The Latest from Revenue Canada

Reference Number
CES - 008

Date
September 26, 1999

Overview of the Charities Division

1. The Division is part of the Policy and Legislation Branch of Revenue Canada. It administers the provisions of the Income Tax Act dealing with charities.

2. The Division handles approximately 4000 applications for registration as a charity per year. It recently increased its staff in the Applications and Examinations Section and we hope to decrease the backlog situation for reviewing files.

3. The Division has a nation-wide telephone enquiries line that handles more than 100,000 calls per year. We have an English toll-free line and recently we added a bilingual toll-free line to answer French callers.

4. Much of our information can now be obtained online, e.g., newsletters, information circulars etc.

5. Soon, we will have our online listing up and running where anyone can find out if a particular organization is registered. Presently, the public relies on our toll-free lines, or in writing.

6. The 1997 Federal Budget provided an additional $5 million for the Department to increase its staff at the Charities Division, to provide excellence in service to clients and registered charities across Canada, and to provide more information for charities to understand and comply with the requirements of the Income Tax Act.

7. These resources will be used in consulting, improving service, improving the annual information return filed by charities, and improving compliance, verification and monitoring.

8. Additional staff have now been hired to review applications for registration in order to address backlog and improve timeliness of registration. We are making progress in this area. Additional staff have also been hired to handle written and telephone enquiries for clients in a more efficient way.

9. We are improving our database management systems so better information will be available for monitoring and measurement purposes.

10. As you may know, the annual information return was significantly overhauled to provide better data and make it easier to complete. We are still making changes to the return each year based on feedback, although not as extensively as in 1997. An information return review section was created to provide an initial review of all information returns being filed in order to improve accuracy of filed information.

11. The Audit Section will increase the number of files for audit and files will be selected so as to maximize the effectiveness of audits generally.

12. Public consultations on draft publications may now be located on the Division's Web site.

13. Information sessions on the requirements for completing the Registered Charities Information Return, Form T3010, will continue this fall. We hope to provide workshops in the future on other issues besides the T3010 information return covering specific issues such as gifting and receipting, foreign activities, etc.

14. Once again, the Internet is now being used more frequently for public consultation, relaying information, etc.

Registered Charity Information Return (Form T3010)

15. As you know, the T3010 information return was substantially revised in 1997 and minor modifications were made in 1998 and 1999.

16. Now all charities have a business number and since 1998, we refer to the charitable number as the "BN/Registration Number".

17. The BN/Registration number has had to be included on official donation receipts since October 1, 1998.

18. The purpose of the T3010 is to:

• Provide the public with information about the charities they wish to support.
• Provide Revenue Canada with the ability to better monitor the activities of charities.
• Serves as a primary source of data on the charitable sector, which forms a significant part of the economy.

19. The revised T3010 is a direct result of several years of consultation with the sector and the public to provide a form that would give the public more information and hopefully be easier for charities to complete.

20. It is longer but simpler in style with many boxed yes or no answers. The T3010 Guide is written in plain language.

21. If the information returns are not properly completed, they may be returned to the charity, and will not be recorded as having been received unless and until they have been entirely completed.

22. Financial statements must be attached. If you would like Revenue Canada to make these available to the public, you can indicate this on the return.

23. It is in everyone's interest that returns be completed properly. The Department is prepared to help everyone it can. If you have any problems, start by checking the line-by-line entries in the guide, do your best, or call the client assistance line.

24. The Charities Division will continue to offer specific training sessions for representatives of registered charities on how to complete this T3010 information return.

25. Some clarifications about the Return

• The Statement of receipts and disbursements can now be reported using cash or accrual methods (whichever method you choose, you have to use it consistently).
• The accrual method is when expenses and income are recorded in the financial period they are incurred.
• The cash method records only the payments actually received or made in the fiscal period.
• Section E is a new section about revenue generating activities to be completed only if a charity receives more than $30,000 during the fiscal period it is reporting (this excludes some 60% of charities).
• Section G is a new section about political activities and the extent that these activities are carried on by the charity.
  • Note: A charity cannot engage in partisan political activities but it can carry on non-partisan activities to a limited extent to further its charitable purposes.
• Section H asks for a list of gifts the charity made to qualified donees.
• Charities cannot make gifts to non-qualified donees.

