Ontario Ministry of Government Services
Commencing in 2000, for-profit corporations operating in Ontario are required to complete a filing with the Ontario Ministry of government Services with each Ontario income tax return. Commencing 2009, all not-for-profit organizations in Ontario file this form as part of their federal corporate T2 income tax return. As registered charities do not have to prepare a T2 return, the Ontario Ministry of Government services is mailing out forms to them directly. These forms should be completed and returned within 60 days of the year end. There is currently no penalty for failure to file.

Canada Revenue Agency
T2 Corporate Income Tax Returns
Canada Revenue Agency (CRA) requires all not-for-profit organizations that are not registered charities to file a T2 Corporate income tax return annually. The return must be filed within six months of the organization’s fiscal year end. There are no penalties for late filing.

Non-Profit Organization Information Returns (T1044s)
All not-for-profit organizations that are not registered charities, incorporated or otherwise, must file a T1044 information return if either of the following conditions applies:

a) The organization has interest, dividend and other investment income in excess of $10,000 in the year; or
b) The organization has total assets in excess of $200,000 in the prior year.

The T1044 return is due within six months of the year-end and must be filed with a copy of the annual financial statements. This form must be filed in addition to a T2 Corporate income tax return. Unlike the T2 Corporate income tax return, there are significant financial penalties for late filing. Specifically, a late filer will be charged a late filing penalty of $25 per day up to a maximum of $2,500. CRA is giving first-time filers a penalty holiday to encourage filing. Once an entity files a T1044 they must file a T1044 annually regardless of whether or not they continue to meet the above criteria for first-time filers.

If you do need to file a T1044 it is critical that you have your financial statements prepared in advance of the six month filing deadline. If you do not have financial statements ready within six months of the year end we recommend that that you submit a draft of your financial statements together with a completed T1044 return to avoid a late filing penalty.

Note that all organizations required to file a T3010 do not have to file a T1044.

Registered Charity Information Returns (T3010s)
Every registered charity must file a T3010 Registered Charity Information Return within six months of the organization’s year-end. Failure to file this return on time may result in de-registration of the charity. CRA has evidently accelerated the de-registration period.

In the past, organizations not filing a T3010 were not de-registered until at least 12 months after their filing deadline had passed. Recent dealings with CRA lead us to believe that this period has been shortened to six months.

In our experience de-registration occurs most often when organizations have moved, do not forward their change of address to the Agency and then forget to file their T3010 on time. CRA’s subsequent warnings and reminders, usually sent through registered mail, are then not received and de-registration occurs.

De-registered organizations can re-register by completing form T2050, paying $150, getting a certificate of good standing from the Ontario Ministry of Consumer and Commercial Relations and filing certain letters. The charity is not allowed to issue donation receipts while it is de-registered.

HST registration and refunds
Requirement to Register
Most not-for-profit organizations need only register for HST purposes and charge HST if they meet both of the following criteria:

a) Taxable sales for HST purposes exceed $50,000 during the fiscal year; and
b) The organization has in excess of $250,000 in revenue from all sources.

In some cases fees charged by not-for-profit organizations are not considered taxable sales (they are instead a recovery of costs) and therefore the organization should not register even though annual revenue from these sources may exceed $50,000. In other cases, not-for-profit organizations provide an exempt service (e.g. provision of childcare) where HST cannot be charged. If you have concerns or questions whether or not you should register for HST purposes you should consult CRA at 1-800-267-2384.

Refunds
Not-for-profit organizations that are not registered charities are eligible for a 50% refund of HST provided they receive at least 40% of their funding from government sources in the current year or 40% on average over the past three years. It is important to note that not-for-profit organizations must exclude services purchased by governments from the definition of government funding. An example of a purchased service is childcare or hostel services purchased by municipal agencies on a per diem basis.

