Charities and Split-Receipting - The July 18, 2005 Proposed Income Tax Act (ITA) Changes
September 1, 2005
Before the ITA was amended, a donor who was making a gift could not have been paid or benefitted in anyway from the gift. If they received a benefit, the gift was not legally a gift and could not be receipted.
Take for example a donor who gifts a Rolls Royce worth $100,000 to a charity. The donor still owes the bank $9,000 he borrowed to buy the car. The donor makes the gift on the condition that the charity pay the donor $9,000 to discharge the bank loan. Prior to the ITA amendments, the donor would not have been able to get a charitable receipt for the transferred value of $91,000. This was because the definition of a ‘gift’ required that the donor not receive any benefit or payment in return for making the gift. So in the example, even though the donor had basically gifted $91,000 to the charity, it would not have been considered a gift since the donor received $9,000 in return. As a result of the proposed amendments of 2002, ‘split-receipting’ is now permitted, meaning the $91,000 in the example, could now be legally receipted.
You may recall that the 2002 proposals were specifically amended in 2003 to address tax-shelters. These proposals have not actually been passed into law, however they will apply retroactively. The July 2005 proposed ITA amendments include the 2002 and 2003 proposed amendments with some further changes and additions. The 2005 proposed ITA amendments will affect all charities.
Non Exhaustive Summary of ITA Section 248 (30) - (41)
These proposed sections are in draft form only, and in due course will be presented to Parliament for consideration. This means that there may further changes. As we receive clarification on how these sections will be interpreted and applied, CCCC will provide further information to its members.
Intention to Give (Split receipting)
248 (30)
An intent to give is still required, the transfer must still be voluntary and the advantage (i.e. the benefit) to the donor cannot be more than 80% of the gift’s value. This applies in respect of transfers of property after December 20, 2002 to qualified donees (i.e. registered charities) and is not intended to allow a taxpayer to profit by making a gift. In some cases, the advantage may be greater than 80%, but the Minister of National Revenue must be satisfied that the transfer was made with the intention to make a gift.
Eligible Amount of Gift
248 (31)
A charitable tax receipt may only be issued to the donor for the ‘eligible’ portion of the gift. The eligible amount of a gift is the dollar amount that the fair market value exceeds the advantage. For example, a charity holds a fund raising dinner with tickets costing $100. The fair market value of the meal (advantage) is calculated at $40, therefore the eligible amount of the gift for charitable tax receipting purposes is $60 (i.e. $100 - $40). This section applies to gifts made after December 20, 2002.
Amount of Advantage
248 (32)
The advantage is the total value of all property, services, compensation or other benefits to which the donor is entitled to as a result of the gift. An advantage may exist even though it is not received at the time of the gift. For example, it may have been received prior to the time the gift was given or it may be receivable in the future. This section applies to gifts made after December 20, 2002.
Note: The advantage must be directly connected to the gift the donor makes. The benefits a person receives from attending a church (i.e. those which anyone attending would receive), are not an advantage for purposes of determining the eligible amount of that donor’s receipt. It would be an advantage if the donor got something specifically for giving the donation, e.g. a book.
The Donor’s Cost of Property Acquired
248 (33)
The implication of this section is that when a donor receives an advantage (e.g. a book) from the charity when he or she makes a donation, they are deemed to have received the advantage at a cost equal to the fair market value of the book. For example, if a charity received books for free which ordinarily cost $25 each, and then gave a book to every donor who donated $200, the donor is deemed to have received a book that cost $25. In this case the charity would issue a receipt for $175 (i.e. $200 less $25).
Note: Comments on this section replaced on Sept. 2, 2005
Repayment of Limited Recourse Debt
248 (34)
Based on our experience, CCCC members are rarely involved in gifting arrangements which use limited recourse debt. It is advisable that charities considering involvement in such arrangements get professional advice. Generally, the repayment of the principal amount of a limited recourse debt (including debts incurred as part of a leveraged cash donation) is deemed to be a gift in the year it is paid. In some cases the total amount of debt and other advantages exceed the fair market value of the gift to the charity, resulting in an eligible amount of nil. The donor must pay off the excess amount before any amount will be allowed as a gift. This section applies to gifts made after February 18, 2003.