26. What are qualified donees? Organizations to which taxpayers may make a gift and receive tax relief. They are:

• other registered Canadian charities;
• registered Canadian amateur athletic associations (organizations that promote amateur athletics in Canada on a nationwide basis, for example, the Canadian Figure Skating Association);
• registered Canadian national arts service organizations (organizations that promote the arts in Canada on a nationwide basis);
• non-profit Canadian housing corporations that provide low-cost housing for the aged;
• municipalities in Canada;
• the United Nations or its agencies;
• certain universities outside Canada;
• charitable organizations outside Canada to which Her Majesty in right of Canada (meaning the Canadian federal government or its agents) has made a gift during the taxpayer's taxation year or the 12 months before it; or
• Her Majesty in right of Canada or in right of a province (meaning the federal government, a provincial government or their agents).

27. Section I is a new section requiring details about activities outside Canada. Charities need only complete this section if their direct program expenditures outside Canada exceed $10,000.

• What is the charity's involvement? To what extent does it carry on activities directly or through partners? And does it maintain control and direction over the use of its funds?

28. Section J Certification - requires the signatures of two (2) persons who have been authorized to sign.

29. The following Confidential Schedules are not provided to the public.

Schedule A This is a general checklist about a variety of activities. The Charities Division will use this section for educational purposes only and to assist us in determining where charities are having problems.

Schedule B This is to be completed only by those charities that have applied for a permission to accumulate property.

Schedule C is the Disbursement Quota.

30. Disbursement Quota - A charity must spend a certain amount on its charitable activities each year. For public foundations this means spending each year at least:

• 80% of amounts for which it issued receipts in the previous year not including:
• gifts of capital received by way of bequest or inheritance
• gifts received with a direction that they be held for at least 10 years.

(However, when the foundation decides to spend these gifts, it must include them in that year's disbursement quota.)

• 80% of amounts received from other registered charities not including:
• specified gifts (gifts one charity makes to another without including it in either's disbursement quota).

• 4.5% of the value of investment assets (shares, cash, property, etc.) owned by the foundation that were not used directly in charitable activities or in the administration of the foundation.

31. Schedule C - Disbursement Quota

• Part I helps the charity determine its disbursement quota. Public foundations must complete sections 1, 2, 3 and 4.
• Part II establishes whether the charity met its disbursement quota.
• Part III is the calculation of a disbursement excess when a charity has spent more than its disbursement quota.
• Part IV is the calculation of a disbursement shortfall when a charity has not spent enough in the year.
• Part V is optional and helps charities keep track of any disbursement excesses.
• Part VI is mandatory and provides a breakdown of essential information on gifts the charity received in the fiscal year and also makes completing next year's return easier.

Gifts and Receipting

32. It is important to understand what is a gift and when receipts can be issued. Individuals can claim a tax credit and Corporations can claim a deduction for gifts made to a registered charity for which the charity has issued an official receipt.

33. There are consequences for a charity that issues receipts contrary to the provisions of the law, such as:

• loss of its tax exempt status
• loss of its right to issue receipts and
• it could be liable to pay a tax equal to the value of its assets remaining after revocation

34. There are also consequences for the donor if a claim is disallowed with all the inconvenience that entails.

35. The Department realizes that the rules and regulations are not easy to follow but we are here to help advise you. We expect charities to exercise caution. If you are ever unsure that a receipt should be issued, contact the Department and we will be pleased to help.

36. Definition of a Gift - The definition of gift is based on common law precedents. A gift is a voluntary transfer of property without consideration. Generally a gift is made if all three of the following conditions are met:

Property

Some property (e.g., cash, gift in kind) is transferred. This means it is actually handed over by a donor to a registered charity. A pledge or promise to make a gift is not in itself a gift.