Most registered charities are automatically eligible for a refund of one half of HST paid on expenses. The refund can be applied for on a monthly or annual basis. We recommend that you file an annual HST refund form at the completion of your annual audit unless the HST refund is significant to the organization. Note that CRA has sanctioned the simplified method whereby the HST refund may be calculated based on an estimate of HST paid during the year. You can alternatively base the refund on actual amounts of HST paid if that information is collected within your accounting system.

Organizations can apply for refunds for up to three proceeding years.

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.

Employer Provided Childcare
Interestingly enough, there is no taxable benefit in the hands of the employee in cases where:

• the employer establishes an in-house childcare facility or leases space to provide a childcare facility off premises,
• the employer pays for all operating expenses of that facility and
• the facility is available to all employees either free of charge or for a minimal fee.

The childcare facility must be available to all employees and not just to a group such as management and, furthermore, all parents using the centre must be charged the same discounted fees.

Workplace childcare centres often result in significant costs to employers. Even though these costs are deductible from business income the employer costs are often perceived to exceed the benefits of providing subsidized workplace childcare. Consequently, employer subsidized workplace childcare centres tend to be few and far between and the generous tax provisions available to employees are rarely taken advantage of.

Employer Subsidized Childcare
Amounts paid by employers directly to an employee to defray childcare costs incurred by the employee will result in a taxable benefit to him or her. For example, if an employee receives $10/day from an employer to help defray the $30/day cost of toddler care then the $10/day will be taxed in the hands of the employee. The full cost of care paid for by the employee of $30/day is, however, eligible for the childcare expense deduction noted in the article “Deducting Childcare Expenses”.

It is important to note that from a cash standpoint employees are always better off having employers defray childcare expenses to whatever extent possible. For example, an employee receiving a $10/day taxable benefit could have their childcare cash outlay reduced by $6/day ($10 received from the employer less additional tax payable of $4). This assumes the allowance does not result in a reduction in their base pay. Employees not receiving the taxable allowance will have to come up with an additional $6/day out of their own pocket.

From the employer’s standpoint the full amount of any childcare allowance should be deductible as an employment expense against business income for tax purposes.

Childcare provided to centre staff
Some centres provide either free or discounted childcare to centre staff who have children. There are a number of compelling psychological advantages to staff for having their children looked after at their place of work.

However, the childcare centre must factor a staff discount policy into its fee assumptions when preparing its monthly cash flow forecast. Several staff might take advantage of this policy at once thereby significantly reducing fee revenue.

Discounts and/or free childcare will result in a taxable benefit to the employee equal to the difference between normal fees charged by the centre and amounts actually paid by the staff. Cash flow advantages are similar to those noted above.

Deductibility of employer subsidized fees
Please note that childcare expenses are only eligible for the childcare expense deduction to the extent that they have been paid by the taxpayer. If an employer pays a subsidy directly to a centre then the employee may only deduct the amount of the fees they actually pay to the centre. For example, if stated pre-schooler fees are $25/day and because of an employer subsidy an employee only has to pay $15/day then only the $15/day is eligible to be deducted as a childcare expense by the employee. On the other hand, if an employee were to pay the full $25/day to the childcare centre and then be reimbursed $10/day by the employer then the employee would be able to deduct the full $25/day as a childcare expense up to the maximum allowed. Note that in both cases the employee will have to include the $10/day subsidy in taxable income.

Summary
In summary, employees are almost always better off having their employer either fully pay or partly defray the costs of their childcare. A tax deduction to the employee is only available for amounts paid in the year to the childcare provider. Consequently, employees should arrange to be reimbursed personally by the employer for any cost defrayment.

• Registered Charities must file a Charity Information Return (T3010) within six months of their year end. Failure to file a return could result in deregistration. Registered charities do not have to file a corporate tax return.
• Not-for-profit organizations that are not registered charities must file a corporate income tax return (T2) within six months of their year end. There is no late filing fee.
• More importantly, not-for-profit organizations with more than $10,000 in investment income in a year or more than $200,000 in total assets (at the end of the immediately preceding fiscal period) must file a Non-Profit Organization Information Return (T1044(e)). The return must be filed within six months of the year end. Note that failure to file the information return on time will result in a penalty of $25/day to a maximum of $2,500 for each year of failure to file. Given the size of the penalty you should review your financial statements annually to determine whether you are required to file this return.