Deemed Fair Market Value
248 (35)
The general rule in 248(31) (i.e. that the cost of a gift is deemed to be the fair market value of the gift at the time it was given) does NOT apply if the gift item was acquired:
- in a tax-shelter arrangement; or
- less than 3 years before the time of donation; or
- less than 10 years before that time if the main purpose for acquiring the property was to gift it to a charity (collectively referred to as the 3-year/10-year rule).
In each of these situations, the eligible amount of the gift is deemed to be the lower of the actual fair market value and the cost to the donor. For example, in year one a donor named John Smith, buys an antique church bell for $5,000 to install in his house. In year two the fair market value of the bell is $6,000. In year two he decides it does not suit his house and he agrees to sell it for $2,000 to the local village church. Mr. Smith wants a charitable tax receipt for the part of the bell being gifted. The charity knows that the receipted amount (i.e. the eligible amount) will be the value of the gift less the advantage. What amount do they use as the value - $5,000 or $6,000? Because Mr. Smith acquired the bell within three years of gifting it to the church, according to 248(35), the charity must use the lower amount, which is $5,000. Therefore the eligible amount would be $5,000 less $2,000 (i.e. the payment), which is $3,000. This section applies to gifts made after 6:00 p.m., December 5, 2003. Note that the ten-year limit for ‘intent to give’ is new, and is an improvement since previous draft amendments provided no limit whatsoever.
Non-arms Length Transactions
248 (36)
This is an entirely new section. It provides that if a charity is in a situation where the 3-year/10-year rule applies and if the property gifted was previously acquired by a person non-arms length with the donor, then the cost amount to be used for determining the eligible amount will be the lower of the two. This means that in the example in 248(35), if Mr. Smith had bought the bell from his father (or any other non-arms length person) the charity would then need to know, what his father bought the bell for. Let’s assume the father bought the bell for $3,500. The charity would then have to calculate the ‘eligible amount’ using the lower of the father’s cost ($3,500) and Mr. Smith’s cost ($5,000). This means the eligible amount on Mr. Smith’s charitable tax receipt will be $1,500 (i.e. $3,500 cost less $2,000 advantage). This section applies to gifts made on or after July 18, 2005.
Note: Assuming that the father in the example above, purchased the bell 30 years ago for e.g. $50, it hardly seems fair to use the lessor of $50 and Mr. Smith’s cost of $5,000. The fact that there is no time limit on how many years to go back when looking at the cost of an item to a non-arms length person, appears to be a legislative drafting oversight.
Non-application of Subsection (35)
248 (37)
The 3-year/10-year rule does not apply to property where the gift is:
- an ecological gift;
- inventory;
- real property in Canada;
- publicly traded securities; or
- cultural property
This section applies to gifts made after December 5, 2003.
Artificial Transactions
248 (38)
This section does not apply to gifts made before December 5, 2003. The section is intended to prevent a donor from getting around the 3-year/ 10-year rule and artificially inflating the fair market value of a gift by disposing and reacquiring a property before donating it to a charity. If the donor did take these steps and it
- was done before July 15, 2005, the cost of the property is deemed to be the lowest cost incurred by the donor at any time to acquire the property; or
- if it was done after July 15, 2005, the eligible amount is deemed to be nil.
Take for example Donor Y who bought office furniture in year one for $1,000. If he transfers it to a charity for e.g. $150 within the next 3 years, he can only get a receipt for $850 based on the 3-year rule. This is the case even if the office furniture would surprisingly increase in value to e.g. $2,000.
This section is getting at an activity such as Donor Y deciding to improve the ‘cost’ amount by selling the office furniture to a second hand store for $2,000, and buying it back immediately for $2,000. The idea is that the eligible amount on the receipt will be $1,850 (i.e. $2,000 new cost less $150 payment).
The ITA will step in and deem the lowest cost of the property ever incurred by the donor as the number to be used in calculating the eligible amount (i.e. $1,000 instead of $2,000). That is only if this transaction was done prior to July 15, 2005. If the transaction was done after July 15, 2005, the eligible amount for the charitable tax receipt will be nil.