Gifts of Services

Since contributions of services are not property, they do not qualify as a gift. A charity may pay for the service and later accept the return of all or a portion of the payment as a gift, provided it is returned voluntarily. The donor must, in such an arrangement, account for the taxable income that would be realized either as remuneration or as business income.

Voluntary

• There must be no obligation on the donor to make a gift to the charity. For example, sometimes people are required by a court to make a payment to a charity as part of their sentence. In this case, the transfer is not voluntary and does not qualify as a gift.

The transfer is made without consideration

• No benefit of any kind may accrue to the donor as a result of the gift. It is not a gift if the donor (or someone named by the donor) receives something in return.

Detached & Disinterested Generosity

In the past year, you may have heard the term "detached & disinterested generosity".

The courts have used the expression "detached and disinterested generosity" to explain the concept of a charitable gift, but the expression has not itself been judicially defined.

"Detached and disinterested generosity" does not extend to the type of broad rapport that a parishioner has with a church or with the practice of a faith, or that a cancer patient has with a charity providing general relief to cancer victims, otherwise it would preclude almost any kind of generosity.

This expression intended to convey to potential donors that a gift should be made selflessly, and without intention to obtain some direct benefit primarily for themselves or others that they wish to favor in a purely personal or private way.

A charity cannot issue an official donation receipt where the donor has directed the charity to give the donation to a specified person or family.

37. Examples where payment to a charity is not a gift:

• payment of fees for admission to an event or to a program put on by a charity (e.g., fees for daycare, fees charged to participate in a conference);
• the purchase of goods and/or services. This rule applies even when the buyer pays an amount in excess of the fair market value (e.g., even if a buyer pays a charity $40 for an item worth $10, this is not a gift);
• if a business gives cash to a charity and in return, the charity provides advertising or promotional services (i.e., not simply an acknowledgment of the gift but the business dictates where and how and in what format its business will be promoted by the charity).

Exceptions to the Normal Rule

38. Benefits of "Nominal value"

If a charity receives a gift and gives the donor something of nominal value by way of thanks, we will still consider that a gift has been made (e.g., plastic daffodils).

Nominal means

• the lesser of $50 or
• 10% of the amount of the gift (e.g., if a donor gives $100 and gets an $8 T-shirt, then the $100 is still considered to be a gift)
• If it is not possible to put a value on the benefit, then it is not of nominal value (e.g., right to meet a celebrity or the right to have an open ended discount on goods sold by the charity).

39. Tickets to Fund-raising dinners, balls, concerts or like events

• When a registered charity sells tickets to a fundraising dinner, ball, concert, show or like event, the difference between the ticket price and the fair market value of the food or entertainment provided by the charity is considered to be a gift.
• A "like event" is an event that provides services or goods that are bought to be used on a particular date. The services and goods should have no resale value if the purchaser does not use them on that date.
• For example, a concert would be a "like event" but an auction is not. Therefore, no receipts can be issued for any part of the admission price to a fundraising dinner combined with an auction.

40. Tickets for draws, raffles and lotteries

• A person who buys a ticket from a charity for a draw is buying the chance to win a prize. This is not a gift and no receipt can be issued.

If tickets are sold in the course of a fundraising ball, concert, or like event, there can be no tax receipt unless the tickets are sold separately.

o Examples:

If buying an admission ticket to a fundraising dinner and also getting a ticket for a door prize, there can be no receipt.

If buying an admission ticket and tickets for prizes are sold separately, then a receipt can be issued for part of the admission price that exceeds the fair market value of food or entertainment provided.

41. Gifts-in-kind

• Gifts-in-kind are all non-cash gifts, including capital property, depreciable property and personal-use property.

42. Fair Market Value

• Before an amount can be recorded on a receipt for tax purposes, the charity must determine the fair market value of a gift-in-kind as of the date of the donation.