Annual Provincial Corporate Filing
Currently all incorporated organizations in Ontario, including childcare centres, are required to file an Annual Return and Special Notice to confirm/update their corporate records with the Ontario Ministry of Government Services. For non-for-profit coprporations that are not registered charities, this form is included with your annual T2 corporate inocme tax return. All registered charities will be mailed a form septarately that must be completed and mailed to the Ontario Ministry of Government Services.

For more information visit the the Ontario Ministry of Government Services website at http://www.rev.gov.on.ca/en/bulletins/ct/pdf/4012.pdf.

The letter should include:

• state that you provide childcare services, that the organization is run by a volunteer Board of Directors not remunerated for their time and effort, and that resources are scarce in this time of fiscal restraint.
• request for a waiver of any penalties. Include a copy of the Notice of Assessment from Revenue Canada setting out the amount owing.
• note why the remittance/forms were filed late (generally oversight resulting from over-work).
• explain that large late filing penalties will have a serious negative financial impact on your operation.

You should hear from Revenue Canada within three months and hopefully your appeal will be accepted.

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:

A cautionary note: Books and records should only be destroyed after you have carefully reviewed the statutory requirements covering your organization. If you have any doubts you should contact the applicable government departments. Please note that the Corporations Act (Ontario) does not specifically address the issue of record retention. In most cases compliance with Revenue Canada’s requirements should suffice.

Revenue Canada requirements
The most comprehensive documentation regarding requirements to keep books and records is maintained by Revenue Canada. These requirements are clearly spelled out in Revenue Canada Taxation Information Circular 78-10R4. A copy of this circular can be obtained from any Revenue Canada office or read on line at http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r4/ic78-10r4-e.html. We urge you to obtain a copy and review it.

Organizations covered by Revenue Canada regulations
The Revenue Canada regulations cover all organizations required to pay or collect taxes, registered charities and registered Canadian amateur athletic associations. Not-for-profit organizations that are not charities, collect no GST and are not employers are also covered as they must maintain records to substantiate their tax exempt status. In short, all not-for-profit organizations are covered.

What records should be kept
Revenue Canada Taxation does not specify precisely what records should be kept. However, the guidelines suggest that at least the following records must be maintained:

• all deposit books together with documentation supporting who the funds were received from and to what they relate
• a record of all cash disbursements, proof of payment such as cancelled cheques and documentation, such as invoices, to substantiate disbursements
• payroll records in sufficient detail to substantiate calculations of amounts withheld from employees and those amounts remitted to Revenue Canada Taxation
• sufficient documentation to substantiate receipts given to individuals and organizations donating money and gifts-in-kind to charitable organizations
• all documentation relating to ten-year-gifts received by charitable organizations and foundations.

If Revenue Canada Taxation audits your organization and determines that inadequate records have been kept then they will, as a minimum, specify what books and records they require you to keep in the future. Note also that the books and records must be kept at your organization’s place of business. It is not acceptable to Revenue Canada to have your organization’s books and records maintained off-site. In situations where a volunteer treasurer or bookkeeper maintains the books off-site, a backup copy must be maintained at the organization’s place of business.

How long records must be kept for Revenue Canada
Revenue Canada divides records into categories which must be kept for:

• the organization’s lifespan plus two years
• six years from the end of the fiscal period to which the records relate
• two years from the end of the calendar year to which the records relate

The lifespan plus two years rule
Revenue Canada specifies that certain financial records must be kept for the duration of the life of your organization plus an additional period not less than two years from the dissolution date. These records include:

• a copy of all Board minutes
• annual audited financial statements
• general ledger
• annual adjusting journal entries
• any significant contracts and agreements entered into documentation and duplicate receipts relating to ten-year-gifts to registered charities. These records must be kept for a period of two years from the earlier of the date the charitable registration is revoked or the organization is dissolved.

