Jeff Manishen, a Hamilton lawyer who specializes in criminal law, wrote to me recently to ask some interesting questions about donations. Jeff sometimes negotiates arrangements under which clients can avoid prosecution by making a donation to a charity. Some charities, however, refuse to issue receipts for such donations. Is that right? My responses follow.
A charity’s right to refuse to issue a tax receipt
Does a charity have the right to refuse to issue a tax receipt for a contribution?
In the appropriate circumstances, a charity has the obligation not to issue a receipt. For example, if the charity knows that a contribution is not a gift, then the charity must not issue a receipt. Issuing the receipt could expose the charity to penalties or, in extreme circumstances, revocation of its status as registered charity (per paragraph 168(1)(d) of the Income Tax Act (the “Act”)).
Charities are quite concerned about issuing receipts only when appropriate because of increased scrutiny in this area from the CRA and the Department of Finance. In fact, last summer, Finance proposed enacting a provision that would have required charities to conduct due diligence on gifts over $5,000 before issuing a receipt. I wrote about this proposal here. Fortunately, Finance later announced that it would withdraw the proposal.
Finance also proposed to enact new subsection 248(41) that would require a donor to inform a charity about circumstances that would reduce the “eligible amount” of a gift (discussed below). If the donor fails to make such a disclosure, the amount of the donor’s gift will be deemed to be nil. Finance has not offered to withdraw this proposed subsection.
Court-ordered donations
What if an individual makes a donation because a judge orders it as a condition of probation or as an alternative to the imposition of a fine?
A gift is generally defined as a voluntary transfer of property for no consideration. If the individual is compelled to make the “donation” because of an order, then arguably it is not voluntary and the individual is not entitled to a receipt. The CRA has taken this position in Registered Charities Newsletter No. 18 (Spring 2004):
Can a charity issue a charitable receipt for a court ordered payment made to it?
No. Under charity law, to qualify as a gift a payment must be voluntary. A payment that results from a court order, even if the taxpayer was given a choice between making a payment and some other penalty, cannot be said to be voluntary. Therefore, if a company or individual is ordered by a court to give money to charity, the charity cannot issue an official donation receipt for the amount it receives. If needed, the charity can issue an ordinary receipt to acknowledge such a payment.
“Voluntary” donations to avoid prosecution
What if the accused is required to make the contribution as part of, say, his completion of Adult Diversion under the supervision of the John Howard Society or in accordance with an arrangement negotiated with the Crown? There is no court order, but the contribution is required under the diversion or arrangement.
The CRA would likely still take take the position that the transfer is not voluntary and that therefore no gift has been made. See the quote from Registered Charities Newsletter No. 18.
Even if the CRA accepts that the transfer is voluntary, however, the value of the donation to the donor could be reduced under proposed subsections 248(31) and (32) of the Act. Under these subsections, a donor is entitled to a deduction for tax purposes in an amount that cannot exceed the “eligible amount” of his or her gift. The eligible amount of a gift is its fair market value less “the amount of the advantage in respect of” the gift. Proposed subsection 248(32) reads in part as follows:
The amount of the advantage in respect of a gift […] is the total of all amounts […] each of which is the value, at the time the gift […] is made, of any property, service, compensation, use or other benefit that the taxpayer, or a person or partnership who does not deal at arm’s length with the taxpayer, has received, obtained or enjoyed, or is entitled, either immediately or in the future and either absolutely or contingently, to receive, obtain, or enjoy
(i) that is consideration for the gift […],
(ii) that is in gratitude for the gift […], or
(iii) that is in any other way related to the gift […]
In the fall of 2004, I published an article that discussed at some length a predecessor version of this provision (see The Philanthropist 18(4) at pages 261–302). The key points to note are that, first, what constitutes a benefit that will reduce the eligible amount of a gift is defined very broadly and, second, the subsection does not require, as a condition precedent to its application, that the charity confer the benefit. (A charity, therefore, is legally required to issue a receipt showing the eligible amount of a gift even though that amount could be reduced by a benefit about which the charity knows nothing!)
In light of this subsection, the CRA might take the position that the eligible amount of a gift in the circumstances described above is nil because the donor has received a benefit (diversion or the charge being withdraw). How do we know the amount of the benefit? The CRA would likely argue that the donor has indicated the amount by “volunteering” to make the payment to avoid prosecution.
Effective date
Was the draft legislation described above enacted? If not, when is it effective?
The legislation described above has not been enacted, although the first version of subsections 248(31) and (32) was announced in December, 2002.
Nevertheless, these subsections will generally be effective from the date of their announcement even though they have been changed since December, 2002. Tax legislation is almost always effective from the date a draft is first released, and the courts seem quite content with that modus operandi. In fact, some governments, Ontario in particular and the federal government too, have taken to enacting tax legislation that has effect before its announcement date! The Supreme Court of Canada has explicitly approved such legislation: see Air Canada v. British Columbia, [1989] 1 S.C.R. 1161, 59 DLR (4th) 161.
If I was ordered to make a ‘donation’ instead of recieving some form of criminal prosecution, am I obliged to do so-seeing that the dictionary term of donation is that is voluntary gift not a fine as such?