Tax & Law

We held a fundraising auction. Some patrons paid more than the value of the items. Can I issue charitable donation receipts?

Only under specific circumstances.

Charitable donation receipts can be issued only for gifts. They cannot be issued for purchases of goods or services. Your auction patrons have bought something; that’s different from an outright gift. (Here’s the citation from the CRA website).

In the case where an auction patron has paid more than the fair market value of the item, a charitable donation receipt can be issued for the portion of the auction price in excess of fair market value if these three conditions are fulfilled:

  1. It must be possible to determine the item’s fair market value
  2. The value must be posted before the start of the auction
  3. The fair market value cannot exceed 80% of the purchase price

Here are two references to CRA articles that discuss receipting:

To restate point #3 in a different but equivalent way, the buyer must pay 25% (or more) over the fair market value of the item.

Let’s say one of your auction items is a camera with a fair market value of $400. In order to qualify for a charitable donation receipt, the successful bidder must pay at least $500. If you do the math, you’ll find the $400 fair market value is 80% of $500. A $500 successful bid is 25% over the $400 FMV.

If the successful bidder paid you $500 for the camera, they would be entitled to a charitable donation receipt for $100, the amount in excess of fair market value.

What if the bidder paid more than $400 but not quite as much as $500? Well, if they fail to meet the test, then they’ve just bought themselves a very expensive camera! In the CRA’s eyes, that 80% rule is the threshold for establishing that a donation has been made.

My charity has received a gift of professional services. Can I issue a charitable donation receipt?

No.

Those services might be valuable. Charities benefit from many types of “pro bono” assistance – accounting, legal, grant writing, performing, design… But the Canada Revenue Agency’s rules are clear: charitable donation receipts can be issued only for gifts of property, not for gifts of services.

The fact that there might be a clearly understood and publicized fee (i.e. the fair market value is unambiguous) does not change this ruling.

There is something you can do, though: you can pay your supporter for their services, and they can donate the money back to you. These transactions create a gift of property, which is eligible for a charitable donation receipt.

It’s not good enough to exchange an invoice marked “paid.” Your supporter must invoice you for the services (and you must retain this invoice as part of your accounting records). You must actually pay the service provider, and they must give you the donation of money (and your banking records must show these transactions).

This process requires the donor to receive payment, which must be declared by them as taxable income. The charitable donation receipt confers a tax credit against this income.

The whole process is often referred to as a “cheque exchange.”

Here are a couple of citations from the CRA website:

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Tips for Creating Your Organization’s Privacy Policy

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When it comes to collecting and using data about your organization’s patrons and donors, it is imperative to have a privacy policy which meets the requirements of federal legislation, PIPEDA (the Personal Information Protection and Electronic Documents Act), and in some cases additional provincial legislation. The Office of the Privacy Commissioner of Canada has some information about the application of PIPEDA to charitable and non-profit organizations here.

Need help wading through the PIPEDA waters? Want to draft a privacy policy but don’t know where to begin?  Charity Central has created a Privacy Policy Checklist, a tipsheet designed to help you better understand your organization’s information-handling practices and why and how you should create a privacy policy.

Click here to view Charity Central’s Privacy Policy Checklist.

Disclaimer 

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We received a gift from a foundation and they want a tax receipt. Should I send one?

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No.

In Canada, the function of a charitable donation receipt is to confer an income tax credit on the donor. This credit reduces the amount of tax payable. Foundations are registered charities and, as such, are exempt from paying income tax. They cannot use the tax credit for any purpose.

Here’s the Canada Revenue Agency’s word on the topic.

As the CRA suggests, you can provide a thank-you letter and/or an ordinary receipt (not an official receipt for income tax purposes). Also, your foundation supporter will need your charitable registration number in order to complete their own T3010 Charities Return reporting.

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

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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.