, and also whether this income would qualify as a charitable donation for which the Canadian Charity could issue an official donation receipt.
CRA confirmed that the first issue is a question of fact. If the employee was working on behalf of the Canadian Charity when operating pursuant to the second contract with the foreign organization, it may be that this income is not in fact income of the employee. Any money receivable from a third party in respect of work performed by an employee acting in the course of his or her employment generally belongs to the employer. If, however, the employee was acting on his or her own behalf in providing services under the second contract, then this income may be attributable to the Canadian employee and therefore required to be declared. The terms of employment under the second contract would be key in determining how the income would be treated.
CRA then moved on to consider whether the transfer of income would constitute a charitable gift. It noted the legal requirements that must be met in order for a transfer of funds to qualify as a gift for which an official receipt can be issued. There must be a voluntary transfer of property from the donor to the charity, made without expectation of a return.
CRA noted that where it is determined that the amounts received under the second contract belong to the employer and are not included in the income of the employee, the transfer of those amounts to the employer would not be a voluntary transfer of the employee’s property and would therefore not be a gift. Although CRA did not say so explicitly, there is some question whether CRA would accept that this transfer constitutes a gift even if the income is considered income of the employee, given that the employee’s contract with the Canadian Charity appeared to include a requirement to make this transfer.
This technical interpretation is a reminder to charity employers that they must be careful in their treatment and accounting of donations out of income from employees. In order for an official donation receipt to be issued, each donation must qualify as a gift, meaning that the income must be the employee’s prior to the gift and must be given voluntarily to the charity. Failure to meet these requirements can lead to sanctions against the charity and a potential reassessment of the donor.