Substantive Gift
248 (39)
This section applies to gifts made after February 26, 2004. In cases where the 3-year/10-year rule applies, if a donor sells the gift item to a charity, receives payment from the charity for the item and then gifts the money back to the charity, the fair market value of the gift (contribution of proceeds) is deemed to be the lesser of the fair market value of the property sold and its cost. The intent of this section, as above, is to discourage donors from trying to get around the 3-year/ 10-year rule.
For example, if Donor Y had simply given the office furniture directly to the charity, the receipt would have shown an eligible amount of $1,000 even though the fair market value was $2,000 at the time of the gift. This is because the 3-year rule still applies even if there is no advantage.
Let’s say that instead of gifting it directly to the charity, Donor Y sells it (within the three-year time frame), directly to the charity for the fair market value of $2,000. He then takes the $2,000 and gives it right back to the charity. He expects a donation receipt with an eligible amount of $2,000.
Much to the dismay of Donor Y, this section of the ITA will work to deem the fair market value of the gift to be the lessor value of the property sold ($2,000) and its cost to the taxpayer ($1,000). So the eligible amount on the receipt, either way, will be $1,000.
Reasonable Inquiry
248 (40)
This is a new proposed section which will apply to all charities for all gifts. If a charity is issuing a charitable tax receipt with an eligible amount over $5,000, for gifts (including money) made after 2005, the person issuing the receipt for income tax purposes is required to ask the donor whether certain circumstances exist to determine if the eligible amount for the receipt is less than the fair market value. The questions this person must ask the donor include whether:
- there is any advantage relating to the gift;
- the gift was obtained in the context of a tax shelter;
- the gift was acquired within the last 3 years or 10 years (with intent) to donate, and if so, the lowest cost to the donor or any person dealing at non-arms length with the donor.
The more times in a year that a charity issues its receipts, the less likely it is that it will issue a receipt to one donor for over $5,000. For example if Donor X gives his church $100 per week for a total of $5,200 for the year, the charity might issue receipts:
- annually, meaning Donor X is issued one receipt with an eligible amount of $5,200; or
- the charity might issue receipts at the end of each six month period in the year, meaning it would issue Donor X two receipts, each with an eligible amount of $2,600.
In the first situation the issuer of the receipts must ask Donor X the above questions, and in the second situation, the issuer of receipts is not obliged to ask questions. Obviously however, the more often the charity issues receipts, the greater the administrative burden on the person who issues receipts.
[Notes 1 and 2 added September 2, 2005]
Note 1: It seems that Regulation 3501 requires a charity to issue receipts for each gift when received, or once for all gifts given during the year. On this basis, issuing receipts bi-annually as suggested would not be the best solution. A charity which receipts annually, and which is required to ask the above questions, would be better served by explaining to the donor the questions that require an answer, and getting an informed response (in writing) from a donor. For gifts received in 2006 , CCCC will be providing assistance to members in this area.
Note 2: CCCC recognizes that the application of this proposed section seems absurd, particularly in its application to gifts of cash, and will be raising this concern with the Government.
(Technical Side Note: For gifts of capital, the person issuing the receipt is not required to inquire if the donor will be electing under subsection 110.1(3) or 118.1(6) to reduce the amount reported as the fair market value to an amount between the fair market value and the adjusted cost base. This amount would be used by the donor to determine the proceeds of disposition for the purpose of calculating his capital gain and to determine the eligible amount of the gift for the purpose of a tax credit relating to the donation.)
Information not Provided
248 (41)
If before the official charitable receipt is issued, the donor fails to inform the charity of information that would be relevant to determine the fair market value and eligible amount of the gift, the charity is to state on the charitable receipt, that the eligible amount of the gift is nil. This section applies to gifts (including money) made after 2005.
[Note added September 2, 2005]
Note: An alternate and preferable interpretation of this section is as follows: Suppose the charity has a situation where they are required to ask a donor the above questions in order to determine whether or not there should be a reduction from the fair market value to determine the eligible amount. Let’s say the charity does ask, and either does not get an answer, or is told no reduction is necessary. The charity has asked the required questions and has met its obligations. It issues the receipt without any reductions. However, if it is later discovered by e.g. CRA, that in fact there is an advantage, then the eligible amount would be deemed nil. This would be a penalty on the donor.
The full text of these proposed ITA amendments as well as the related legislative notes, can be obtained at: http://www.fin.gc.ca/news05/05-049e.html.
