One of the primary advantages of an organization becoming a registered charity is being able to issue official donation receipts. A registered charity can issue an official donation receipt for tax purposes to its donors, who can use the donation receipt for a tax credit or a tax deduction.
There are a number of rules that apply to donation receipts and they must be strictly followed. Incorrectly issuing receipts can result in penalties, sanctions and, in egregious cases, could result in suspension of tax-receipting privileges or even revocation of charitable registration. If a donation receipt is not properly issued, it could also result in a donor being denied a tax credit or deduction.
This article sets out an overview of some of the fundamental donation receipt rules that charities must follow.
Rule 1: Donation receipts must be issued to the donor
A charity must issue the donation to the person who made the donation. While this may seem straightforward, there are times when it may not be clear who the donor is. The donor is the owner of the property that is gifted to the charity. For example, if John makes a gift to a charity on behalf of Bob, the donation receipt must be issued to John, even though the charity may publicly acknowledge Bob through its donor recognition channels.
Rule 2: Donation receipts must be complete
Donation receipts must contain not only correct information, but they must be complete. Donation receipts must contain the following information:
- a statement that the receipt is an official receipt for income tax purposes;
- the name and address of the charity on file with the Canada Revenue Agency (the “CRA”);
- the charity’s charitable registration number issued by the CRA;
- a serial number;
- the place or locality where the receipt was issued;
- the date the receipt was issued;
- in the case of a cash gift, the date or year the gift was received by the charity or, in the case of a non-cash gift, the date the gift was received by the charity;
- the full name of the donor, including the middle initial in the case of a donor who is an individual;
- the donor’s address;
- the amount of the gift;
- the amount and description of any “advantage” (if there is no advantage, an advantage field does not need to appear on the receipt);
- the “eligible amount” of the gift;
- the signature of an individual authorized by the charity to acknowledge gifts; and
- the name and Internet website of the CRA (Canada.ca/charities-giving).
If the gift is a non-cash gift, the following rules also apply:
- the donation receipt must include a brief description of the gift;
- the amount of the gift listed on the donation receipt must be the fair market value of the property; and
- the donation receipt must list the name and address of the appraiser if an appraisal was obtained.
Rule 3: Fair market value
For non-cash gifts, the charity must use the fair market value at the time the gift was made as the “amount of the gift.” Normally, fair market value is determined by:
the highest dollar value you can get for your property in an open and unrestricted market and between a willing buyer and a willing seller who are knowledgeable, informed, and acting independently of each other.[1]
The CRA’s policy is that if the fair market value of a gift is less than $1,000, someone who is competent and qualified may determine the value of the gifted property. The person who determines the value can even be a member of the charity. If the fair market value is more than $1,000, the CRA recommends that the property be professionally appraised by an appraiser that is at arm’s length from the donor and the charity.
There are certain instances where the fair market value for the purposes of the donation receipt is deemed to be a lesser amount, namely, the cost of the property to the donor. The deemed fair market value rules reduce the value of the donation receipt and apply where the donor acquired the gift:
- as part of a tax shelter arrangement; or
- less than three years before the time of the donation; or
- less than ten years before the time of the donation if one of the main purposes of the acquisition was to make a gift to a qualified donee (generally, a registered charity).
The deemed fair market value rules do not apply to gifts made as a consequence of a person’s death or to gifts of inventory, Canadian real property, certified cultural property, and certain publicly-traded securities.
Rule 4: Split receipting (taking into account the advantage)
The value of the tax deduction or credit a donor receives is based on the “eligible amount” of the gift. The eligible amount is determined by subtracting the fair market value of any advantage the donor received from the fair market value of the gift. These rules, which are known as split receipting, allow a charity to issue a donation receipt even though the donor received something in return for making the gift.
In order for a charity to be able to issue a donation receipt where the donor received an advantage, the charity must be able to determine the fair market value of the advantage. If the charity is not able to determine the fair market value, the CRA’s policy is that no receipt can be issued. Further, CRA’s policy is that if the fair market value of an advantage is more than 80% of the fair market value of the gift, the donor had no true intention to make a gift and the charity cannot issue a donation receipt.
Rule 5: Do not issue donation receipts to other charities
The CRA’s position is that registered charities should not issue official donation receipts to one another. Official donation receipts are required for tax deduction or credit purposes only. Registered charities do not pay income tax and do not need an official donation receipt. A charity can always acknowledge a gift it receives from another charity by providing a letter or a receipt that acknowledges the gift but does not state that it is an official receipt for income tax purposes.
Rule 6: Record keeping
Charities must keep copies of official donation receipts for at least two years from the end of the calendar year in which the donations were made.
These are some of the most important rules for charities to keep in mind when issuing donation receipts, but there are additional rules and guidelines that may come into play. Unique circumstances often arise that make it challenging for charities to determine whether to issue a donation receipt, and if so, the correct amount of that receipt. If you have any questions about how to issue donation receipts, you can contact any member of our Social Impact Group for assistance.
[1] CRA, “Charities and giving glossary” (available at: Canada.ca).
