What is the general principle on receipting of donations of services?
Contributions of services (that is, time, skills, or effort) do not qualify as gifts. At law, in order for there to be a gift, there must be a transfer of property; services do not involve such a transfer.
A charity can, however, pay for services rendered and later accept the return of all or a portion of the payment as a gift, provided it is returned voluntarily. This is often referred to as a cheque exchange. In such a case, a charity should make sure that it keeps a copy of the invoice issued by the service provider. The invoice and cheque exchange not only ensure that the charity is receipting a gift of property, but they also create an audit trail, as the donor must account for the taxable income either as remuneration or as business income.
A charity should not issue an official donation receipt to a service provider in exchange for an invoice marked “paid”. Eoing so would raise questions about whether any payment has been transferred from the charity to the service provider and, in turn, whether any payment has been transferred back to the charity.
(Although, in some circumstances, CRA does permit a charity to issue a donation receipt to volunteers, in lieu of re-imbursing expenses incurred by the volunteer, this practice does not extend to service providers. Re-imbursed expenses are not income for a volunteer, and do not have to be reported as remuneration or business income.)
|ABC Landscaping plows the snow and sands the parking lot of a charity.|
|Can the charity issue a donation receipt to ABC?|
|No. The charity cannot issue a receipt. Gifts must involve a transfer of property; providing a service does not involve a transfer of property.|
|However, ABC could bill the charity for the $2,000. The society would pay the invoice.
If ABC subsequently gives the charity $2,000, or another amount, ABC can receive a donation receipt for that amount.
Sometimes the line between what constitutes a property and what constitutes a service is quite clear. If an individual or company cleans the charity’s office, the individual or company is providing a service rather than a property and this cannot be receipted as a gift in kind.
Other scenarios are less clear, either because it is not certain whether the scenario involves a service or property or whether the donor can be considered to have transferred property to a charity. For example, can a website be considered property for the purposes of making a gift? The Income Tax Rulings Directorate considers such proposed transactions on a case-by-case basis.
What are the general principles on receipting of capital property as gifts?
Capital property is depreciable property that, if sold, would result in a capital gain or a capital loss to the owner. Capital property does not include the trading assets of a business, such as inventory. The deemed fair market value of a gift of capital property made by a taxpayer is used by the charity to determine the eligible amount of the gift for receipting purposes.
The following properties are generally capital properties:
– securities, such as stocks, bonds;
|– units of a mutual fund trust and land, buildings, and equipment used in a business or a rental operation|
Generally, a taxpayer or corporation that gives capital property as a gift is deemed to have received proceeds of disposition equal to the fair market value of the property, subject to the deemed fair market value rule. If the fair market value of the property exceeds its adjusted cost base, the taxpayer or corporation will realize a capital gain as a result of such a disposition. A taxpayer or corporation can reduce the capital gain, however, when the gift or bequest of a capital property is made to a registered charity.
In addition, if a donor makes a gift of capital property to a registered charity and the fair market value (or deemed fair market value, if applicable) of the donated capital property is determined to be more than its adjusted cost base, the donor may designate an amount that is less than the fair market value to be the proceeds of disposition. This may allow a donor to reduce the capital gain otherwise calculated.
Any such amount that a donor chooses to designate in respect of the donation must be within the following limits:
|(a)||it cannot be more than the fair market value of the property at the time the gift is made|
|(b)||it cannot be less than the adjusted cost base of the property.|
The designated amount is deemed to be the proceeds of disposition of the property. It is also considered to be the fair market value (or deemed fair market value, if applicable) of the gift made by the taxpayer for the purposes of determining the amount of the deduction or tax credit. Furthermore, this amount is used by the charity to determine the eligible amount of the gift for receipting purposes.
Keep in mind that a charity always issues the receipt for fair market value or deemed fair market value. The donor may choose to use the adjusted tax base.
Because of the complexity of capital property as gifts, a charity will benefit from seeking professional help in sorting out all related issues.
What are the general principles on receipting of gifts of certified cultural property?
