I got a bonus, and I had to pay a huge chunk of it as tax. What happened?

The bonus becomes part of your total compensation for the year. Let’s say your salary is $36,000 and your employer gives you a $500 bonus. You now need to be taxed as though you’re making $36,500. The bonus calculations need to adjust for the boost in your annual earnings.

Employment Insurance (EI) is a straight percentage of earnings up to an annual maximum. It’s not the culprit, here.

Canada Pension Plan (CPP) is a straight percentage of earnings over $3,500, to an annual maximum. The first $3,500 of earnings is not pensionable. This exempt amount is spread over all of the pays in the year. So, on a salary of $36,000, your weekly gross would be $36,000 ÷ 52 = $692.31. Your weekly non-pensionable earnings would be $3,500 ÷ 52 = $67.31. You pay CPP on only $692.31 – $67.31 = $625.00.

However, if you receive the $500 bonus on a separate cheque, you need to pay CPP on the whole bonus, because you’ve already had the exempt amount on your paycheque. That may make the CPP feel extra expensive.

Tax works in a similar way. In Canada, the first chunk of our income is tax-free: the basic personal exemption (for 2012, $10,822 federally). Thereafter, increasing tax rates apply to different slices of our income. Here are the rates for 2012.

The tax amount on your weekly paycheque is a blended rate: 0% on the first slice, 15% on the next slice, and so on. However, a lump sum such as a bonus must be taxed at the marginal rate: the tax rate that applies to the next dollar of earnings. This can feel very costly, but in fact it’s fair.

To work this out for yourself, you can use the CRA Payroll Deductions Online Calculator, or your can try the manual method, explained in more detail here.

What should appear on a tax receipt?

The Canada Revenue Agency (CRA) provides templates to guide you in what information should appear on a tax receipt (donation receipt). In addition to showing what basic identification information about the charity and donor should appear, the CRA provides ‘4 flavours’ of sample receipts:

1. Cash gift (no advantage) – The most common scenario, this receipt acknowledges the full cash amount donated (e.g. $20 donation = $20 tax receipt).
2. Cash gift with advantage – This receipt is issued for only the eligible amount of the cash donation – the full amount minus the amount of the advantage, or what the donor receives in exchange for the gift (e.g. a $50 donation to attend a fundraising lunch for which meal is valued at $20 receives a tax receipt for $30). The full gift amount, the advantage value, and the eligible amount are all noted on the tax receipt.
3. Non-cash gift (no advantage) – This receipt includes the appraised value of a non-cash item donated to a charity (e.g. a donation of an artwork appraised at $1500 receives a tax receipt for $1500).
4. Non-cash gift with advantage – This receipt is issued for only the eligible amount of the non-cash donation – the full amount minus the amount of the advantage, or what the donor receives in exchange for the gift (e.g. if an individual donates a house valued at $100,000 but receives $20,000 cash in return, the tax receipt is issued for $80,000). The full gift amount, the advantage value, and the eligible amount are all noted on the tax receipt).

Visit this page on the CRA website to view sample receipts. Remember, these are guides. They are intended to show you what relevant information needs to appear, but you can format yours differently and brand it for your own organization.

What is the difference between a gift-in-kind and a gift-of-service?

According to the Canada Revenue Agency charities glossary, “Gifts-in-kind, also known as non-cash gifts, are gifts of property. They cover items such as artwork, equipment, securities, and cultural and ecological property.

A contribution of service, that is, of time, skills or efforts, is not property and, therefore, does not qualify as a gift or gift in kind for purposes of issuing official donation receipts.”

See also the Young Associates glossary entry on in-kind donations.

Can I issue a tax receipt for a gift of service?

No. A donation of services is not a gift, according to the Canada Revenue Agency (CRA) which states: “At law, a gift is a voluntary transfer of property without consideration. Contributions of services (for example, time, skills, effort) are not property”. However, a charity can issue a tax receipt if the service provider participates in a ‘cheque exchange’ with the charity. In this case, the service provider does the work and invoices the charity, the charity pays the service provider for the work, and then the service provider voluntarily donates the money back to the charity.

