Charitable organizations and non-profits rely on the donations they receive and the funds they raise to finance their operations, and in return issue donation receipts to their donors for tax purposes. This may sound like a straightforward process, but in reality, the issuing of donation receipts can get pretty complicated. Let’s look at some of the challenges charities face in sorting this out.
Making sure that donation receipts are accurate and official
First and foremost, to be considered official, donation receipts issued by the charity must include every piece of information specified by the Canada Revenue Agency (CRA). Omitting any of these will result in the CRA denying the donation receipt, which means more admin work for the charity and a tax filing headache for the donor.
Common pieces of information that get left off of receipts include the:
- Legal name of the charity (not the operating name)
- Charity number
- Receipt number
- Location from which the receipt is being issued
- CRA web address (www.cra-arc.gc.ca/charitiesandgiving)
A wise precaution for charities and non-profits is to use a receipt template to ensure that all of the necessary information is present. Donors can use the CRA checklist to confirm the accuracy of the receipts they receive in advance before submitting these to the CRA.A wise precaution for charities and non-profits is to use a receipt template. Click To Tweet
Knowing when to issue donation receipts, and for how much
If the charity receives a direct donation, then the amount written on the donation receipt is equal to the amount that was donated—simple. Other cases are more complex. Consider this scenario. A charity is hosting a gala that includes dinner. To get in, donors must pay $100.
The donation receipt should be made out for $100, right? Wrong. Providing the meal costs the charity $25, so the meal value is actually a benefit to the donor. On the donation receipt, this has to be clearly broken down: the full amount of the ticket ($100), the donor’s advantage ($25), and the difference ($75). Only the difference is claimable by the donor for tax purposes.
Let’s do another example. Let’s say you are a member of a sports club. The make a donation of $100, but it comes with a club membership that gives you access to the facilities. This gym access membership is a benefit to the donor. Let’s assume that the normal cost of going to this gym is $20, then the donation receipt can only be for $80.
Recognizing which donations don’t qualify for receipts
Sometimes charities and non-profits accept “donations” in exchange for providing a product or service (e.g.: facilitating a film screening or some other event, activity, or presentation). In reality, the donation is payment for the product or service provided, and while this is indeed a bit of a gray area, charities and non-profits should not issue donation receipts in these cases.
Here are some other common types of donations that do not qualify for a tax receipt:
- Donations received as a result of an obligation or inducement
- Donations of services to a charity (as a contractor)
- Gift cards and certificates
- The purchase of goods or services from a charity
- Donations directed to specific individuals, families, or non-qualified recipient
- Donations of non-qualifying securities
- Use of vacation property
- Lottery or raffle tickets
Assigning a fair market value to non-cash donations
Donation receipts can be issued for donations of shares or assets by assigning a market value to the donation. But how is this value determined? Let’s say a donor transfers marketable securities, like stocks or bonds, to a non-profit. In this case, the non-profit would issue a donation receipt for the fair market value of the securities on the date of the transfer. If the shares go up or down in value the next day, it doesn’t matter.
Now let’s say the donation was an item, like a car or a computer. If the item has a readily available market value (e.g.: a second-hand car worth $3,000), the non-profit would just issue a donation receipt for that amount. It gets more complicated when the value of the non-cash gift is unclear. Say a donor gives a piece of art to the non-profit. To assign a fair value, the non-profit would need to get an expert to independently evaluate the piece’s worth, and then issue a donation receipt based on this valuation.
Do you have donations that you need help sorting out?
If you have a question about what the difference is between a charity, non-profit and a foundation, click here.