Rules for issuing donation receipts
The Income Tax Act states that registered charities can issue official donation receipts for property gifted by a donor to a registered charity. Note that as “services” are not property they are not eligible for receipts. For a transfer of property to be a gift the transfer must be voluntary (i.e. not subject to a contract or other formal obligation on the part of the donor), and the property must be transferred without expectation of return. “Without expectation of return” means that nothing of value or benefit should be collected by the donor or anyone designated by the donor in return for the gift.

Receipts for gifts-in-kind may be issued for the fair market value of the gift at the date of donation. Gifts over $1,000 must be independently appraised. The donation receipt issued must include a brief description of the property donated and the name and address of the appraiser.

Donation receipts may not be issued for:

• services such as computer consulting and design work
• old clothes, furniture, home baking, hobby crafts etc. Exceptions can be made for articles of unusually high value.
• sale of raffle, lottery and other games-of-chance tickets

These are the basic rules dictating when donation receipts may and may not be issued. See the following CRA guidelines for specifics (http://www.cra-arc.gc.ca/E/pub/tp/it297r2/). Following are guidelines for applying the rules to specific situations:

Games of chance
You may not issue donation receipts for sale of lottery or raffle tickets as people buying these tickets have an expectation of return. It is clear that charities running the ubiquitous hundred dollar sweepstake lotteries cannot give donors receipts for purchasing tickets for these events. It becomes less clear when you think of issuing receipts for charitable functions which include a door prize in the event. Generally Revenue Canada overlooks benefits to donors such as door prizes where they are only a minor part of the event.

Donation of Services
A charity may not issue a donation receipt for a contribution of services. This follows from the rule that donation receipts may only be issued for a transfer of “property”: Services are not property. To issue a receipt for a donation of services the transaction must be divided into two parts: one being a sale and the second a cash donation.

• Firstly, the “donor” of the services would invoice the charity for the value of the services provided. The charity should then pay for the services in cash.
• Secondly, the service provider would donate the cash (i.e. the “property”) to the charity. The charity may then issue a donation receipt to the donor.

There are two separate transactions in this exchange. Firstly, the service is provided and paid for. The income generated must be included in the taxable income of the service provider and, in addition, HST and PST, if applicable, must be charged and remitted as in a normal sale. The second transaction is the donation and involves the gifting of money from the donor to the charity and issuance of the charitable receipt in return.

Charities and donors often shortcut the process by merely swapping a donation receipt for services provided. HST is often missed in the swap transaction and the donor may not be aware that the value of services provided must be included in taxable income on their income tax return. At the very worst, a charity can lose its charitable registration for issuing a donation receipt for contribution of services.

Sponsorships
Donation receipts may not be issued for sponsorships where the sponsor receives a benefit such as advertising or promotion in return for the donation. Revenue Canada’s position is that the donor must deduct these sponsorship expenditures as business expenses and, therefore, a donation receipt should not be given. As an example, companies and individuals often sponsor golf holes or dining tables at charitable events. The name of the donor is included in the event publicity. In this way the sponsor receives public recognition. As businesses can deduct advertising and promotion from taxable income, the tax deductibility of the payment will not be lost.

Gala fundraising events
Donors attending gala fundraising events pay for and receive a benefit, such as a meal or tickets to a performance, for their contribution. One of the cardinal rules of receipting is that a donor receiving a benefit of more than a nominal value (e.g. a package of golf balls, flowers, a page of address labels) is not entitled to a donation receipt.

An exception to the nominal value rule occurs where a donor purchases a ticket to attend a charitable event such as a play or banquet and the donor pays more than the value of the event. The charity is allowed to issue a receipt for the difference between retail value of the cost of the event and the purchase price of the ticket. For example, if a charity sells a $200 ticket for an event costing the charity $110 per person, then the donor is eligible to receive a donation receipt for $90.

It is important to note that the value of the receipt is the difference between the retail value of the entertainment and the price charged by the organization for the event. If the cost of the event is partially or completely covered by another individual or organization (e.g. if a theatre contributes a block to tickets to a performance at a discount) then the donor is still only entitled to receive a donation receipt for the difference between the retail value of the cost of the event and the purchase price of the ticket. If, using the above $200 ticket example, the charity receives a donation of food for the dinner to bring the cost per person down to $75 from $110, then participants are still only eligible for a $90 receipt for each $200 ticket purchased.

