Directing Fees to a Charity
By: Arthur Drache C.M., Q.C.

A recent CRA ruling letter[1] deals with the tax mechanics of a situation which in our experience is not unique and, given the thrust of the ruling, might be a source of new donations to some charitable organizations.

The ruling deals with the withholding and reporting obligations on amounts paid in respect of services rendered by an incorporated non-profit organization's board of Directors members under the Income Tax Act n the following three distinct fact situations:

A board member requests that his or her director fees from the Organization be paid directly to an approved cancer charity.

A board member irrevocably waives his or her right to receive such director fees.

A board member directs that such director fees be paid directly to his or her personal corporation or sole proprietorship.

The broad issue revolve around what are the administrative implications of each of these scenarios. Our interest is with regard to the first scenario.

For tax purposes director fees are taxable as income from an office or employment.  Where an individual directs that an amount of remuneration from an office or employment be paid directly to a charity, subsection 56(2) of the Act will apply to include that amount in the employment income of that individual in the same manner as if it were paid directly to the individual.  The payer of the remuneration would still be required to comply with any withholding and reporting obligations under the Act in respect of such remuneration even where the remuneration has been paid to a third party such as a registered charity. 

The most interesting part of the ruling is the following, reproduced verbatim.

"However, where an amount of remuneration is paid to a registered charity the particular individual might be entitled to claim a non-refundable tax credit under subsection 118.1(3) of the Act provided the amount is considered to be a charitable gift.  As described in Interpretation Bulletins IT-110R3, Gifts and Official Donation Receipts and IT-297R2, Gifts in Kind to Charity and Others, a charitable gift will generally be considered to have been made where the transfer is voluntary and is made without expectation of return by the donor.

Notwithstanding the above, where an individual who is a director or other officer of a non-profit organization, agrees to irrevocably waive an amount of remuneration that he or she is otherwise entitled to receive, perhaps for philanthropic reasons (i.e., with the effect that the particular individual is essentially providing his or her services to the non-profit organization on a purely voluntary basis), the CRA is generally prepared to not apply subsection 56(2) of the Act in such circumstances provided the particular individual is not otherwise able to direct or influence how such waived remuneration is to be spent by the particular non-profit organization.  In such a situation, the amount of such waived remuneration would not be subject to the withholding and reporting requirements under the Act and the individual would not be entitled to claim a non-refundable tax credit under subsection 118.1(3) of the Act if the amount was ultimately contributed to a registered charity by the non-profit organization.[2] (our emphasis.)

Finally, we note that many corporate law regimes require that corporate directors and officers be individuals who act in their personal capacity.  For tax purposes, therefore, it would not be possible for such an individual to transfer or assign income earned from performing such duties to his or her personal corporation, nor would it be possible to have such income treated as business income for income tax purposes.  Consequently, such remuneration continues to be treated as income from an office or employment for the purposes of the Act and subject to the withholding and reporting obligations under the Act."

Obviously, if a director does not need the fees to which he or she is entitled but does not want to impugn the rights of other directors to receive fees personally, this approach of a waiver and transfer to a charity can be a useful tool.