Charities Newsletter (download PDF)

Changes for 2005
Affecting All Registered Charities and Foundations

A number of significant changes were proposed to the Canadian Income Tax Act as a result of the 2004 federal budget which will affect charities in 2005. The changes will affect many of the financial aspects of each charity, from the form of its charitable receipts, the amount of funding it can expend on its administrative function and to new sanctions which can now be applied by the Canada Revenue Agency (“CRA”) for not complying with its various filing and operational requirements.

Receipting

Currently a charity must include on its donation receipts information about the charity, the donor, the amount of the gift, and the date of the gift. Starting in 2005 the receipt must also include the name (Canada Revenue Agency) and website address (www.cra-arc.gc.ca/charities) of the Canada Revenue Agency. We suggest that if the number of receipts you issue is relatively small, you may consider manually adding or stamping this information onto your 2005 receipts, until your new receipts become available. New receipts are mandatory as of 1 January 2006.

The Regulations of the Income Tax Act that govern the content of a receipt for donations and gifts require the following information on a receipt that is issued to a donor:
“Every official receipt issued by a registered organization shall contain a statement that it is an official receipt for income tax purposes, and shall show clearly, in such a manner that it cannot be readily altered:

(a)       the name and address in Canada of the organization as recorded with the Minister;

(b)       the registration number assigned by the Minister to the organization;

(c)       the serial number of the receipt;

(d)       the place or locality where the receipt was issued;

(e)       where the donation is a cash donation, the day on which or the year during which the donation was received;

(e.1)    Where the donation is a gift of property other than cash:

            (i)     the day on which the donation was received,

            (ii)    a brief description of the property, and

            (iii)   the name and address of the appraiser of the property if an appraisal is done;

(f)        the day on which the receipt was issued where that day differs from the day referred to in paragraph (e) or (e.1);

(g)      the name and address of the donor including, in the case of an individual, his or her first name and initial;

(h)       the amount that is

            (i)    the amount of a cash donation, or

            (ii)   where the donation is a gift of property other than cash, the amount that is the fair market value of the property at the time that the gift was made; and

(i)        the signature of a responsible individual who has been authorized by the organization to acknowledge donations.”

On 3 October 2005, the Canada Revenue Agency published information on their website in connection with registered charities as a result of these 2005 amendments. They produced a pamphlet on what is new and they also provided samples of official donation receipts, under the new Split Receipting Guidelines. Under these guidelines, not only the total donation, but the value of any benefit or advantage to the donor must be reflected which then reduces the eligible amount of the gift. They provided four examples, namely a cash gift with no advantage, a cash gift with an advantage, a non-cash gift with no advantage and a non-cash gift with advantage. You may find these donation receipts useful. We have attached the information from the website as an appendix.

In CRA’s Charities Newsletter No. 25 in the fall of 2005, they referred to the decision of the Stewards’ Charitable Foundation in connection with a fundraising luncheon with speakers. In return for a $1,000 gift, donors would receive admission to the luncheon and a coffee table book. The receipt issued was for $855 under the new Split Receipting Rules. The client who did not attend, gave the ticket to his accountant and objected to the fact that his receipt was not for the full $1,000 cash amount that he gave the charity. The Court upheld the use of the Split Receipting guidelines set out by the Canada Revenue Agency. This illustrates the importance of communicating effectively with donors to avoid similar misunderstandings.

Sanctions

The CRA can now assess taxes and penalties on charities, when previously its only alternatives were either to issue a warning to the charity or to revoke its charitable status. The infractions and penalties include:

However, where a charity incurs penalties and taxes in a year of over $1,000, the charity can elect to transfer the amount owing to other registered charities rather than paying the CRA. This is to help keep the funds within the charitable sector.

Appeals

With the introduction of new penalties and taxes on charities, the government was required to implement some new appeals processes for charities to fight the assessments. A charity can now file a Notice of Objection to an assessment which will be reviewed by independent representatives of the CRA. If the Objection is not successful, the charity can then appeal to the Tax Court of Canada for a further review of any matters relating to the new sanctions, or to the Federal Court of Appeal for matters relating to the registration or revocation of the charity (as before).

Disbursement Quota Calculation

To ensure that a charity is devoting its resources to its programs and services (rather than administration, management, or fund-raising), the government requires that each year a charity must expend a minimum amount of funding on its charitable programs or in transfers to other qualified donees. This minimum amount is called the disbursement quota and is based upon receipted donations to the charity and the charity’s own investments in the preceding fiscal year.