Art auctions
Charitable organizations are increasingly turning to art auctions as a source of donation revenue. In these situations, either artists themselves or individuals or corporations donate works of art. If an artist contributes his or her own work of art then the artist is deemed to have sold it in the normal course of business at fair market value at the time of the gift. As the work of art comes from the artist’s inventory the sales price must be included in the artist’s taxable income. As is the case with donation of services, the artist should sell the work of art to the charity and then donate the cash from the sale back to the charity. The artist should still charge HST and if applicable. The donation receipt issued by the charity to the artist can be used to offset the taxable income of either the artist or the artist’s spouse.
Some organizations are concerned that if they cross cheques with donors then the donation cheque may not be honoured (i.e. may be returned NSF). The organization would then be stuck with a piece of art which they may have trouble selling for full market value. Consequently cheques are often not crossed and the art is incorrectly swapped directly for a donation receipt.

In the case of art donations from non-artist individuals or corporations, the donor would still receive a tax receipt based on the value of the donation. Revenue Canada has an administrative policy of not requiring formal valuations for works of art with a retail value of under $1,000. However, for donated works valued at over $1,000 an independent appraisal is required. A donation receipt may then be issued to the donor for the appraised value.

Typically, proceeds realized by charities on auction of artwork are significantly less than appraised values. Revenue Canada could come back and challenge the appraised fair market value of the donation up to four years after the fact. Revenue Canada would presumably base its challenge of the receipted amount in part on the gap between the amount of the donation receipt issued and the auction price. To avoid embarrassment and future financial difficulty for donors, charities are advised to obtain the most reputable appraisals possible.

The purchasers of art at an auction are, of course, not eligible for receipts as they are buying art and are not making a donation.

One further wrinkle to the art auction: Charities are required to spend at least 80% of the value of receipts issued on charitable activities (the disbursement quota). If, as an example, receipts are issued to donors for $100,000 and only $40,000 is raised at the auction then the charity must still spend 80% of the receipts issued (i.e. $80,000) on charitable activities in the next fiscal year. If the art auction is the only source of revenue then the organization may have difficulty spending $80,000 as it only raised $40,000 in cash. For organizations with significant sources of non-receipted revenue such as government funding, meeting the quota is generally not an issue. However, if that is not the case then care must be taken to ensure you have sufficient funds to meet the 80% disbursement test.

Benefits to donors of gifting
Donors can receive donation receipts for donations of property made to the following types of organizations:

• charitable organizations, public foundations and private foundations
• Canadian amateur athletic associations
• housing corporations that provide low-cost housing and are exempt under the Income Tax Act
• gifts to a municipality within Canada
• gifts to the United Nations or one of its agencies
• gifts to universities outside Canada and charitable organizations outside Canada, in certain circumstances. These donation receipts are typically only deductible against taxable income earned in the jurisdiction of the organization. For example, donations to a certain public US television station can only be deducted against US source income.
• gifts to the Crown.

Donors are eligible for a credit against tax payable of approximately 27% for the first $200 of donations and approximately 50% for donations in excess of $200. The benefits are significant. Either spouse may claim the credit for charitable gifts regardless of who actually made the donation.

In the case of corporations, charitable donations can generally be deducted up to 20% of taxable income in the year. In many situations, however, sponsorship payments should be classified as advertising and promotion expenses. In these cases, donation receipts should not be issued as the expenditures may be deducted directly against business income.

Summary
The Income Tax Act permits donors to claim a significantly higher deduction in the year of the donation than was formerly available. In many situations donors will now find it more beneficial to donate gifts of property, on which they have accrued capital gains, than to dispose of the property and contribute the cash. Again, the organization should work through individual situations with donors as they arise.

We have attached for your information a summary of the information required on donation receipts and a list of some of the infractions that will give rise to financial penalties. A CRA reference has been provided for each item in case you would like more information.

