Young Associates updates, tips, and expertise for nonprofits
News from the CRA - Registered charities in Canada have until March 31, 2019 to update their tax receipt templates. As of then, all tax receipts must include the new web address for the charities directorate: canada.ca/charities-giving
Get more information from the CRA on how to format tax receipts here.
On December 6, 2017, Toronto City Council voted to establish a new property tax class for "Creative Co-Location Facilities". This is intended to provide some arts facilities (e.g. 401 Richmond, Artscape) in Toronto significant relief against property taxes pegged to market values, and to ensure that creative hubs are able to maintain their activity in vibrant and developing neighbourhoods. The new property tax class is in effect as of the 2018 taxation year.
Staff Post
By Anna Mathew
By the end of 2018 charities will finally be able to do most of their government submissions and communications online. The improvements are part of the Charities Modernization Project (CHAMP) which came out of funds earmarked in the 2014 Federal Budget for IT improvements at the CRA.
The 2014 Federal Budget provided the Directorate with $23 million to modernize its IT systems over a five year period. Improving these systems will allow charities to apply for registration and file their annual returns electronically, reducing their administrative burden.
As part of CHAMP, by the end of 2018:
Drache Aptowitzer has a September 2017 article which discusses the implications and how charities should prepare for the change to online submissions and communications. They advise:
Visit the full Drache Aptowitzer article here.
The Charities Directorate of the Canada Revenue Agency does, indeed, have rules around accumulation of property. The particular rule that charities are probably thinking about if they’re worried about the size of their accumulated surplus is the disbursement quota (DQ). The purpose of the DQ is to establish a minimum requirement for spending on charitable activities, with reference to the wealth that a charity has accumulated. As long as you maintain an appropriate level of charitable activity – measured through your spending – you are compliant with this rule.
CRA provides guidance about its spending requirements here. Note that there are separate rules for charitable organizations, which exist to deliver charitable programs and services, and foundations, which exist to support charitable programs and services.
Young Associates works with many smaller charitable organizations. Most groups in this category are unlikely to have accumulated property at a level that would cause non-compliance with the CRA. However, this is an issue that may involve complex legal and financial concepts. If you have concerns, it is wise to discuss your situation with a professional.
CRA defines its requirement for charitable organizations as follows:
If the average value of a registered charity's property not used directly in charitable activities or administration during the 24 months before the beginning of the fiscal period exceeds $100,000, the charity's disbursement quota is:
3.5% of the average value of that property.
The interpretation of this hinges on what property is not used directly in charitable activities or administration. CRA lists real estate and investments as examples.
A charity, for instance, may hold long-term investments such as units in a mutual fund, and use the resulting interest revenue in its operations. However, the principal sits intact for multiple years, not directly used for charitable activity. (This is distinct from the case of a charity that places short-term investments to earn some interest revenue before the investment matures and the principal winds up in a chequing account, available for spending.)
A charity may also own a building that it doesn’t currently occupy; this may be the case for institutions such as hospitals, universities and churches, which may have considerable real estate holdings and needs that change over time.
Once you have identified property that meets CRA’s definition of “not used directly in charitable activities or administration,” you must calculate its average value over the two years before the start of the current fiscal year. CRA provides some latitude in how the average may be calculated. If your organization needs to make this calculation, the method for assessing value and calculating the average over time would be a good topic for discussion with your CPA.
Last step: calculate 3.5% of the average value. That yields the amount your organization is obliged to spend on its charitable activities or administration during the current year.
Let's say your charity owns an investment portfolio, and you determined that its average value over the last 24 months was $100,000. Your DQ for the current year would therefore be $3,500.
You can see that this is actually a pretty low bar to jump over! Most organizations with the capacity to build a $100,000 investment portfolio would have operations that demanded more than $3,500 in program and admin spending. CRA’s rule is set at a level that catches inactive charities, but that is unlikely to cause compliance issues for most charities that are actively carrying out their mandates.
Staff Post
By Jerry Smith
A recent post by Andrew Valentine with the Miller Thomson Law Firm shone some light on a new piece of guidance from the Canada Revenue Agency. If you are currently considering an application for – or already possess – charitable status, the CRA has recently delivered the final version of the Guidance for Arts Activities and Charitable Registration (Reference CG – 018, December 14, 2012).
Building on feedback from the sector, including organizations such as CAPACOA seeking a broader definition of who could qualify, this finalized version attempts to clarify what CRA finds as acceptable examples of appropriate purposes to merit charitable status.
First, there are three broad categories of arts-related activities that could qualify as charitable purposes under one or more of the four heads of charity, including:
In particular, CRA has clarified and expanded details in its arts forms and styles appendix, thus opening the door for more presenter members of CAPACOA to garner or maintain standing as a charity.
If you are interested in exploring these ideas in more detail, these links will be of value:
Staff Post
By Heather Young
The topic of accounting for in-kind donations came up on one of my LinkedIn groups, and I thought I would share some content.
The person asking the question reported that her not-for-profit agency has an operating budget of about $300,000, but each year secures about $200,000 more in donated goods and services. She’s been struggling for years with how to reflect this appropriately to her donors and funders – particularly given an accountant who doesn’t understand the issues and can’t provide the advice she needs.
That seems like a good place to start. A chartered accountant with not-for-profit expertise is a tremendous resource when it comes to measurement, reporting and disclosure issues such as this. The not-for-profit sector has specific accounting needs, and having the right expertise on board is crucial to getting the best financial advice and reporting.
The reporting – or not – of in-kind donations in your financial statements is a matter of accounting policy. You – with advice from your accountant – need to develop the best policy framework for your organization. Here’s what the Canadian Institute of Chartered Accountants offers as guidance:
“Donations-in-kind also present accounting considerations that require judgment. If the accounting policy is to record donations-in-kind, a contribution of goods or services may be recognized in the financial statements when a fair value can be reasonably estimated and when the donated goods or services would otherwise have been purchased. Fair value would be estimated using market or appraisal values at the date of the donation.”
(From A Guide to Financial Statements of Not-For-Profit Organizations, available online.)
Can you substantiate the fair market value of the donations? That tends to be relatively easy for physical objects, much harder for services/pro bono work/volunteer time. Because of this measurement difficulty, an accountant might steer you away from including in-kind gifts in your financials – or they might agree with reflecting tangible gifts but advise against trying to quantify volunteer time and other services.
The Charities Directorate of the Canada Revenue Agency has specific requirements for determining the fair market value of donated items, detailed here.
If your policy is not to include the value of in-kind donations in your statements, you should be able to find other avenues for conveying the full scope and impact of your organization. For instance, you might discuss with your accountant the appropriateness of a detailed note to your financial statements describing the in-kind support you receive.
You could also look at the different types of financial reports you produce. Your formally prepared audit may not capture in-kind gifts, but you might also present to donors and funders a supplementary statement that adds the value of in-kind items to your formal statements.
An annual report could provide an avenue for describing these resources and what they mean for your organization’s work. Annual reports often contain photos, graphs, charts and other illustrations that add impact to your description.
The area of social accounting tries to get to grips with this issue – an important one for many nonprofits, because cash transactions reflect only a portion of our economic activity. Here are a couple of links to publications that might help by discussing the accounting issues and proposing practical solutions:
On the whole, it’s to your advantage to reflect all the value you can within your organization. However, it’s also important to know the government regulations and generally accepted accounting principles that guide the reporting of this information.