43. Definition of FMV

• The Income Tax Act does not define fair market value.
• Its accepted meaning is the highest price, expressed in a dollar amount, that the property would bring in on an open and unrestricted market, between a willing buyer and a willing seller, who are knowledgeable, informed, and prudent and who are acting independently of each other.
• FMV does not include any amounts paid or payable to other parties such as commissions to sales agents or GST/PST.

44. Determination of FMV

• The person who determines the fair market value of the property must be competent and qualified to evaluate the particular property being transferred.
• If the FMV is $1,000 or less, a qualified staff member of the charity receiving the gift can usually appraise it.
• If the fair market value is more than $1,000, we strongly recommend that the property be appraised by someone who is NOT associated with either the donor or the charity receiving the donation.

Other common situations

45. Auctions

Charity can issue a receipt for the fair market value of the donated item at the time the gift is made.

Should keep in mind when issuing receipts that charity must meet its disbursement quota, regardless of what the items sell for at auction.

• Example: Next year, the charity must spend 80% of receipted amounts. If charity issues a receipt for $1000 and the item only sells for $300, next year it must still spend $800 on its charitable activities.
• Charity cannot issue a receipt to individuals who purchase items at an auction, even if a bid is in excess of the fair market value.

46. Gifts out of inventory

When a business makes a gift to a charity, it must separate gifts of cash or non-inventory items from gifts made out of its inventory.

o Examples:

• computers from a computer store,
• food from a grocery store, or
• paintings from a commercial gallery.

Gifts out of inventory are another matter. Registered charities can still issue an official donation receipt for such gifts, and the business can still use these receipts to claim a charitable deduction.

47. Tuition Fees

• A payment for the cost of a child's education in a religiously based school is not a gift. However, it is our administrative policy to treat as a charitable gift a part of a parent's payment for instruction at a private elementary or secondary school that offers both secular (academic) and religious education.
• The part Revenue Canada treats as a gift is for the religious education only. The Department does this even though it gives an economic advantage to the students or their parents.
• This policy is explained in Information Circular 75-23, Tuition Fees and Charitable Donations Paid to Privately Supported Secular and Religious Schools.

Public Information on Charities

48. The Income Tax Act was amended in June 1998, to allow more information on registered Canadian charities to be made publicly available than was previously allowed.

49. The Income Tax Act now permits Revenue Canada to provide the following additional information, upon request:

a charity's application form when it sought registration;

Revenue Canada's letter to a charity approving its registration, including any condition or stipulations it is required to meet;

a charity's governing documents (i.e., corporate documents, constitution, bylaws);

the names of the persons who at any time were the charity's directors and the periods during which they served as directors;

if revoked, a copy of any letter sent to the charity relating to the grounds for the revocation.

50. Form T2050 - Application for Registration: Effective November 1, 1999, we will have a new application for registration form that will be longer and will give more information. Again, this will be a public document for the most part. The new T2050 form will include information about the organization's structure, activities and financial information.

Supreme Court Case - Vancouver Society of Immigrant and Visible Minority Women

51. On February 23, 1998, the Supreme Court of Canada heard an appeal in the case of the Vancouver Society of Immigrant and Visible Minority Women against the decision by the Department to refuse its application for charitable registration.

52. In March 1996, the Federal Court of Appeal, in a unanimous judgment, had agreed with Revenue Canada's decision and dismissed the appeal.

53. The grounds for the decisions by Revenue Canada and the Federal Court were that the Society's purposes and activities were so indefinite and vague that neither the Department, nor the Court could determine the Society's activities with certainty. Also, it was not clear whether its beneficiaries were persons in need of charity, rather than simply in need of help.

54. The Society obtained leave to appeal to the Supreme Court by arguing that the current definition of charity used by the Department should be replaced. The Society recommended a definition that stresses consistency between an applicant's activities and existing government policy and legislation.

55. The Canadian Centre for Philanthropy intervened in the case. Common law currently requires charities to benefit the community at large, or a sufficient segment thereof. The Centre's proposal would broaden the concept of "public benefit" by allowing benefits to be intangible in nature and open to identifiable groups of whatever size or interest. Our concern is that this would allow the charitable tax incentive to apply to narrow, special interest groups.

