DATE:
May 14,
1998
TO:
Senior Financial
Officers and Senior Full-time Financial
Officers
CC:
Departmental Legal Advisors
SUBJECT:
Financial
considerations to be made when receiving funds
through donations
IMPORTANT
NOTE
This bulletin should not be
construed as encouragement of, or approval for,
departments to seek or solicit funds through
donations. When considering receiving funds through
donations, departments must first ensure that this
is appropriate and consistent with their
mandate.
Introduction
With the expenditure reductions
announced in recent budgets, departments are
intensifying their search for ways to reduce
program costs and increase other sources of
funding. Occasionally, additional funds are
obtained through contributions, gifts, bequests or
other donations. For instance, scientific and
research initiatives are sometimes partially funded
by donations from interested non-federal government
parties. The purpose of this bulletin is to provide
departments with a description of the factors they
must consider when receiving and administering such
funds.
As mentioned previously, it is
important that departments ensure that receiving
funds through donations is appropriate and
consistent with their mandate. If it is, ways of
doing so include:
· a
department soliciting contributions or donations
itself; or
·
having an independent, not-for-profit
‘friends of ...’ organization raise the
funds.
When exploring either of the above
methods, departments should be aware of the
following considerations.
General Considerations
Although not directly related to
financial management and control, attention should
be paid to the necessity of searching out
‘new money’ and/or non-traditional
sources of revenue. There could be a negative
reaction, however, from public and other
organizations that traditionally rely on donations.
These organizations may perceive - or even complain
publicly - that the federal government, despite its
broad taxation powers, is cutting into their
donation revenues.
Purpose of the
Donation
·
The acceptance of a donation involves certain
explicit and implicit obligations on the part of
the Crown. These obligations reflect the purposes
and terms and conditions under which the donation
is made and accepted. Depending on the specifics of
the terms and conditions, the eligibility of the
donation for an income tax deduction or credit may
also be affected. Departments should therefore
establish, at the outset, clear guidelines on what
types of donations will and will not be accepted.
Revenue Canada should be consulted when formulating
guidelines or prior to issuing receipts for
conditional gifts.
·
Donations must be for purposes consistent with the
department’s mandate and cannot be
transferred to offset an expenditure from a voted
authority or applied toward the cost of ongoing
operations like salaries, wages and benefits of
public servants chargeable to an appropriation.
Donated funds can, however, be used to hire
temporary staff, consultants or contract personnel,
provided that the payments are made directly from a
specified purpose account and do not ‘flow
through’ an appropriation.
· It
should also be remembered that, from a
government-wide perspective, donations are not
entirely ‘free’. If a tax receipt is
issued and the donor claims an income tax credit or
deduction, there is a cost to the treasury in terms
of foregone tax revenue.
·
The Repayment of Receipts Regulations
require donations to be returned to the donor,
where possible, if they cannot be used in
accordance with the terms and conditions under
which the donations were made and accepted. Revenue
Canada should be consulted regarding the return of
a donation. If a return is not possible, then the
money remaining would go into the Debt Servicing
and Reduction Account.
Donations and Other
Revenues
·
Donations are usually in the form of money, goods
or property given to the federal government in
return for which the donor receives nothing
substantive. For example, money received through a
partnership arrangement with the Crown would not
qualify as a donation because both partners benefit
from the arrangement. Where a donation is in the
form of property or goods, its value must be
determined in accordance with procedures
established by Revenue Canada. (See IT-110R3
Gifts and Official Donation Receipts; IT-297
Gifts in Kind to Charity and Others; and
P113 Gifts and Income Tax.) Due to potential
liability and other legal issues, departments
should consult with their legal advisors before
accepting gifts of property.
- Care must also be taken to distinguish
between true donations and revenues from
concession, licensing or other royalty
arrangements, and to ensure that:
– no advantage is conferred on anyone
making a donation, apart from a tax receipt,
where applicable, and possibly some form of
public recognition or acknowledgement;
– no pressure is placed on
departmental suppliers and clients; and
– making a donation does not become a
precondition to doing business with the
department.
