If you represent charities or certain nonprofit organizations, you may need to help your clients figure out when they can issue receipts for charitable donations. Receipts allow donors to claim their donations as a deduction on their tax return, which can be a powerful incentive to encourage giving. But if the organization issues receipts erroneously, it can face serious penalties.
First, your clients need to ensure they qualify to issue receipts. Under Canadian tax law, only registered charities, amateur athletic associations, corporations focused on providing low-cost housing, and a few other types of organizations are considered qualified donees. Organizations cannot just meet the descriptions listed above. They must apply and register with the Canada Revenue Agency.
Receipts for Gifts
Registered organizations can only issue receipts for cash and gifts, and the gifts must be voluntary. In other words, your clients cannot issue receipts if the donor was court ordered or contractually obligated to make the donation. Gifts can include real property such as land and buildings, as well as personal property such as furniture, clothing, stocks, and bank accounts. Donations can be intangible property such as patents and copyrights, but they cannot be gifts of service. For example, if someone donates a bag of clothing to a registered charity, the charity can issue a receipt for the fair market value of the clothing, but unfortunately, if someone donates her time, the charity cannot issue a receipt.
Special Rules for Gift Certificates
The CRA also has special rules for gift certificates. As a general rule of thumb, if a business donates a gift certificate for its own store, the charity cannot issue a receipt for that donation. However, if someone buys a gift certificate from a business and donates the gift certificate to a registered charity, your client can issue a receipt for that donation. There are only a few exceptions to this rule.
In a lot of cases, charities offer gifts to their donors in exchange for donations. These gifts are called advantages, and donees need to take the value of advantages into account when drafting charitable receipts. To explain, imagine a registered charity holds a charity dinner, and each ticket is $500. To determine the amount for the receipt, the charity needs to subtract the fair market value of the ticket from the price. If the fair market value of the ticket is $200, the charity can issue a receipt for $300.
If the fair market value of the advantage is worth 80 percent or more of the gift, the donor cannot get a receipt. To illustrate, imagine a donor buys a ticket to a charity event for $300, but the fair market value of the ticket is $250. In this case, the fair market value of the advantage is 83 percent of the amount the donor paid for the ticket. This exceeds the threshold, and the donor cannot get a receipt or claim a tax deduction.
The tax courts take fraudulent donations and charitable schemes very seriously. When advising clients, be sure they understand the importance of registering their organization with the CRA and only drafting legitimate receipts.