Canada Revenue Agency Donation Receipt Requirements (effective March 2004)
Cash donations
The following information must be included on every receipt issued for a cash donation:

Gift-in-kind donations
The following information, in addition to that noted above for cash donations, must be included on every receipt issued for a gift-in-kind donation:

Notes on issuing charitable donation receipts:

• Receipts can only be issued for gifts of property. A donation receipt cannot be issued for a gift of services as services are not property. Guideline RC4108
• The fair market value of all non-cash gifts must be determined (IT 297 R2 Para 6). We recommend that a charity obtain an independent appraisal for all gift?in?kind donations in excess of $1,000.
• Charities must retain a paper copy of every receipt issued, or be able to print a copy of the receipt without inputting any new data required on the receipt. Guideline RC4108
• Copies of lost donation receipts must be marked “Cancelled”. All copies of a spoiled donation receipt must be retained by the charity and marked “Cancelled”. Guideline RC4108
• The annual information return (T3010A) must be filed within six months of the year end.

Fines and penalties included in the March 2004 budget and effective January 1, 2005 are as follows:

In the summer of 1997 Revenue Canada clarified their position around issuing donation receipts for events which include an auction. The topic reappeared this summer in the Registered Charities Newsletter (No. 7). As Revenue Canada appears to be focusing more attention on the charitable sector we thought it would be a good time to discuss the rules surrounding fundraising auctions.

Revenue Canada’s rules
Receipts may only be issued for events that Revenue Canada classifies as a “like event”. To the best of our knowledge Revenue Canada has not issued a written definition of a “like event”. Over the phone a Revenue Canada representative informed us that a “like event”:
must happen at a particular moment in time;
must be ticketed; and
usually involves a consumable item such as dinner.
An auction does not qualify as a “like event”. Instead, an auction falls under the same category as a chance to win a prize or draw. As such, registered charities cannot issue donation receipts for admission to auction events.

The problem
Revenue Canada considers a “like event” combined with an auction to no longer be a “like event”. Since all events other than like events are non-receiptable no donation receipt may be issued for any part of the admission charge to the combined event. This presents a problem for organizations staging gala events as many galas combine a dinner with an auction (silent and/or live). The auction often provides a substantial portion of the net fundraising proceeds of the event and is generally essential to the success of the combined event.

To illustrate the problem: consider a formal fundraising dinner for patrons at a hotel ballroom followed by a live auction in the same room. Tickets are $500 per person with an expected donation receipt of $400 per ticket. If the auction portion of the event removes the ability of patrons to receive the $400 donation receipt then selling the tickets will be considerably more difficult.

When does having an auction associated with an event pose a problem?
We understand from Revenue Canada that an auction will jeopardize an organization’s ability to issue a donation receipt only if attendance at the auction is limited to or gives the appearance of being limited to event ticket holders. If your organization issues separate tickets for both the auction and non-auction portions of your event then a donation receipt could be issued for the difference between the ticketed price and the fair market value of the non-auction portion. No receipt may be issued for the auction ticket.

Organizations generally do not separately ticket the auction and non-auction portion of events for good reasons. Patrons are less likely to purchase a separate auction ticket and auctions are often structured as the evening’s entertainment. Continuing with the example used above, a Revenue Canada representative informed us that they would consider attendance at the auction as being available only to dinner ticket holders. In Revenue Canada’s eyes the requirement of formal dress at the event, in addition to the absence of general seating for non-dinner patrons implicitly limits auction attendance to the dinner attendees. Being unable to issue donation receipts at such an event would, at best, be highly embarrassing for the host organization and could, at worst, be financially disastrous.

Linking a silent auction to an event can pose similar problems if only event patrons are able to see and bid on auction items. Revenue Canada advised us that none of an event ticket price would be eligible for a donation receipt if attendance at the silent auction is implicitly limited to event patrons.

Strategies to reduce problems
Auctions are often very lucrative and efficient fundraising events. Provided your organization follows Revenue Canada’s guidelines you can continue to raise funds through auctions without jeopardising the charitable status of your organization. Here are several suggestions:

• Have an auction that is not combined with any other event and do not issue receipts to the participants for admission tickets. This approach is often used for stand-alone art auctions.
• Hold an auction and a “like event”, such as a gala dinner, as separate events with separate tickets issued for each event. A patron could then choose to buy tickets to both events or to either one. A receipt would be issued for part of the purchase price of the dinner tickets even if the auction and dinner were hosted on the same evening and in the same place. You could sell tickets to the auction separately for a nominal sum (e.g. $2). The dinner ticket price would naturally be higher and a receipt could be issued for the appropriate amount (see Vol. II, Issue 6, p.26).
• If you plan to combine a “like event” with a free auction under one ticket then:
  • make it clear that the two are separate events. Consider posting a public sign at the entrance to the event announcing the auction;
  • make it clear that those who paid to attend the dinner will be given no preference at the auction (e.g. in terms of seating);
  • have additional seating for non-dinner guests available at the auction;
  • have separate entrances to the auction and the dinner areas. Make sure security is adequate, as entrance to the event is now effectively open to the non-paying public. Security could be a major concern at a silent auction where the items are often on display for a significant period of time.
  • do not make the auction the primary focus of the event.

If you have any questions about fundraising auctions we strongly urge you to call the Charities Division of Revenue Canada at 1-800-267-2384 or visit them online at http://www.cra-arc.gc.ca/charities.

Establish fundraising objectives
The goal of a fundraising campaign is, obviously, to receive money and gifts-in-kind. However, raising money is not an end in itself. Your Board of Directors should first clearly identify the reason additional funds are needed by the organization. Matching the organization’s fundraising objectives with the interests of its members increases the likelihood of a successful campaign. Some common objectives are:

• Purchasing specific items: Fundraising for specific purchases is one of the most common objectives and the easiest to promote. Asking for donations for computer equipment or specific enhancements, such as a music program, is a much easier task than asking for money to eliminate a deficit as the objective is positive and tangible.
• Improving your financial position: If your organization is having difficulty obtaining sufficient funds to meet operating expenses on a day-to-day basis then your Board may determine that a fundraising campaign is necessary.
  Unfortunately, fundraising to remain solvent usually does not work for organizations whose revenue is primarily generated by fees and memberships. For example, a childcare centre with capacity for 60 children and monthly expenses of $25,000 may need to raise up to $2,000 a month to make up for lost revenue if enrolment drops below the break-even point by only two children. Raising $2,000 a year, let alone every month, from fundraising is a challenge for most not-for-profit childcare centres. The centre would be better off first focusing its efforts on bringing enrolment back up to the break-even level.
  Similarly, if fifty percent of government grant revenue is eliminated, your organization should first work towards redesigning its program to cope with the reductions and then determine whether it is appropriate to support the redesigned program with extra fundraising dollars.
• Sense of community: An often overlooked benefit of fundraising is an increased sense of community among members of the not-for-profit organization. For example, a childcare centre might put on a fundraising dinner and dance for the children’s parents. As well as raising money for the centre, the parents get a chance to meet and, hopefully, have a fun evening resulting in a more closely knit community.

Develop a fundraising plan
Once the fundraising objectives have been clearly articulated then setting a plan to achieve them need not be difficult. The plan should specify:

• How much money, net of fundraising expenses, is to be raised and when the money will be needed. It is important that the fundraising goal be net of expenses as the organization only benefits from net resources raised.
• Whether the fundraising campaign is to be an ongoing campaign or a one-shot effort.
• Exactly what resources of the organization are available to the fundraising team including money, staff and volunteer time.
• Who the target audience is for the campaign.
• Efficiency benchmarks. For example, requiring that a campaign generate at least a set amount , net of expenses, per volunteer hour (e.g. $40 per hour) and that administrative expenses be no more than a specified percent (e.g. 10%) of gross receipts raised.

Reporting results to the Board of Directors
The fundraising committee should make regular financial reports to the Board of Directors including:

• A statement of revenue and expenses for each campaign and a comparison with the original forecast. Again, the report should focus on revenue less related fundraising expenses and not gross receipts.
• Whether efficiency benchmarks (e.g. dollars per volunteer hour) are being met and if not what recommendations the fundraising committee has to improve returns.