· In
particular, the items below would not
qualify as donations and be treated as specified
purpose funds. The following are ordinary non-tax
revenues, to which the normal rules regarding
revenues apply:
– registration and entry fees,
licensing fees and royalties;
– concession fees and revenues;
– fees for booth or exhibit space;
– any revenue where the payee receives
goods or services of more than purely nominal
value; and
– anything received that does not
qualify for a tax receipt as a "gift to the
Crown" in accordance with Revenue Canada
rules.
Accounting and
Reporting
·
Contributions, gifts, bequests and other donations
to the Crown are not trust or endowment funds, but
"moneys received for a specified purpose" that must
be deposited as such into a specified purpose
account in the Consolidated Revenue Fund, and
treated as "restricted-use revenue" in the
accounts.
Note: In accordance with paragraph
4(d) of the Debt Servicing and
Reduction Account Act, S.C. 1992,
c. 18, unconditional gifts and gifts for
which no purpose was specified are to be
treated as non-tax revenue. They should be
credited to the Debt Servicing and Reduction
Account and applied to deficit reduction.
· If
revenues received from donations are significant or
a department embarks on a specific project to
solicit donations, then the revenues and
expenditures associated with the project should be
reported in their Business Plan and in the
Public Accounts of Canada.
Administrative
Costs
·
Unless a particular donation is specifically
earmarked by the donor to be applied towards the
administrative costs of the donation program, all
fees, commissions and administrative expenses
relating to the solicitation and management of
donations would be an operating expense of the
department.
· No
interest would accrue or be paid on the balance in
the account.
Tax Implications
To qualify as a charitable gift under
the Income Tax Act, the transfer of funds or
property must be voluntary and given without
consideration or any expectation of return or
refund. If the gift, bequest or donation of money
or other property (but not ‘services’)
is made to the Crown or to an agent thereof for the
use of the Crown by a donor corporation, that
corporation will usually qualify for a deduction;
an individual donor will be entitled to a tax
credit. The donor must provide Revenue Canada with
official receipts containing the information
required by subsection 3501(1.1) of the Income
Tax Regulations.
Where the gift, bequest or donation is
indirect (i.e. to a ‘friends of
…’ or similar organization which is not
acting on behalf of the government in an agency
capacity), then that organization, and not the
department, would be responsible for issuing the
tax receipt if it is a registered charity in its
own right.
Where the department is merely acting
as a conduit for funds or property intended for a
third party (e.g. property given to a department on
condition that it be turned over to, or used by,
someone else), the transaction would not
qualify for a tax receipt. The third party could,
however, issue a tax receipt, provided it qualifies
as a donee under Revenue Canada rules.
As mentioned earlier, donations that
do not qualify under the Income Tax Act and
related rulings as either a gift, bequest or
donation to the Crown cannot be treated as
Specified Purpose Funds in the form of a donation,
but must be classified as non-tax
revenue.
Tax questions of an administrative
nature with respect to gifts, bequests and
donations to the Crown, such as what qualifies for
a tax receipt and the valuation for tax purposes of
‘gifts in kind’, should be directed to
the Director of the Charities Division of Revenue
Canada at (613) 954-0931. Related tax policy
questions should be directed to the Department of
Finance Canada.
Additional Considerations
Use of Contractors
- While doing so is not recommended or
encouraged, in special and exceptional
circumstances a contractor may be used to raise
money for a department. The gross amount
collected is all public money for which the
donor would be entitled to a full receipt, and
any fees or commission payable to the
contractor are operating expenses chargeable to
the departmental appropriation. This holds true
regardless of whether an actual payment is made
or the amount due the contractor is simply
deducted or withheld from the amount turned
over to the department.
Note: Withholding funds in this
manner requires an authority either in legislation
or through regulations.