For many smaller not-for-profit organizations this information will fit in a cardboard storage box each year. The box should be filed somewhere dry, safe and secure.

Keep for at least six years
Most books and records not covered by the lifespan plus two years rule must be retained for a minimum of six years from the end of the fiscal period to which they relate. This category includes, among other information, bank statements, invoices and payroll records. In 1998, organizations with a December 31st year end can therefore destroy those books and records not covered by the lifespan plus two years rule for the 1991 fiscal year and before.

The rules get a bit more complicated for records supporting deferred grants. Documentation regarding a grant received in 1991 but deferred in the financial statements until 1992 must be maintained until 1999. This is because the retention requirements refer to six years “from the end of the last fiscal year to which the documents relate”. Documents relating to long-term contracts such as mortgages and multi-year funding agreements may, therefore, need to be kept for substantially longer than the traditional six year period.

Under the Employment Insurance Act and Canada Pension Plan, the retention period is defined as six years “from the end of the calendar year to which the books and records relate”. Therefore, in 1998 an organization with a March 31st year end can destroy payroll records not covered by the lifespan plus two years rule for 1991 and prior calendar years.

Keep for at least two years
Duplicate donation receipts issued by a registered Canadian amateur athletic association or a registered charity, other than those relating to ten-year-gifts, need only be held for at least two years from the end of the calendar year in which the donations were made. In 1998, registered charities can therefore destroy duplicate donation receipts from 1995 and prior calendar years.

Early destruction
Books and records can be destroyed at an earlier date with advance written permission from the Minister of Revenue. Your organization must complete a Revenue Canada Taxation form T137, “Request for Destruction of Books and Records”, in order to obtain permission. Please refer to Information Circular 78-10R2 for full details.
Note: All of the above comments on document retention assume that your organization is not about to be wound up or dissolved. Boards of Directors planning a wind-up or dissolution should refer directly to Revenue Canada Information Circular 78-10R2.

Record retention for amalgamated entities
Any organization involved in an amalgamation must ensure that all the amalgamated entities fully comply with Revenue Canada’s record retention requirements. The books and records of all the organizations prior to the amalgamation must be kept according to the appropriate regulations as well as those of the new amalgamated entity. This is because the organizations have not dissolved, they have merely been amalgamated into one legal entity.

Specific record retention requirements of Ontario statutes
We have briefly reviewed the record retention requirements of a number of Ontario statues. It would appear that in most cases adherence to the Revenue Canada Taxation requirements will result in compliance with the regulations of other statutes. Note, however, that this applies primarily for the retention of financial books and records. Retention requirements for other types of documents such as medical records are often quite different. Again, we urge you to review the requirements of the statutes governing your organization. A summary of the retention requirements of the statutes we are most familiar with follows:

Day Nurseries Act (Ontario)
Enrolment documentation and records regarding individual children enrolled in a centre are stipulated in Sections 48 and 49 of the Act. Records must be maintained for at least two years after the discharge of a child. This requirement could result in documents being maintained for longer than the six year period required for financial books and records. For example, you would have to retain enrolment and related records for nine years in the case of a child enrolled at the centre for a seven year period (seven years of enrolment plus a two year post-enrolment period). Practically speaking, we recommend that you maintain enrolment and related records for a period at least two years longer than the longest period for which a child could be enrolled in your program.

Sections 64 through 66 of the Day Nurseries Act specify that financial records are to be maintained by every operator governed by the Act for a period of “at least six years from the time of their making”. Compliance with the Revenue Canada regulations should, therefore, ensure compliance with the Day Nurseries Act requirements for financial documents.

