When B.C. policeman Caedmon Nash took his financial planner’s advice and became an art donor, he never thought the Canada Revenue Agency (CRA) would come knocking. After buying pieces of native art at a low cost, he donated them two months later to a university at an appraised value much higher than his purchase price. In return, he received a tax receipt for the higher value amount, ensuring a significant tax credit – and a tax dollar-financed profit to boot. If, as Nash reasoned, the university, the artists and Nash himself benefited from the transaction, certainly the transaction was legitimate.

The CRA disagreed. And in November 2005, the Federal Court of Appeal overturned a Tax Court of Canada ruling and decided in the government’s favour. It stated that Nash’s actions were not without fault. Moreover, he owes the government money – lots if it. Though the case may be appealed to the Supreme Court, it is a good example of the federal government’s stronger stance on tax issues as they relate to receipting and charities.

Vigilance and new regulations shape charitable landscape

Alongside greater vigilance, in 2005 the nonprofit sector saw the federal government introduce and pass into law a number of significant changes to tax regulations affecting charities. And these new regulatory schemes, known as Bill C-33, will not only affect in-kind donations, art-flips or buy low, donate high schemes as seen in Nash. They will also influence a number of other receipting issues in the nonprofit sector. Considering the potential penalties facing charities and donors, it is vital that both stay informed and remain cautious.

Many feel the government’s so-called crackdown was not only inevitable but necessary. “The charitable sector is growing,” explains Malcolm Burrows, chair of government relations for the Canadian Association of Gift Planners (CAGP). “More dollars are donated and there’s a call for higher public accountability.” In 2004, he says, $6.9 billion was donated to nonprofit organizations. “The government is waking up and saying, ‘that’s a lot of money, what safeguards do we have to ensure it’s being spent well?'” Burrows, who also works as a consultant for Charitable & Gift Planning at Scotia Private Client Group, adds that the tax receipt is a major form of accountability and the one thing the CRA has some control over. Their decision, therefore, to use it as a tool for public confidence and disclosure is to be expected. “Taxpayers demand it.”

Though a more circumspect approach and new regulations seem worthwhile, some caution that the rules can go too far. “In general, AFP prefers self-regulation over additional government mandates,” says Tad Brown of the Association of Fundraising Professionals (AFP). And while he supports some of the more significant regulations, such as those relating to split-receipting, he is concerned others can potentially hurt charities. “When government action is needed, regulations should be balanced so as to minimally burden charities so they can continue to advance their missions while still providing government the information it needs.”

Getting the word out

Of course, a charity’s ability to provide the government with what it needs is largely dependant on the government’s capacity to inform the sector of any regulatory changes. And that is a serious matter for the AFP. “We have noted this in direct comments to the Canada Revenue Agency, as well as through a Joint Regulatory Table of the Voluntary Sector Initiative,” says Brown. Though the AFP works hard to keep charities informed, the government must be committed to this educational process too, in whatever way possible.

Burrows agrees. The vast majority of charities are small, run by volunteers and are not necessarily linked up to all the educational resources out there, he states. That problem aside, he adds there will definitely be a significant period of adjustment for charities. For example, they will have to change the way they keep their records and the way they calculate receipts. As for the latter, in addition to all the previous requirements, a receipt issued in 2006 must now contain the name of the Canada Revenue Agency, as well as the agency’s website.

Fair Market Value – nothing more, nothing less

A charity must also be sure to provide receipts that accurately reflect the fair market value of the donation provided. Though not a new concept, nor one that has seen any changes, the Nash case has revived its importance. And, with the stricter and more complex rules recently proposed, understanding this hotly debated notion is vital. According to the CRA, the valuation of fair market cannot be greater than the purchase price of the object itself. Even if an independent appraiser finds it to be worth more, the charity cannot record this higher amount on their receipts. Evidently, the implications of this concept on future charitable donations are significant.

Be wary of split-receipting and undue benefits

Another issue that charities must be careful of is split-receipting. Though newly proposed laws would allow a donor to receive a tax receipt in certain situations where the donor or someone else received an advantage, those situations are very limited. For the most part, the general rule stays the same: individuals or corporations are not allowed to benefit from donations to charities. A case in B.C. in March 2005 illuminates the difficulty with this concept of undue benefit and the implications of these new regulations. A retired businessman, Harry Richert, paid $1,000 to attend a fundraiser sponsored by a Vancouver-based charity. Included in the event were lunch, guest speakers and a coffee table book. Arguing that he received no benefit from any of these things, he wanted a receipt for the complete amount of $1,000 rather than the receipt of $855 issued by the charity. The charity refused and the BC Supreme Court affirmed its decision.

For their part, the AFP has endorsed the government’s regulations regarding split-receipting. “Given that charities enjoy special tax status, having to distribute proper receipts with accurate information is, in one sense, simply the cost of doing business,” says Brown. Furthermore, though there may be a concern that Bill C-33 will hurt charitable giving by placing too great a burden on the prospective donor, the AFP is not concerned these split-receipting regulations will have that affect.

Withdrawal meets approval

What did concern AFP, though, was the proposed regulation placing a strict onus on charities to make “reasonable inquiries” of the prospective donor. For this requirement to have been met, charities were expected to extensively research the circumstances related to the gifts before accepting them and producing any receipts. “These would hurt charitable giving because it places the charity in an adversarial relationship with the donor, forcing them to make inquiries about very sensitive subjects,” explains Brown.

A number of organizations, including the AFP and the CAGP, opposed this proposal and it has since been withdrawn. Adam Aptowitzer, a lawyer who works in the charity tax field at Drache LLP, warns that “the fact that they’ve withdrawn the provision does not necessarily remove a charity’s responsibility to make discreet inquiries of the donor.” The donees still need to exercise due diligence to ensure the information on the receipts is accurate.

Beware of greater penalties

With the new regulations in force, the risk charities face should they not act diligently have increased. According to Aptowitzer, charities face more penalties today than ever before. In cases involving undue benefits, for example, charities must pay the CRA for benefits given to a third party in the amount of 105% of the benefit for the first offence and 110% of the benefit for a second one. The most punitive, yet rare, consequence is the revocation of a charity’s registration if drastic measures are deemed necessary.

Aside from the monetary loss, the added consequence of being penalized is that charities risk losing credibility with their donors. “And if it’s a smaller charity, it could really be hazardous to its financial health,” explains Aptowitzer. In addition, the new tax laws will result in greater use of tax courts as charities appeal their penalties. This new reality, says Aptowitzer, “will create ongoing credibility problems for the charity, as even if it survives a penalty, its misdeeds become a matter of public record.”

Charities face a steep learning curve when it comes to understanding the new regulations on charitable giving and receipting. That fact is best illustrated by the numerous charities who declined interviews for this piece because of their self-admitted lack of knowledge. Since the laws are new, this is completely understandable, but as organizations move forward in 2006, one can only hope that they become informed – their reputations and status depend on it.

Elisa Birnbaum is a freelance print and broadcast journalist living in Toronto.