Certified cultural property is property that has been determined by the Canadian Cultural Property Export Review Board to be of “outstanding significance and national importance” to Canada. The Review Board issues tax certificates for the fair market value of such items. Certified cultural property can include, among other examples:
- archival material
- decorative arts
- musical instruments
- military objects
- technological objects
Special incentives have been created to encourage Canadians to keep in Canada cultural property that is of outstanding significance and national importance. Under the Cultural Property Export and Import Act, people can donate this type of property to Canadian institutions and public authorities that have been designated by the Minister of Canadian Heritage. You can find a list of the institutions and public authorities designated by the Minister of Canadian Heritage at www.canada.ca/en/canadian-heritage.html
The eligible amount of the gift is calculated based on the fair market value of the property, as of the date the donor legally transferred ownership.
The fair market value of the donated property, as determined by the Canadian Cultural Property Export Review Board, applies for a 24-month period. When that 24-month period lapses, the fair market value is re-determined and the new value holds for the following 24 months. When a donor makes a gift of the property, it is the last determined or re-determined fair market value that is used to calculate the eligible amount of the gift.
As this is another complex area, charities receiving gifts of certified cultural property will benefit from professional help in sorting out related issues.
Does cultural property have to be certified by the Canadian Cultural Property Export Review Board to be considered a gift in kind?
No, not all cultural property has to be certified by the Review Board. Cultural property not certified by the Review Board is considered a regular gift in kind. So, the charity receiving the non-certified property may still issue an official donation receipt based on the fair market value as determined for any gift in kind. The donor would NOT receive the tax advantages described in our FAQs on certified cultural property.
Cultural property donated to registered charities or other qualified donees within Canada that are not designated Canadian institutions or public authorities is not subject to valuation through the Review Board process.
What are the benefits of having property certified as cultural property?
The Income Tax Act provides favourable income tax treatment for the disposition of certified cultural property to institutions and public authorities designated by the Minister of Canadian Heritage.
This treatment includes
- a tax exemption for capital gains realized on the disposition of cultural properties to those designated institutions
- when disposition is as a gift to those institutions, a tax credit or a deduction to donors of up to 100 per cent of their net income.
For further information, see Guide T4037 Capital Gains www.cra‑arc.gc.ca/E/pub/tg/t4037/README.html
If a charity that is a designated institution disposes of cultural property other than to another designated institution, what are the tax implications?
Unless the property is transferred to another designated cultural institution
if the property were disposed of within 10 years of first being certified by the Canadian Cultural Property Export Review Board,
the organization would be subject to a special tax equal to 30 per cent of the fair market value of the property.
More information on this topic is available in IT-407 Dispositions of Cultural Property to Designated Canadian Institutions
Our charity received a donation of ecologically sensitive land from a farmer. Can we issue an official donation receipt?
It depends. In order for an official donation receipt to be issued, the donation must:
- fully qualify as a gift under Canadian tax law
- must meet the requirements for ecologically sensitive land.
For it to be a gift, there must be a voluntary transfer of property. For example, a farmer donated a part of her land to your charity because as a condition for developing a portion of her property, she must donate part of her land for parkland. This donation would not qualify as a gift, as it was not voluntary.
All requirements for the gifting of ecologically sensitive land must also be met before a donation will be considered and treated as such. The requirements include:
- the charity must be approved as an environmental charity and
- each donation of land or a partial interest in land must be certified as ecologically sensitive before it can be included under the Ecological Gifts Program. The federal Minister of the Environment or a designated authority carries out this certification.
More information on a gift of ecologically sensitive land is available here. Because of its complexity, a charity may wish to seek professional advice in dealing with this kind of donation.
What are the general principles on receipting of gifts of ecologically sensitive land?
Gifts of ecologically sensitive land to a municipal or public body performing a function of government in Canada qualify for favourable tax treatment. Corporate donors may deduct the amount of their ecological gifts (eco-gifts) directly from their taxable income, while the value of an individual’s eco-gift is converted to a non-refundable tax credit. Donors of eco-gifts also receive a reduction in the taxable capital gain realized on the disposition of the property.
There are a number of steps involved in this process, including
- arranging the donation
- preparing and filing information on ecological sensitivity
- determining the fair market value of the donation.
