On July 18, 2005, the Department of Finance released over 300 pages of draft legislation amending the Income Tax Act (Canada) (the “Act”). For the most part, the legislation merely reintroduces previously-announced proposals, but Finance slipped in a new measure that imposes new burdens on charities. If the proposal is enacted, a charity that issues a receipt with an eligible amount in excess of $5,000 will be required first to make “reasonable inquiry” about whether the amount should be reduced under any one of a number of complex provisions of the Act relating to gifts.
In the fall of 2004, I published an article in The Philanthropist (18(4) at pages 261–302) in which I discussed in detail proposals to amend the Act to permit “split receipts”. The concept of a split receipt is simple enough: if a donor makes a gift to a charity but receives some benefit in return then, in general, the “eligible amount” of the gift — the amount in respect of which the donor can claim a deduction — should be reduced. The amount of the reduction is the value of the benefit conferred on the donor. I pointed out in my article, however, that the proposed rules for determining when a benefit has been conferred, which are quite broad in their scope, could lead to uncertainty and complexity. I also asked whether a charity would be held responsible if it issued a receipt for an amount that had not been reduced by a benefit but should have been because, unbeknown to the charity, the donor had received a benefit for making the gift. Some commentators took the common sense position that, as long as the charity did not know about the benefit, or was not willfully blind to it, the charity should not be held responsible. But Finance, it seems, is not content to rely on common sense. Proposed subsection 248(40) of the Act requires charities to make inquiries about benefits.
What is worse, the new subsection also requires charities to make inquiries about other circumstances that might reduce the eligible amount of a gift. Not long after Finance released the split receipt rules, it tacked on a series of proposed measures designed to thwart tax shelters that involve donations. The July 18 draft legislation adds to these measure. The measures, among other things,
- in certain circumstances adjust the fair market value of property that is the subject of a donation, and
- require that the eligible amount of a gift be reduced in circumstances where “limited recourse debt” is associated with the gift.
Proposed subsection 248(40) applies to gifts made after 2005. Charities, then, must begin now to develop procedures for making their “reasonable inquiries” about large donations. These procedures might include a form for large donors to complete with questions about “circumstances” that might reduce the eligible amount of a gift.
Proposed subsection 248(40) says nothing about what “reasonable inquiry” means, however, and Finance has provided little additional guidance. In its explanatory notes, Finance merely says that reasonable inquiry
would include, for example
- the existence of an amount of an advantage in respect of a gift of property or a contribution, including any limited recourse debt as defined under subsection 143.2(6.1) of the Act;
- whether a gifted property was acquired in the context of a tax shelter;
- whether a gifted property was acquired by the donor in the last three years and, if so, the lowest cost to the donor and to any person dealing non-arm’s length with the donor who acquired the property at any time in the last three years; or
- if not acquired in the last three years, whether the gifted property was acquired by the donor in the last ten years mainly for the purpose of making a gift and, if so, the lowest cost to the donor and to any person dealing non-arm’s length with the donor who acquired the property at any time in the last ten years.
Will charities be required to make other inquiries? The proposed subsection does not say, and Finance only states that an inquiry would include the questions listed above. What happens if the responses received are incomplete or unclear? Where should the questioning stop? Expect disputes between the CRA and charities about whether the charities’ forms or other inquiries met the statutory standard. Expect also significant variation in the quantity and quality of efforts undertaken by charities to meet the standard. No doubt some charities — the wealthier ones, with the resources — will design comprehensive forms on which they will follow up where adequate responses are not forthcoming. Many charities, however, will have a great deal of difficulty even designing the forms never mind following up on inadequate responses. It is hard to see how such variation will assist the CRA in its efforts to combat donation tax shelters.
What is worse, perhaps, is that charities that do their best to ask the right questions will inevitably be met with blank stares from donors. Inevitably, the donors will ask the charities for help with the relevant tax concepts (what does “arm’s length” mean anyway?) The charities, however, might be ill-equipped to deal with such inquiries. Either they will have to hire professional tax help to answer the questions or they will have to ask their donors to incur the expense instead.
Finance should remove subsection 248(40). The subsection is sure to create administrative headaches for charities and their donors, and it is hard to see how it will combat abuse among the tiny percentage of charities that issue receipts other than in good faith. If Finance cannot bring itself to remove the subsection, it should, at the very least, amend the provision and put the burdens it imposes back where they belong, which is on the CRA. Rather than attempting to co-opt the charitable sector as an assistant auditor, Finance should assign the task to the CRA, which is, after all, made up of professionals whose task it is to ensure compliance with the Act. Let the CRA, using its verification and enforcement expertise, design a form that asks questions about circumstances where the eligible amount of a gift could be reduced. Then require the donor, who wishes to claim a deduction on a tax return for a large gift, to complete and file the form with the return.
