Charities often wish to express their gratitude to their donors for their contributions. However, in doing so, charities should be mindful that they do not impact on their ability to issue a charitable donation tax receipt. In the case of donations from businesses and business owners, charities should be aware of the rules regarding sponsorships, and whether and how they should be receipted.
Depending on the particulars of the situation, registered charities can face monetary penalties, a suspension of their receipting privileges or revocation of charitable status as a consequence of improperly issued charitable tax receipts. If a corporate donor claims a deduction based on an improperly issued tax receipt, then such deduction would be denied.
- Split-Receipting Rules
Pursuant to the “split-receipting rules” contained in the Income Tax Act, the amount of a charitable donation receipt which may be issued is limited to the “eligible amount” of a gift. This is the amount eligible for a tax credit (in the case of an individual donor) or the amount eligible for a deduction in computing income (in the case of a corporate donor). In general, the eligible amount of a gift is the amount by which the fair market value of the property that is the subject of the gift or monetary contribution exceeds the amount of the advantage, if any, in respect of the gift or monetary contribution. A typical example is the case of a charity selling tickets for a gala dinner, and being permitted to issue a charitable donation receipt for that portion of the ticket price which exceeds the value of attendance at the event, including the value of a comparable meal provided by a comparable facility.
Under the split-receipting rules, the value of all advantages must be calculated in order to issue a receipt for the eligible amount of a gift. Where an advantage is received in respect of a gift, the Canada Revenue Agency’s (CRA) position is that the donee must be able to support the basis for the determination of the amount of the advantage. The CRA advises charities to consider obtaining a qualified independent valuation of the amount of the advantage. A description of the advantage and the amount of the advantage is required to be reported on the official donation receipt. A key point is that whenever the donor receives an advantage the fair market value of which may not be calculated, no charitable donation tax receipt may be issued by the charity.
Furthermore, if the value of all advantages is more than 80% of the value of the gift, the CRA considers that there is no true intention to make a gift and therefore, the charity can generally not issue a donation receipt.
The CRA draws a distinction between charitable gifts and sponsorships. In contrast to a charitable gift, sponsorship is when a business makes a donation toward the cost of a charity’s activity or event and, in return, the charity advertises or promotes the business’s brand, products or services. If a business receives the same level of recognition as all other donors, with no special treatment, and the recognition is minimal (for example, a simple acknowledgment), the charity can issue the business a receipt for the full amount of the donation. On the other hand, if a business receives special recognition for its donation, or if it receives more than minimal recognition (for example, banners or advertising of products), this is considered sponsorship.
The CRA considers sponsorship as an advantage; the fair market value of which must generally be deducted from the amount of the donation for receipting purposes. However, the CRA has also indicated that it is difficult, if not impossible, to calculate the value for sponsorship. As discussed above, when the value cannot be calculated, the charity cannot issue a charitable donation tax receipt.
The following factors should be examined to determine whether a sponsorship exists:
- Source: Is the donation from an individual or a business? Generally, individuals will not benefit financially from name recognition. If the recognition does constitute a benefit, it will have little value. There may be exceptions. For example, if the donor’s name is closely associated with a business, using the donor’s name may provide a valuable benefit to the business.
- Purpose: Is the purpose of the donation to get recognition?
- Contracting: Is there a written or unwritten understanding that shows the donor expects and will receive a benefit in return for the donation?
- Naming: How is the donor being acknowledged (for example, newsletters, plaques, cards)? If the acknowledgement is in a newsletter or similar publication, is the publication available only to members of the charity or is it available to the general public?
- Valuation: Can the value of the recognition (for example, promotion, advertising, sponsorship) be calculated?
The CRA has provided some examples on their website of situations where it would be appropriate or inappropriate to issue a charitable donation tax receipt:
- A corporate donor provides a donation to a registered charity. The registered charity puts out a seasonal brochure thanking all donors for their support, including the corporate donor. Neither the corporate donor nor their owners receive any other benefits. In this case, the charity may issue an official donation receipt to the corporate donor, because the corporate donor is simply being recognized along with all the other donors without any special recognition.
- A corporate donor agrees to be the major sponsor of a fundraiser. In return for its donation, the corporate donor’s brand will be identified as the major sponsor on all advertising, banners and the participants’ T-shirts. In this case, the charity should not issue an official donation tax receipt, as the corporate donor is getting advertising and promotional benefits for its sponsorship. The charity must be able to calculate the value of these advantages in order to issue a receipt. When the value is unknown, the charity cannot determine the eligible amount of the gift.
- An individual donor makes a donation to sponsor a specific element of a charity fundraiser, and is recognized as sponsoring that element through signage. In this case, although the individual donor receives some social recognition for her gift, she will receive no material advantage and neither will her employer, who is not mentioned on the sign. As such, the charity can issue an official donation receipt to the individual donor.
- An individual owner, who owns a business, makes a donation to sponsor a specific element of a charity fundraiser, and is recognized as sponsoring that element through signage. The individual’s name forms part of the name of the business, which is the only business of its kind in town and advertises heavily using social media. In this case, a charitable donation tax receipt should not be issued. The individual donor’s name is very closely associated with the business, which stands to benefit from the publicity. The charity must be able to calculate the value of this advantage to issue a receipt. When the value is unknown, the charity cannot determine the eligible amount of the gift.
- Consequences to Donor
Provided that the amount of the payment can be justified by a corporate or other business donor as an advertising or promotional expense, the type of the receipt may not be of real consequence to the donor, as the corporation would be entitled to a tax deduction in either case.
When it has been determined that it would not be appropriate for a charity to issue an official charitable donation tax receipt to a corporate donor, the charity may instead issue a receipt to the corporation in respect of the amount of the sponsorship provided. Thus, if the advantages provided to corporate donors make it impossible to characterize the contribution as a gift, corporate donors may still benefit from the ability to deduct all or part of their contribution as a business expense.
In this case, the tax treatment to the corporate donor is similar to that of a charitable gift made by the corporation. The corporation may deduct from its income for the taxation year a “reasonable amount” in respect of the sponsorship, to the extent that it was “made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property” and that it does not fall under the category of “personal or living expenses.” Such amounts could potentially be characterized by the corporation as advertising or promotion expenses.