In order to receive a gift of ecologically sensitive land, a registered charity must
- have as one of its primary purposes “the conservation and protection of Canada’s environmental heritage” or some similar statement acceptable to the federal Minister of the Environment
- apply to Environment Canada for eligibility.
In addition, before it can be included under the Ecological Gifts Program, a donation of land or a partial interest in land must be certified as ecologically sensitive, that is, important to the preservation of Canada’s environmental heritage. The federal Minister of the Environment or a designated authority carries out this certification.
The Minister—through the offices of an appraiser—will also ultimately determine the fair market value of the gift. For a gift of a covenant or an easement or, in Quebec, a real servitude, the fair market value of the gift will be
the greater of
- the determined fair market value of the gift
- the amount of the reduction of the land’s fair market value that resulted from the gift.
The fair market value of the donated property, as determined by the Minister, will apply for a 24-month period after the last determination. When 24 months have elapsed, a re-determination is required. The last determined or re-determined value is the value a charity must use to calculate the eligible amount of the gift, whether the gift is claimed as a gift of ecologically sensitive land or as an ordinary charitable gift.
Donors may gift fee simple donations (comprehensive rights to the real property) or partial interests (any one or combination of lesser rights short of a fee simple donation). Whether fee simple donations or a donation of a partial interest in land, all owners have a responsibility to maintain the biodiversity and environmental heritage of these properties in perpetuity.
For more information, visit the Ecological Gifts Program web page here.
This is a complex area, so charities receiving gifts of ecologically sensitive land will benefit from professional help in sorting out related issues.
A donor wants to give our charity some ecologically sensitive land, but also wants to pass it on to her heirs. What does our charity do if the donor wants to maintain some connection with the land?
Although many eco-gifts are outright donations of land with no conditions (called “fee simple” donations), making such a gift does not necessarily mean severing the connection donors have with their land. There are options available.
A conservation easement, covenant, or servitude is an agreement that is registered on title and that protects a property’s conservation value by permanently placing terms and conditions on its use that are determined by the donor. It can place limitations on subdividing, the number and location of structures, and the types of land use. Under the terms of the agreement, the donor continues to own the land and may live on it, sell it, or pass it on to heirs. The recipient ensures that the restrictions put on the property are followed in the future, regardless of who owns the land.
Whether your charity receives a fee simple donation or a donation that is a partial interest in land, in exercising your rights both you and the donor have a responsibility to maintain the biodiversity and environmental heritage of these properties in perpetuity.
Our charity received a gift of mortgaged property. In what amount should we make out the official donation receipt?
In order to determine the value of mortgaged property, your charity will have to consider all relevant factors, including market prices, the terms and conditions of the mortgage, and the amount and conditions of any other charges on the property.
In order to determine the eligible amount, it will be necessary to value the mortgage. Accurate valuation of a mortgage may involve examining the terms and conditions of the arrangement and not just calculating the outstanding principal. To do this, you may wish to hire an expert in the area.
- A house is transferred to a charity. The only advantage given by the charity is the assumption of the mortgage. The fair market value of the house is $575,000. The amount of the mortgage being assumed by the charity is $124,000.
- If the terms and conditions of the mortgage were in line with the current market, the eligible amount would be $451,000 ($575,000 – $124,000 = $451,000).
The terms and conditions of the mortgage could be unfavourable, however. For example, high interest rates or high penalties for transfer might result in the charity having to pay a third party $150,000 to assume the mortgage. In such a case, the eligible amount would be $425,000 ($575,000 – $150,000 = $425,000).
Note: If any other advantage were being given to the charity, the amount of that advantage would also have to be considered when determining the eligible amount.
What are the general principles on the receipting of charitable annuities?
A charitable gift annuity is an arrangement under which a donor contributes funds to a charitable organization in exchange for guaranteed payments for life at a specified rate depending on life expectancy or for a fixed term. When this occurs, the advantage received by the donor is a stream of guaranteed payments for a period of time.
The eligible amount for receipting
|is equal to the excess of||the amount contributed by the donor|
|over the amount that would be paid at the time of donation to an arm’s length third party, like a trust company or bank, to acquire an annuity to fund the guaranteed payments.|
A donor makes a $100,000 contribution to a charitable organization.