Charitable Institutions Act and Homes for Retarded Persons Act (Ontario)
A written record and file for each resident of a charitable institution or home for retarded persons [sic] must be kept for at least twenty years after the last entry in the record with respect to the resident or, where the resident dies, for a period of at least five years after the death of the resident. [O. Reg. 814/81, S.5.]

Homes for Special Care Act and Nursing Homes Act
Any record relating to a trust account (i.e. details of deposits and withdrawals) must be kept for a period of six years from the date of the making of the record. Again, compliance with the Revenue Canada regulations should ensure compliance with the requirements of the Homes for Special Care Act and the Nursing Homes Act.

Public Hospitals Act
Patient medical records must be kept for a minimum of ten years after which time each facility can determine its own policy.

Retention of insurance policy documentation
It is important to note that insurance claims are covered by the insurance company engaged by your organization at the date the insurable event occurs, not the date at which it is reported. Maintaining a record of your insurance carrier and details of the policy in force for six years may seem sufficient however cases of alleged abuse may not surface until well after the six year period is over. As a result, we recommend that you maintain copies of all of your corporate insurance policies for your organization’s lifespan plus two years along with your minute books, general ledger, financial statements etc.

Following is a list of benefits and related employee tax consequences:

RRSP Contributions
Employer paid RRSP contributions are fully taxable in the hands of the employee and must be included in the employee’s income for the year on his or her T4. The employee will receive an RRSP receipt directly from the RRSP carrier at year end. This will result in a reduction in the employee’s taxable income for the year to the extent that he or she is eligible for the RRSP deduction.

Insurance
Group Term Life Insurance
Premiums paid by employers for employee group term life insurance are taxable benefits to employees. To avoid the administrative effort of adding small amounts to employees’ earnings every pay period, consider including a lump sum in one pay period for the annual premium.

If you pay your employees’ group term life premiums and they in turn reimburse the organization then no taxable benefit will result.

Note: the taxable benefit exemption on the first $25,000 of group term life insurance premiums was removed in 1994.

Long-term Disability Premiums
Payment of long-term disability premiums by an employer for an employee does not necessarily result in a taxable benefit to the employee. If an employer has paid the premiums on an employee’s behalf and a claim is made on the policy then the employee would have to pay tax on benefits received. The cost of paying tax on the claim payments generally significantly exceeds the benefit to the employee of having the employer pay the monthly premiums. Consideration should, therefore, be given to having the employee pay their own long-term disability premiums. In this case the employee would not be subject to tax on payments received in the event of a claim on the policy.

Private Medical and Dental Plans
Insurance premiums paid by employers for private medical and dental plans do not result in a taxable benefit to the employee. This is one of the most common tax-free benefits offered to employees.

Directors’ and Officers’ Liability Insurance
Employees and directors are not deemed to have received a taxable benefit if their employer/organization pays the premiums for directors’ and officers’ liability insurance.

Travel and Transportation
Parking
Where general parking is provided and an employee does not have exclusive access to a specific space then no taxable benefit will be assessed. However, where an employer pays for individual spaces and assigns a space specifically for the use of a particular employee then that employee may be deemed to have received a taxable benefit. The taxable benefit is equal to the market value of the parking spot.

If you do provide employees with parking and intend the parking spaces to be on a tax-free basis then you should ensure that parking spaces are not reserved exclusively for benefit of specific employees.

Traveling with a Spouse
Employer reimbursement of the costs for an employee to take his or her spouse to a conference is taxable to the employee unless the spouse is actively engaged in the conference. To avoid having a taxable benefit assessed make sure that the non-employee spouse takes an active and professional role in the conference and that the conference relates to the employee’s job.

Transportation Assistance for Daily Commuting
Providing employees with transportation passes (e.g. TTC passes) for commuting between home and the workplace results in a taxable benefit to the employee equal to the full market value of the pass. Although the employee must pay tax on the value of the pass, that will still be a fraction of the actual cost of the pass.

