Charities occasionally find themselves faced with the question of whether and in what circumstances they can return a gift to a donor. There are several situations in which this issue may arise. For example, a charity may have taken donations for a particular project which has been postponed or abandoned due to lack of funding. A donor may have requested a refund to alleviate personal financial difficulties. A charity may also wish to refund donations from donors whose association with the charity might harm the charity’s reputation. In all such circumstances, it is important that charities understand the rules and restrictions that apply to refunding donations, as well as the potential tax effects on donors who receive refunds.

When can a gift be returned?

As a general rule, charities are not permitted to return gifts except in limited circumstances. Once a gift is made, it becomes the property of the charity and the donor has no further authority over its use. The charity’s directors or trustees have a fiduciary obligation to see that the gift is used for the charitable purpose for which the gift was made. In the case of unrestricted gifts, this will be the general charitable purposes of the organization. The purpose of the gift may also be restricted if the donor has directed that the donation be used in a particular program or project of the charity. A charity will normally be in breach of its obligations if it returns a gift to a donor, as the gift will not have been devoted to its intended charitable purpose. Charities that improperly return donations may be subject to both provincial and federal penalties.

There are, however, exceptions to this rule and charities may return gifts in certain limited situations. The clearest circumstance of this is where the charity is under a legal obligation to return the gift. This may arise because the initial donation lacked one of the requisite elements of a gift at common law (and therefore was not a gift at all). This can occur where the donor was not competent to make the gift, where a donor inadvertently sent funds to the wrong recipient, or where the donor clearly misunderstood the nature of the recipient and the intended use of the donation. A charity may also be required to return a gift made subject to a condition subsequent which is later fulfilled. Where this occurs, the charity is under a legal obligation to follow the conditions imposed on the initial gift and return the funds pursuant to the gift agreement.

Charities may also be able to return gifts where it has become impossible or impractical to fulfill the purpose of the gift. In this circumstance, it is generally necessary to apply to a court for direction on how the gift is to be dealt with. The court will review the donor’s intentions and determine whether the gift can still be used for analogous charitable purposes. However, the court may also direct that the gift be returned to the donor.

In some cases, it may be appropriate to return gifts in order to protect the reputation of the charity. This can occur where the charity receives a gift from a donor with which the charity does not wish to be associated. The directors of a corporate charity have a fiduciary obligation to act in the best interests of the charity and must consider both the short-term availability of funds as well as possible long-term reputation damage that may occur as a result of retaining donations from certain donors. It may be appropriate for a charity to return the donation if it concludes that its reputation and its ability to fundraise in the future from other donors would be seriously compromised if it retained the donation and was thereby associated with a particular individual or corporate donor.

Consequences to the Donor

The Canada Revenue Agency (“CRA”) has provided relatively little guidance on how it will treat donors who receive refunds of gifts. However, CRA has indicated in a 2003 information letter that where a charity cannot reasonably satisfy the conditions attached to a gift, and the court orders that the property be returned to the donor, the tax implications to the donor will depend on whether the gift was completed prior to its return. If the gift was not completed at the time the property was returned, CRA would be entitled to reassess the donor in respect of any donation tax credit or deduction claimed in respect of the gift. However, if the gift was complete, CRA indicates that it will not reassess the donor. CRA also indicates that the refund would not likely be considered income in the hands of the donor and would therefore not be taxed.

There is some uncertainty surrounding CRA’s position, and in particular, what it means when it indicates that a gift must be completed to avoid reassessment of the donor. While this appears to refer to the common law definition of gift, it is unclear how any receipt could be issued (or a corresponding tax credit or deduction claimed) where a gift is not complete at common law. It is likely that CRA will assess this issue on a caseby- case basis.

Charities should be very careful before providing any refunds of donations, and we strongly recommend seeking legal advice before doing so. Miller Thomson’s Charities and Not-for-Profit lawyers can advise charities on when and how to refund donations.