For ease of reporting and tracking of expenditures all fundraising proceeds should be deposited in a bank account separate from that used for general operations. Note that this must be done by law for all gaming campaigns such as bingo, Nevada ticket sales, and raffles. We also strongly recommend separate accounts for campaigns where donors have been promised that their contributions will be used for specific purchases. Efficiency considerations

1. The Board of Directors should set up a fundraising committee to select appropriate campaigns and make sure they are executed in as efficient a manner as possible. Maintaining some continuity of committee members from year to year will ensure successful and not-so-successful experiences are passed on as lessons learned from Board to Board. [See Volume I Issue 10, p.45 for comments on establishing Board committees]
   One of the responsibilities of the fundraising committee should be to monitor fundraising trends in the not-for-profit industry. Campaigns such as bingo and direct marketing have become less effective as more and more organizations have begun taking advantage of them. Staying one step ahead of the fundraising pack is difficult but necessary. Monitoring efficiency benchmarks should give the Board an idea when a particular fundraising strategy is running out of steam and a change is required.
2. Try to match the duration of a fundraising campaign with the period over which your organization needs the money. Specifically, if your organization needs additional money every month then select a fundraiser that will generate funds each month. If your organization can philosophically accept using gambling proceeds then consider applying for a bingo or Nevada license that will generate funds on a continuous basis. If gambling proceeds are ideologically unacceptable you must look elsewhere. If, on the other hand, you want to raise funds for a single purchase a one-shot fundraising campaign may be more appropriate.
3. Not-for-profit organizations frequently undertake a fundraiser and assume that staff will fit it in along with their regular duties. This may or may not be possible and in many instances staff do the fundraising on their own time.
   Budgeting staff time and determining when the work will be done brings the Board’s staffing decisions to a conscious level. If overtime is necessary it should be acknowledged. To ensure the Board is aware of the extent of staff involvement, set a budget for staff hours and ask for regular reports of whether hours spent are greater or less than expected.
4. Volunteer time is a resource which is often just as valuable as paid staff time when it comes to fundraising. The fundraising committee should estimate how much volunteer time is required as part of selecting a fundraising campaign. The anticipated dollars raised for each volunteer hour should be compared to the benchmark established by the Board of Directors. If the return is lower than required it may be time to find a more efficient (i.e. profitable) campaign.

Categories of fundraising campaigns
Selecting the appropriate fundraising campaign can be a difficult task. Fundraising campaigns usually fall into one of four categories. Each has its own strengths, weaknesses and legal requirements.

1. Donor appeals: Donation drives for money (flyers, door-to-door campaigns, direct marketing) work best when the organization has a well known cause with a large public from which to solicit funds. Donor appeals often require a large initial investment in volunteer time (door-to-door canvassing) and/or money ( the printing and mailing costs of direct mail). The ability of your organization to issue charitable donation receipts is generally necessary for running a successful campaign.
2. Sale of merchandise: Sale of merchandise works best when you have a dedicated membership. Sales of food products, clothing, gift wrap and coupon books are popular items. Reduce the risk of incurring significant up-front costs that may not be recovered. For example, ordering more t-shirts than can be sold for a t-shirt sale campaign could result in your organization actually losing money. Selecting a fundraising campaign where merchandise is purchased after orders are taken will reduce this risk. The down side is that impulse purchases are less likely to be made and every sale can require a follow-up visit to deliver the merchandise.
   Given recent bad press involving the sale of coupon books you would be well advised to do your homework on the reliability of the distributors of the books. Ask distributors for several references from well known organizations selling the books and be sure to follow them up.
3. Gaming: Using bingo, Nevada, raffle, Monte Carlo and other gambling schemes for fundraising can provide a steady stream of revenue if your organization itself is lucky and if revenue from gambling is philosophically acceptable. These campaigns often require a significant investment in volunteer time if they are to be run legally. They also have strict government reporting requirements. In our experience returns per volunteer and staff hour from these sources have declined significantly over the past few years as more and more organizations, especially government organizations, have jumped on the gaming bandwagon.
4. Social and professional development events: Events such as fun fairs, dinner dances and professional conferences can be good for community building and can generate significant money. They also require much volunteer and staff time both to stage the events and to obtain donations from businesses and individuals. Generally these events can be held annually at best and are therefore most useful for one-time fundraising needs. Many organizations without a steady stream of fee revenue, such as school parent councils, use events such as spring or fall fun fairs to raise the majority of their fundraising dollars.
   There is generally no need to obtain licenses for these events unless you plan to sell liquor or conduct a raffle as part of the festivities.

In conclusion, fundraising is not for the faint of heart. It requires energy, effort and commitment. Start by setting objectives then develop a plan and match the campaign with your cash needs. Remember, fundraising does not replace sound financial management for meeting day-to-day expenses.