In general, a charity’s disbursement quota is the sum of:

+ 80% of tax-receipted donations received in the preceding year (with the exception of endowments, gifts of capital and 10-year gifts - now falling into the new category of enduring property),
+ 100% of enduring properties (other than specified gifts) transferred by the charity to another qualified donee,
+ 80% (100% for private foundations) of amounts received from other registered charities in the preceding year (other than enduring properties),
+ 80% of the proceeds received from the disposition of enduring properties and expended during the year,
-a deduction for capital gains realized in the course of liquidating enduring properties
+ 3.5% of the capital not used directly in charitable activities (ie: invested)

To clarify some of the points above:

The 3.5% of invested capital previously only existed for foundations at a rate of 4.5%, but has now been extended to all charities. However, this addition to the disbursement quota only applies if a charity has invested capital in excess of $25,000. In addition, for charitable organizations registered before 22 March 2004, this new rule has been deferred until their fiscal years beginning after 2008 to give them time to reorganize their program policies.

Gifts received by direct designation (ie: by naming a charity as the beneficiary of an RRSP, RRIF, or life insurance policy) are now granted the same treatment as endowments. They will be subject to the 3.5% disbursement quota limit while they are held as capital, and the 80% disbursement quota limit in the year of expenditure.

As in the past, any program expenditures made in a fiscal year in excess of the minimum disbursement quota can be carried forward to future years for use in a year when your charitable program expenditures are less than the calculated disbursement quota.

The disbursement quota calculation is becoming more and more complicated and since it is no longer part of the T3010 form, there may be a tendency to not regularly keep track of this amount. However, because the calculation has changed significantly, and because the CRA will now be actively tracking this balance, we recommend that you ensure that you are aware of your disbursement requirements during your budgeting process and throughout the year so you can continue to organize your charitable programs in an orderly and efficient manner.

One of the key issues which is expected to arise in future will be the determination of whether an expenditure relates to the delivery of charitable programs and services (and qualifies to be applied against the disbursement quota), or whether it relates to administration and fund-raising (which does not qualify). There is no guidance on this matter in the Income Tax Act, and the commentary in the CRA guide Completing the Registered Charity Information Return is very limited. One must determine the purpose behind the expenditure rather than simply its classification on the financial statements (is a salary expense for a program counsellor or for a fund-raiser?). The farther one goes from the actual charitable activities, the more difficult this determination becomes. A number of people feel that the CRA has been extremely difficult in this area.

For example, in the opinion of the CRA, costs to hold an annual meeting or for accounting or legal fees which may be necessary to keep the charity running, do not qualify as part of the cost of delivering the programs. We hope that these issues will be clarified by some additional publications, but until that time we should be sure to develop sound criteria to identify and allocate the various charitable and administrative expenses.

Public information

In addition to the information already made available to the public about charities (annual information returns, governing documents, names of directors, registration letters, etc), the new rules provide that additional information will be made public:

- the annual financial statements which are filed with the information returns
- the identity of charities which are sanctioned under the new rules above, the nature
of the sanctions and the letter sent to the charity discussing the reasons for the sanction
- CRA decisions regarding Notices of Objection filed by charities
- CRA letters sent to charities relating to the grounds for annulment of the charities’ registration
- information submitted by charities requesting special status or exemptions, and the responses
of the CRA (ie: requests for permission to accumulate assets), and
- information relating to failed applications by organizations for registered charity status.

This information may assist other charities in understanding how the CRA is administering the new rules.

Other Matters

To give charities more voice in developing the administration of the tax rules, the Charities Advisory Committee has been created with representatives from charities who will advise the CRA and the Minister on these issues. The members of the new committee representing BC are: Ms Lois Hollstedt, the former CEO of the Vancouver YWCA, and Ms. Margaret Mason, a trust lawyer specializing in the charity sector and who is a director of both the Minerva Foundation of BC Women and the Finance Committee of the Saint Mary’s Hospital in New Westminster.

The CRA will also be providing enhanced public education through its website (www.cra.gc.ca/tax/charities): on issues to be aware of when making donations to charities, how to confirm the status of a charity, and how to file a complaint about a charity. It will also post information related to the granting of registered charity status to organizations and summaries of the Agency’s annual activities relating to charities.