- The donor’s life expectancy is eight years.
- The donor is to be provided annuity payments of $10,000 per year, which amounts to $80,000 over eight years.
- The cost of an annuity that will provide $80,000 over eight years is $50,000.
- The donor receives an official tax receipt for $50,000 for the year of donation.
- The donor receives $80,000 in annuity payments, of which $30,000 will be included in income over the eight years.
As indicated, the eligible amount for receipting
|is equal to the excess of||$50,000|
|the amount contributed by the donor||$100,000|
|over the amount that would be paid at the time of donation to an arm’s length third party, like a trust company or bank, to acquire an annuity to fund the guaranteed payments.||$50,000|
Charitable annuities issued after December 2002 are taxed under the Income Tax Act in the same manner as all other annuity contracts are taxed. Assuming the annuity is a “prescribed annuity contract” as defined in subsection 304(1) of the Income Tax Regulations, annuity payments are included in the taxpayer’s income in the year the payments are received and the taxpayer may claim a deduction in respect of the capital element of the payments.
While charities are advised to seek professional help in sorting out charitable annuities, specific reference should be made to section 300 of the Regulations. The calculation of the capital element of a life annuity apportions the “adjusted purchase price” of the donor’s interest in the annuity (that is, the cost of the annuity) over the expected life of the donor. The expected life of the donor is determined by referring to the 1971 Individual Annuity Mortality Table as prescribed in Volume XXIII of the Transactions of the Society of Actuaries.
Our charity has been given a “charitable remainder trust”. What is it and how is it receipted?
Generally, a charitable remainder trust involves transferring property to a trust whereby the donor or beneficiary retains a life or income interest in the trust but an irrevocable gift of the residual interest is made to a registered charity. A charitable remainder trust may be created either through provision in a will (a testamentary trust) or through a living (inter vivos) trust established and effective during the lifetime of the donor. Your charity can issue an official donation receipt for the fair market value of the residual interest at the time that the residual interest vests in your charity.
The Canada Revenue Agency will consider a gift of residual interest to have been made if all of the following requirements are met:
- property is transferred
- the property must vest with the recipient charity at the time of transfer.
A gift is vested if:
- the person or persons entitled to the gift are alive and their whereabouts is known,
- the size of the beneficiaries’ interests are ascertained,
- any conditions attached to the gift are satisfied.
- the transfer must be irrevocable
- it must be evident that the recipient organization will eventually receive full ownership and possession of the property transferred.
The method of valuing a residual interest in real property or an equitable interest in a trust, whether for determining the amount of a charitable donation or other tax consequences, will vary according to the type of gift, other interests in the property or trust, and the documentation providing the gift. The general approach is to value the various interests taking into consideration the fair market value of the property itself, the current interest rates, the life expectancy of any life tenants, and any other factors relevant to the specific case. In the case of property other than real property, the longer the period before full ownership of the property is passed to the charity, the more difficult it is to establish its value.
In cases where the size of a residual or equitable interest at the time of the donation cannot reasonably be determined, such as when a life tenant or trustee has a right to encroach on the capital of the trust, no deduction or tax credit in respect of the donation will be allowed.
Assume that a trust is created by the will of a taxpayer to hold property gifted by the deceased to a registered charity.
The terms of the will require the trustees to pay all of the income earned by the trust to the taxpayer’s surviving spouse and, on the death of that spouse, to transfer the property to the charity.
Neither the spouse nor any other person has the power to encroach on the capital of the trust.
In this case, a testamentary gift of an equitable interest in a trust is considered to have been made and the taxpayer is deemed to have made a gift of the interest to the charity in the taxation year in which he or she died. Once it is established that a gift has been made, the value of the gift at the time of the transfer must be determined before it can be clai
Assume a taxpayer transfers a property to a trust and the trustee is instructed to pay all of the income earned by the trust to the taxpayer during the taxpayer’s lifetime and, on the death of the taxpayer, to transfer the property to a registered charity.
If all of the requirements listed above were satisfied at the time of the transfer to the trust, an inter vivos gift of an equitable interest in a trust is considered to have been made at that time.
Considering the complexity of a charitable remainder trust, your charity is well advised to consult professional help.