A tax receipt. It sounds simple enough. Your charity receives a valued donation, you issue a tax receipt, and the donor receives a tax credit.

The ability to provide official tax receipts is an important advantage for charities seeking to attract donors. However, as donations arrive in ever more varied forms – gifts, land, buildings, securities, services, art, property, and more – the incidence of incorrect receipting is increasing. This can become a serious issue when donors do not receive the tax credits they anticipate, or if the Canada Revenue Agency (CRA) imposes penalties on your organization or even revokes its tax receipting privileges.

To be sure your charity enjoys the full benefits of issuing official donation receipts for income tax purposes, and your donors can take full advantage of the tax benefits, following are common receipting errors – and ways to prevent them.

Issuing a receipt in exchange for services rendered

Many charities receive “donations” of services – from legal counsel to marketing advice.

Under the Income Tax Act, registered Canadian charities may issue official donation receipts to donors who gift property to their organizations. Services, however, do not qualify as “property” and a charity cannot issue a tax receipt for a donation of services.

If a service provider to your charity wishes to receive a tax receipt, an option would be for this donor to invoice the charity for the service and also to make a cash donation for this amount. Since the cash received meets the CRA’s definition of property, your charity could issue a tax receipt to the donor.

This can get complicated, however, because the donor may have to charge GST or HST on the services provided. As well, the donor would have to declare the payment he or she receives as income for tax purposes (this should not be a major issue if the individual regularly bills clients). This would offset the amount of the donation tax credit the donor receives. In such cases, it would be worthwhile to consult with a specialist to determine the tax implications.

Other types of donations that do not meet the definition of property and are also ineligible for a tax receipt include sponsorship fees, loans, free use of property, and pledged donations that were not received.

Issuing a receipt without accounting for the “advantage” received

Many charities host fundraising events for which donors buy tickets. The appeal of these events is often enhanced by offering a tax receipt for a portion of the ticket price. Unfortunately, many charities also issue receipts for incorrect donation amounts in these situations.

Special tax rules come into play when a donor receives an “advantage.” This represents the value the donor receives in exchange for “donating.” A meal, a performance, a round of golf – these would all be considered “advantages” to the donor.

The value of such advantages must be accounted for when calculating the eligible amount of a gift for a tax receipt.

• If the advantage is small – no more than the lesser of $75 and 10% of the donation – then a receipt can be issued for the full amount of the donation.
• If the value of the advantage is greater than 80% of the donation, then no tax receipt can be issued.
• If the value of the advantage is between the two amounts above, then the charity can issue a “split receipt” – the value of the gift, less the value of the advantage.<.li>

 

The value of the advantage must be calculated as the regular retail value – even if the charity paid a reduced price for, say, a dinner or performance. For example, if an individual purchases a ticket for a stage performance for $100 and the cost to the charity of the event is $70/person, then the donor is eligible to receive a donation receipt for $30.

If you aren’t sure of the amount of a receipt to issue for an occasion where a donor receives an advantage, consult with your charity’s accountant or with the Canada Revenue Agency.

Issuing receipts that don’t reflect fair market value of gifts in kind

Gifts in kind can also be confusing to receipt. The CRA definition of a gift in kind is: “a gift of property other than cash – in particular capital property, depreciable property and personal-use property. It also includes a residual interest, a right of any kind, a licence, a share, and inventory of a business. It does not include a gift of services.” Gifts in kind may also include equipment, supplies, furniture, books, art, and more.

Errors arise when a charity issues a receipt with an amount representing the donor’s estimate or interpretation of the value of the gift. In order to provide an accurate tax receipt for a gift in kind, it is the charity’s responsibility to determine the fair market value of the gift.

The CRA has a specific definition for fair market value: “the highest price, expressed in dollars, that a property would bring in an open and unrestricted market between a willing buyer and a willing seller who are knowledgeable, informed, and prudent, and who are acting independently of each other.”

Fair market value can be established in the following ways.

• Secure proof of purchase such as a bill, from the donor.
• Obtain a price list for the item from a commercial enterprise independent of the donor.
• Acquire an independent third party appraisal, especially if the value the item is estimated to be more than $1,000.

Another common receipting error related to gifts in kind is an insufficient description of the donated property. In the case of an appraisal, for example, your charity should record the name and contact information of the appraiser and should retain a record of the appraisal letter.

The same rule applies for valuations of real estate. If a charity does not have proper written support establishing the fair market value of the property, the CRA may reassess the value of the donation.

Charities sometimes struggle with providing accurate receipts for shares of public companies. Often, they will base the receipt on the amount of cash they receive upon liquidation of the shares, which may be inappropriate. To ensure the CRA accepts the fair market value of these shares, use the closing price on the day the shares arrive in your charity’s account.

Incorrect recordkeeping of tax receipts issued

With more CRA auditors auditing more charitable organizations, identification of improper record keeping is on the rise. To avoid expensive reassessments or fines, be sure to retain copies of official donation receipts for two years from the end of the calendar year in which the donation was made.

The timeline for retaining receipts and records for 10-year gifts (where the donor requires the gift to be held by the charity for at least 10 years), bequests, or enduring property is much longer. These must be retained as long as your charity is registered – plus two years after its charitable status is changed or revoked.

If you have concerns about other income tax receipt issues, consult with your charity’s accountant, or visit the Issuing Receipts section of the CRA’s website.

To ensure that your charity and your donors receive all of the tax advantages that are your due, make it a priority to “receipt right.”

Bob McMahon, CA, is a partner of BDO Canada LLP. He provides auditing, accounting and advisory services to nonprofit, private, and public organizations. You can reach Bob at (905) 270-7700 or bmcmahon@bdo.ca.