Guidelines for Charitable Receipting: What Canadian Registered Charities Should and Should Not Do

Canadian registered charities and other qualified donees have the privilege of issuing "official donation receipts," which is a critical aspect of their operations. However, many charities face compliance issues due to a lack of understanding of the receipting requirements, putting both the organizations and their directors at risk.

Issuing a tax receipt is a valuable privilege that can be likened to having a money-printing license. Therefore, it is crucial for qualified donees to provide official donation receipts in accordance with the guidelines outlined in the Income Tax Act and Canada Revenue Agency’s directives. The CRA has found that during its audit of charities, nearly 89% of them fail to issue receipts correctly. Receipting is likely the principal cause of Canadian registered charities losing their status following an audit. Fortunately, by understanding the proper procedures, several of the most prevalent issues can be quickly resolved with ease.

The objective of this post is to dispel common misunderstandings surrounding charitable receipting and offer practical advice to registered charities and qualified donees.

1. Charitable organizations are NOT required to provide tax receipts.

There is a common misconception among charities that they must issue a tax receipt for any proper gift made to the organization. However, this is not accurate. Charities may have their own administrative policies outlining the circumstances under which they issue tax receipts. For instance, some charities may set a minimum donation threshold, while others may only provide receipts for cash gifts and not gifts in kind. It is crucial for charities to be transparent about their policies with donors to maintain public trust and confidence in the receipting process. In fact, in certain instances, it may be better for charities to decline a donation rather than issue a problematic receipt, as the majority of receipting issues arise from a small fraction of receipts.

2. Not issuing a receipt for funds does not make them any more flexible than if a receipt were issued.

Certain charities may mistakenly believe that if they choose not to issue a receipt for a donation, they have complete freedom to allocate the funds as they see fit. However, even in the absence of a receipt, Canadian registered charities must adhere to the laws, regulations, and guidance provided by the CRA, and may only utilize funds in a manner consistent with their stated objectives.

3. For a contribution to qualify as a tax-deductible donation, it must satisfy the definition of a 'gift' as outlined in the Income Tax Act.

To qualify as a receiptable donation to a registered charity, a transfer of funds or gifts in kind must fulfill the following criteria: 1) voluntary, 2) a full and final transfer, 3) involve property, and 4) meet the donor's intention to make a gift threshold. If any of these elements is absent, then the transaction does not qualify as a gift, and no receipt should be provided.

4. Common payments that do not meet the criteria for being considered as gifts

Here are some typical payments that do not usually qualify as tax-deductible gifts:

• Standard charges for events or programs
• Membership costs that deliver tangible benefits to the donor
• Payments for lottery tickets
• Tuition fees, except for specific religious school tuition fees outlined in IC 75-23
• Business sponsorships.

5. Necessary details must be included on official donation receipts

To issue official donation receipts appropriately, it is necessary to include specific information on them. Failure to include any of this information renders the receipts invalid. This is the most frequently occurring error and also the most straightforward to rectify.

6. Guidelines for split receipting

Charities must adhere to the regulations of split receipting and verify that the eligible amount of the gift stated on the receipt is accurate. Split receipting involves deducting the value of any advantage received by the donor from the gift amount listed on the receipt. For instance, if a donor pays $200 for a ticket to a gala dinner that includes a meal worth $75, the charity should calculate the advantage of $75 and subtract it from the total gift amount to determine the eligible amount of the gift.

7. Services received as a contribution

Contributions of time, skills, and effort are considered as "services" rather than property, and as a result, do not meet the requirements as "gifts" for the purpose of issuing receipts. Examples of service donations that do not qualify as gifts include:

• A lawyer, accountant, or other volunteer providing professional advice.
• A local contractor building a shed for a charity.
• A photographer volunteering their time and skill to take pictures at a charity gala.
• A catering company providing food and service at a charity fundraiser.

The charity can issue a receipt for services only if the following requirements are met:

1. The charity is charged for the services and pays for them.
2. The individual who provided the service makes a voluntary contribution to the charity for a specific amount.
3. The charity issues a receipt to the person for the same amount as the contribution.

This "cheque exchange" is different from simply issuing a receipt. Once the individual receives payment from the charity for their services, they are required to declare it as income on their tax return, thereby causing an increase in their taxes. The receipt issued by the charity offsets the increase in taxes. Thus, there is no significant advantage for either the charity or the donor to participate in a cheque exchange. The cheque exchange can apply to both time and property donations.

8. Determine the identity of the donor

Identifying the donor is crucial to ensure that the charity issues the receipt to the right person or entity. In case of uncertainty, the charity may request a declaration from an individual or corporation clarifying the donor's identity. If it is impossible to establish the true donor, it is better not to issue a receipt.

9. Retain duplicates of authorized donation receipts and ANY additional books/records

The CRA mandates that charities retain duplicates of tax receipts for at least two years from the end of the calendar year during which the contributions were received. For most other documents, a retention period of seven years is necessary. It is advisable to retain duplicates of official donation receipts for a longer duration than two years in case they are needed by the donor or CRA in the future. Moreover, if official donation receipts are created digitally, it is crucial to maintain either a printed copy or a record in an unalterable format, for instance, a CD.

10. A charity is prohibited from functioning as a "conduit"

Occasionally, individuals approach charities with a desire to donate to a non-registered foreign charity or Canadian non-profit and seek to channel their funds through a Canadian charity to obtain a tax receipt. Such conduct can be deemed a "conduit" situation or a form of "lending" of charitable registration. This practice is unsuitable and may lead to revocation. While Canadian charities are permitted to engage in foreign activities and collaborate with non-profits in Canada, they must comply with the guidelines governing direction and control.

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