- It is strongly recommended by both the
Treasury Board of Canada Secretariat and
Revenue Canada that the contractor be paid a
fixed sum or at an hourly or daily rate for
services, and not on the basis of a
percentage of the amount raised or
collected.
Not-for-Profit
Organizations
Where a not-for-profit organization
raises funds, some or all of which are turned over
to the government, there are several additional
considerations as outlined below.
·
Such organizations must be independent of the Crown
(i.e. neither under the Crown’s direction or
control nor acting in – or deemed to be
acting in — an agency capacity). In
particular, departments must ensure that the
prohibitions of paragraphs 90(1)(a) and (b) of the
Financial Administration Act, as modified by
the exception of section 92 (1.1), against
incorporation and acquiring shares of an
organization are fully respected. This includes
‘membership interest’ if the Crown
appoints a majority of the members of the board of
directors or otherwise acquires control.
Departments should consult with their legal
advisors on this matter.
·
The organization may potentially have two principal
means of raising funds: for-profit activities (i.e.
concessions, sales of souvenirs, galas, etc.) and
direct donations. Unless exempt in its own right or
through the special rules applying to registered
charities, GST/HST would apply to the for-profit
activities and have to be charged, collected and
remitted in the usual fashion. The purchaser would
not be entitled to an income tax receipt unless
there was a built-in donation or ‘gift’
to the Crown. For example, a person pays $100 for a
ticket to a gala. Of that $100, $75 represents
value received and $25 represents a donation. In
this case, the person could claim a tax receipt for
the $25 ‘donation’ portion. Revenue
Canada recognizes a narrow range of activity having
both a payment and gift component. The publication
Gifts and Official Donations Receipts
(IT-110R3) describes the eligible situations which
include a fundraising event such as a "dinner,
ball, concert, show or like event". Revenue Canada
has interpreted the term "like event"
restrictively.
·
Any lease, concession, licensing or royalty fees
payable to the department by the organization are
not "money received for a specified purpose", but
simply normal non-tax revenues from leases,
concessions, licences or royalties, as the case may
be; and
·
What could be considered "money received for a
specified purpose" is any moneys donated to the
Crown by the organization from its operations,
apart from any amount payable to the Crown under a
lease, concession, licensing or royalty agreement.
This distinction should form part of the charter
and objectives of the organization, rather than an
agreement with the department, otherwise, it is
likely to be construed as simply another form of a
licensing fee or royalty and not specified purpose
money. For example, if an organization is licensed
to sell souvenirs bearing a Crown logo or trademark
in exchange for turning over all (or a share) of
its profits, then the money paid over is non-tax
revenue from licences and
royalties. This holds true whether the
money paid over is directly in the form of
‘cash’ or indirectly in the form of
equipment or other goods.
Further Information
This information bulletin is available
in electronic format through the Treasury Board of
Canada Secretariat web site, at the following
address:
http://www.tbs-sct.gc.ca/fin/
Under: Information Bulletins
For further information contact Bruce Hirst, Director Financial Authorities and Planning
Division, by telephone at (613) 957-7168 or by
e-mail at:
Hirst.Bruce@tbs-sct.gc.ca
References
·
Sections 17, 21, 90 and 92 of the Financial
Administration Act
·
Paragraph 4(d) of the Debt Servicing and
Reduction Act
·
Sections 110.1(1) and 118.1(1) of the Income Tax
Act and regulation 3501(1.1) of the Income
Tax Regulations
- Revenue Canada Information:
- P113 Gifts and Income Tax
- IT-110R3 Gifts and Official Donation
Receipts
- IT-297 Gifts in Kind to Charity and
Others
- 84-3R4 Gifts in Right of Canada
·
Treasury Board policies:
– Policy on Specified Purpose
Accounts;
– Policy on Accounting for
Non-monetary Transactions;
– Repayment of Receipts
Regulations; and
– Revenue Trust Account
Regulations.
· Treasury
Board Information Bulletin "Financing
Conferences and Seminars" dated November 1,
1995
J. Colin Potts
Deputy Comptroller General |