Donors frequently provide gifts to charities to be used for a specific purpose or toward specific programs/initiatives. These gifts are commonly referred to as restricted gifts and, by accepting such gifts, charities are obliged to apply the gift pursuant to the terms upon which the gift was made. But, what happens when the purposes of the charity change or the program no longer exists? In a recent technical interpretation, the Canada Revenue Agency (“CRA”) provided its views on when a gift could be returned to a donor and the potential consequences/considerations for both the donor and the charity in returning a gift.
Under the circumstances in question, the donor gifted a life insurance policy to a foundation under the express condition that the foundation establish a scholarship for a specific program of a specified college. This initiative fit within the purposes of the foundation and so the gift was accepted and the scholarship fund created. After some time, the college stopped offering the specific program, resulting in the foundation’s inability to continue to fulfil the conditions of the gift (i.e., individuals were no longer able to enrol in the specified program, so scholarships for the program could no longer be awarded). After being asked by the donor to return the life insurance policy, the foundation asked CRA to provide it with comfort that there would be no negative impact on the foundation’s registered status if it obliged the donor’s request. While CRA refrained from confirming the precise income tax treatment that would be applied, it made the following comments:
- In most cases, returning a gift to a donor is prohibited. This is because at law a gift transfers ownership of the gifted property from the donor to the charity. However, as mentioned above, where a restricted gift is made, the charity is obliged to apply the gift pursuant to the terms upon which the gift was made. CRA acknowledged that the circumstances under which a gift can be returned are primarily a matter of provincial trust law rather than tax law.
- The tax consequences applicable to the donor where a gift is returned are set out in the Income Tax Act (Canada). Generally speaking, the taxpayer is deemed not to have disposed of the property nor to have made a gift. As a result, the taxpayer’s income tax return for the year(s) in which the taxpayer claimed the donation tax credit/deduction may be reassessed as it relates to the transfer.
- Before returning a gift, charities need to consider whether the return of the gift could be regarded as making a gift to a non-qualified donee or providing an undue benefit, both of which could result in sanctions, including revocation of registered status. Charities are recommended to consult CRA Guidance CG-016 – Consequences of returning donated property. The requirements pursuant to this guidance are discussed below.
Pursuant to the Act and CG-016, where a charity returns a gift with a value over $50, an information return is required to be submitted to CRA within 90 days after the return of the gift and must take the form of a letter, addressed to the Audit Section, setting out the following:
- a description of the returned property;
- the fair market value of the returned property at the time it is returned;
- the date on which the property is returned;
- the name and address of the person that the property is being returned to including, in the case of an individual, their first name, initial, and last name; and
- the information contained in the original donation receipt, or a duplicate copy of the original receipt, if the property is being returned by the qualified donee that originally issued the receipt or a person not at arm’s length with the qualified donee
Charities are advised to keep in mind that the return of a significant gift in relation to the charity’s overall assets could trigger a full or partial audit.
The inability to fulfil the conditions of a restricted gift does not automatically result in the requirement to return the gift. It may be appropriate for a charity to seek a cy-pres order varying the permitted charitable purposes for which a gift can be used. In the absence of such an order, however, use of a restricted gift in a way other than pursuant to the conditions upon which the gift is made generally constitutes a breach of trust pursuant to the trust laws of the province in which the charity operates.
Accordingly, and as reminded by the circumstances serving as the impetus for the technical interpretation discussed above, charities are well-advised to document restricted gifts by way of a formal written gift agreement with the donor and to include in such agreement a “variance clause”. If worded correctly, variance clauses permit charities to alter the use of a restricted gift, without the requirement to have the purposes for which the gift may be used varied formally by the court (which is a costly and lengthy process). Absent such a clause, a court order is the only way that a charity can alter external restrictions that apply to a gift. In Ontario, consent to such an order must first be obtained from the Public Guardian and Trustee.
Notably, there are very rare and unique circumstances where there may be a legal requirement for the charity to return the gift. These include:
- Where the gift fails because it lacks one of the requisite elements of a gift (i.e., there has been no donative intent);
- Where the gift was made subject to a condition subsequent which later occurs; or
- Where a court has ordered the return of a gift
If your organization has been offered a restricted gift, one of our social impact lawyers can assist you in drafting a gift agreement in a way that protects your organization should it be unable to fulfil the terms of the gift in the future. Where a donor demands the refund of a gift, one of our social impact lawyers can assist you in determining whether the gift can be returned.