56. Other intervenors: contending that under the Canadian Charter of Rights and Freedoms, any organization that benefits a minority should be considered charitable at law.

57. After almost one year of deliberation, the Supreme Court delivered a decision (4-3) in favour of dismissing the appeal by the Society.

58. The decision upheld the ruling by the Federal Court of Appeal and Revenue Canada's position in the case.

59. Call for legislative reform was a theme of the majority decision - common law approach of defining a charity works but there are limits to the judiciary's power to move the law forward -- purposes that are commendable are not necessarily charitable at law.

60. The majority recommended that the framework suggested by the Canadian Centre for Philanthropy be seriously considered as a potentially useful guide, but needing further clarifications and refinements.

61. The majority recognized that there are tax consequences to increasing the number of charities through a broader definition. We believe the current approach indicates that Parliament intended to limit the number of charities. Given tremendous tax advantages for charities and the consequential loss of revenue to the treasury, it is not unreasonable to limit beneficiaries.

62. Both the majority and the minority judgments stressed the importance of maintaining a distinction between non-profit organizations (for example, service clubs) and charities.

63. The court dismissed the notion that a denial of registration to a group of persons recognized under section 15 of the Canadian Charter of Rights and Freedoms is discriminatory.

64. The judgment broadens the definition of education. The Department is currently analyzing the key elements, including teaching the necessary life skills or providing information for a practical end (e.g., obtaining employment). This still excludes any attempt to promote a particular point of view of political orientation and must be structured so information-only groups still do not qualify.

65. The judgment confirmed that purposes must be clear, precise and not include any non-charitable purposes.

66. Immigrants are not necessarily objects of charity. There must be a need to be met when providing aid to immigrants.

The Broadbent Report

67. In 1997, the Liberal party policy platform, Securing Our Future Together, committed the government to enhancing its understanding of the voluntary sector, to working in partnership with the sector to explore new models for overseeing and regulating charities, and to enhancing the overall capacity of the voluntary sector.

68. This commitment led to the Privy Council creating a Steering Committee involving 17 departments, with a mandate to address related government-wide policy development issue.

69. The Steering Committee, chaired by the Assistant Deputy Minister, Policy and Legislation Branch, was later supported by a Voluntary Sector Task Force in the Privy Council.

70. The Voluntary Sector Roundtable, a loosely-knit coalition of prominent national organizations from Canada's voluntary sector, was formed in 1995, to respond to the challenges facing all charitable and voluntary organizations (approximately 175,000 organizations). Its purpose is to encourage more effective communication between the government and the voluntary sector.

71. In the fall of 1997, the Voluntary Sector Roundtable commissioned a panel (Panel on Accountability and Governance in the Voluntary Sector) headed by Mr. Ed Broadbent.

72. The mandate of the Panel:

to review current governance and accountability practices within the voluntary sector;

to develop proposed guidelines and practices to promote effective governance and accountability within the sector; and

to lead a broad consultation on these proposals.

73. The Panel issued a Discussion Paper in May 1998 and engaged in consultations across the country.

74. The tabling of the panel's report ("Helping Canadians Help Canadians: Improving Governance and Accountability in the Voluntary Sector") in February 1999, increased both the profile of the Government's initiative and voluntary sector expectations.

75. Highlights of the Report's recommendations:

• The federal and provincial governments enter into discussions with the voluntary sector to develop better relationships and agreement on appropriate conduct.
• The voluntary sector should have a voice in government policy making by assigning responsibility for the sector to a specific Minister.
• Charities should develop good governance practices such as adopting an ethical fundraising and financial accountability code.
• A legislative definition of "charity" to add additional categories to the current common law definition of the term.
• An open and transparent application process having all applications and decisions made public.
• The federal government to create a voluntary sector commission that would be quasi-independent to the federal government.
• Different T3010 reporting requirements for large and small organizations.
• Clearer guidelines on related business.
• Reviewing the disbursement quota requirements.
• Providing for intermediate sanctions rather than revocation.
• Within the legal framework, the federal government to have a new non-profit corporation bill to better serve the voluntary sector.