Why does a cheque exchange make the transaction acceptable? Because the service provider has been paid for their work. It’s now taxable income for them, and they have made a gift of property (the cash) from their after-tax income. That’s the scenario that charitable donation receipts are designed to serve.

Make sure to keep a copy of the invoice issued by the service provider, but remember, you can only issue the tax receipt once you’ve paid the service provider and they donate the money back to your charity.

Read this page on the CRA website for more information.

An editorial note on the term “gift”:  “Gift” is frequently used colloquially to describe any kind of donation (be it of cash, goods, or services).  Even Young Associates uses it – see our glossary entry for “donation”.  The varied and widespread use of “gift” and “donation” to cover all kinds of charitable contributions (whether they are eligible to receive a tax receipt or not) is a source of confusion. Make sure you are up to date with the CRA (or other appropriate body, depending on your location) regulations and wording to be absolutely sure you are operating within the law.

How do I determine fair market value?

If you have received a non-cash gift of property, you need to have it appraised for fair market value (FMV) – for your charity’s books, and so you are able to issue a tax receipt to the donor. According to the Canada Revenue Agency, fair market value is normally the highest price that the property could bring in if the market was open and unrestricted and the buyer and seller are both willing, knowledgeable, informed, prudent, and independent of one another.

It is important to keep in mind the following:

• The $1,000 threshold – If the FMV is less than $1,000, a member of the registered charity or other competent, knowledgeable individual can determine the property’s value. If the FMV is likely more than $1,000, the CRA recommends third party professional assessment of the property. Remember to include the name and address of the appraiser on the tax receipt.
• Deemed fair market value – The FMV of the property might be different at the time of donation then when the donor originally acquired it. In some cases the charity would then only be able to issue a tax receipt for the lesser amount. This can also be the case when the donor originally acquired the property as part of a tax shelter. Read this page on the CRA website for more information on when deemed fair market value is applicable.
• Fair market value for Advantages – For any donation, a charity must deduct the FMV of the advantages the donor receives (if any) to determine if only a portion of the amount of the gift can be receipted. Depending on the ratio of the value of the advantage to the value of the donation, the charity will: a) only be able to receipt for the amount of the donation less the value of the advantage, b) be able to issue a receipt for the full amount of the donation, or c) might not be able to issue a receipt at all. See this FAQ or visit this page on the CRA website for more information on these ratios and on how to handle split receipting.

Remember, it is the onus of the registered charity, and not the donor, to ensure that the FMV recorded on tax receipts is accurate.

What is split receipting and how do I do it?

Sometimes a charity acknowledges a donation with some sort of advantage. Common examples include providing a donor with complimentary tickets to a performance, or providing anyone who purchases a ticket to a fundraising event with a catered meal. In cases like these, where the patron is both making a gift and buying something, it is possible that only a portion of the amount of the donation would be eligible to be tax receipted. This is called split receipting.

Anytime a donor receives an advantage, the charity must deduct the value of the advantage – (click here for information on calculating fair market value) – from the amount of the donation and determine whether split receipting is necessary. The donation, less the advantage, must still represent a voluntary transfer of property by the donor to the charity.

Sometimes, even when a donor receives an advantage, split receipting is not necessary. It is important to remember the following:

• The 80% rule – If the advantage the donor receives is valued at more than 80% of the amount of the donation, the CRA does not consider the donor as having intended to make a gift and the charity cannot provide a tax receipt at all.
• The de minimis rule – Some advantages are too small to warrant split receipting. The de minimis rule dictates that if the value of an advantage (or combined advantages) does not exceed the lesser of $75 or 10% of the value of the gift, it is too minimal to have any effect on the amount of the gift. In these cases, a charity can issue a tax receipt for the full amount of the donation.

Visit this page on the CRA website for information on split receipting.