76. The federal and provincial governments will be working together to develop organizational laws.

77. In March 1999, 3 joint government/voluntary sector tables were established to consider issues related to developing a new relationship between the voluntary sector and government, strengthening the voluntary sector's capacity, and improving the regulatory regime.

78. Reports of the 3 tables were finalized and integrated into a comprehensive document that is now public (see www.pco-bcp.gc.ca).

79. Many of the tables' recommendations would have a substantial impact on the Department. Some are short-term initiatives while others are longer term. However, they do not represent government policy.

80. Interdepartmental teams will be formed to further develop and to cost the proposals found in the joint tables' reports. The teams' work will be used to prepare a Memorandum to Cabinet in the fall.

Human Life International (HLI) & Alliance for Life Decisions

81. As the activities of HLI were not charitable at law, Revenue Canada proposed to revoke its registration. HLI was primarily engaged in promoting its own view on issues such as abortion, sex education in schools, sexual orientation and contraception, to name a few.

82. HLI subsequently appealed that proposal to the Federal Court of Appeal. The Court confirmed Revenue Canada's view. HLI sought leave to appeal to the Supreme Court but was denied. HLI's registration was revoked effective February 6, 1999.

83. Alliance for Life also appealed the proposal to revoke its registration to the Federal Court of Appeal. Again, the Court confirmed Revenue Canada's view that the activities were not charitable at law. Alliance for Life's registration was revoked effective August 21, 1999.

84. Register an organization only when and if it meets the legal definition of a charity. A charity cannot become too involved in political activities. A purpose is said to be political if it aims to influence policy makers or legislators, or it seeks to sway public opinion on a controversial issue.

85. Many charities, particularly those in the faith community have looked upon these decisions with some dismay - presumably to the extent that, as a result of their own religious belief, they all support possibly varying held views of the same topics.

86. Religious charities are unique compared to educational charities. The law does not usually question the veracity of the tenets on which a particular religion is based. Accordingly, as long as an issue remains within the realm of morality or religion and is taught to the congregation, the law tends to accept the belief at face value. This would not be the case for an educational organization allegedly informing the public-at-large on the same issues.

87. In all fairness, the objects of HLI as registered with Revenue Canada did not refer at all to the advancement of religion, the appellant did not even invoke advancement of religion in support of its case, as the court only dealt peripherally with the issue.

Canada Customs and Revenue Agency

88. Revenue Canada will revert to agency status. The Canada Customs and Revenue Agency has been approved by Parliament and will take effect November 1, 1999.

89. The Minister's duties and responsibilities will be much the same as those he has currently. The Minister will answer to Parliament for the Agency's actions and be accountable for using the powers in legislation (e.g., the Income Tax Act and the Customs Act). The Minister will delegate the powers in legislation to a Commissioner.

90. The Agency will have a Commissioner, Deputy Commissioner and a Board of Management. The Board of Management (15 members), whose members will be nominated by the provinces and territories as well as the federal government, will assume responsibility for overseeing the Agency's administration and human resource policies.

91. The Commissioner, as the Agency's chief executive officer, will have responsibilities similar to the current Deputy Minister for day-to-day management of the Agency.

92. The Agency will be given greater autonomy and flexibility administratively, which will result in better service in revenue and customs administration.

93. The Agency will better work with the provinces to eliminate overlap and duplication in revenue and administration and thereby reduce costs to Canadians.

94. The new Agency will assume full mandate of Revenue Canada and will continue to carry out existing activities in the areas of customs, tax administration, trade administration and delivery of social and economic payments to individuals and businesses.

95. The Agency will also be able to enter into agreements with the provinces and territories. To date, the Charities Division will be a part of the new Canada Customs and Revenue Agency and will continue to operate in the same capacity.