Employers can reimburse an employee for transportation other than from home to the fixed place of employment without creating a taxable benefit. For example, there is no tax consequence to a social worker who travels from home to a client’s house and then to work and is reimbursed by his or her employer for the full cost of the transportation. On the other hand, if the social worker goes from home to work, from work to the client’s house, back to work and then home from work at the end of the day, he or she can be reimbursed only for the midday trip without incurring a taxable benefit.

In situations where not-for-profit organizations cover a portion of an employee’s travel costs, some planning can result in a good portion of the reimbursement being non taxable. Not-for-profit organizations should, however, ensure that they have well documented and clear travel policies to avoid employees misunderstanding and incorrectly applying for reimbursement of travel costs.

Automobile Allowances
Employees are not deemed to have received a taxable benefit if they receive a “reasonable” car allowance reimbursing them for transportation costs other than just from home to the fixed place of employment and back. Revenue Canada periodically publishes maximum amounts employers are allowed to deduct as an expense on reimbursement of employee travel. CRA automobile allowance rates can be found at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/llwnc/rts-eng.html.

Work Environment and Staff Development
Work Environment
Improving your organization’s work environment generally does not give rise to a taxable benefit. Often a fresh coat of paint, some donated art and “new” donated office furniture can do a lot to increase morale by making a workspace look clean and new with only a modest cost to the organization.

Professional Development
Employers can pay for professional development for their employees without creating a taxable benefit provided the courses/conferences are related to the employee’s job. For example, a children’s mental health organization could send a staff member to an all-expenses-paid conference on children’s mental health. Attendance at the conference would presumably increase the employee’s effectiveness and value to the organization. The employee would receive the “perk” at no monetary cost.

Paying for employees to attend post secondary courses is more problematic.The courts have held that the value of an MBA course paid by an employer on behalf of an employee was a taxable benefit to the employee. Revenue Canada reasoned that the employee received significant personal benefit from attending the course. The ruling was challenged vigorously and we understand that Revenue Canada is currently re-evaluating its position.

Your organization should tailor its employee development spending to its budget. Payment of employee tuition can be a very expensive proposition for employers. However, attendance at conferences and workshops need not be expensive.

Company Fitness Facilities
Providing employees with a fitness facility at the place of work does not result in a taxable benefit to the employees. Unfortunately, not-for-profit organizations are generally too short of space and finances to provide such a facility.

If your organization pays an employee’s recreational club dues then payment of the dues will be non-taxable provided you can demonstrate that having your employee as a member of a club directly benefits your organization. Please note, however, that golf club memberships paid by an employer are always taxable.

Payment of Employee’s Counseling Costs
Providing an employee with counseling services for tobacco, drug or alcohol abuse, for stress management or for retirement or re-employment will not result in a taxable benefit to the employee.

Use of Employer’s Childcare Facilities
Permitting employees to use a childcare facility fully paid for by the employer will not result in a taxable benefit to the employee. Regrettably, there are very few workplace childcare centres fully funded by employers.

Some employers do provide a space for childcare, set a per diem fee and charge all parents the same fee. Any preferential fee discounts to employees are taxable.

Awards, Prizes, Gifts and Employee Discounts
Prizes for Achievement
Employees receiving cash or other prizes of significant value for achievement (e.g. an all-expenses paid trip) must have the value of those prizes included in their taxable income. Receipt of a trophy or a plaque with limited resale value will not result in a taxable benefit.

Annual Tax Free Gift
Revenue Canada allows employers to gift employees a non-cash amount of up to $300 annually as a non-taxable gift. This is a Revenue Canada administrative practice and is not specifically provided for in the Income Tax Act. The gift is permitted only if the employer does not claim the amount as a business expense. As not-for-profit organizations generally do not pay corporate tax, the $300 tax-free gift can be given to the employee with no negative tax consequences to your organization.

Employee Discounts
Providing your employees with the opportunity to obtain services from your organization at a value less than cost will result in them receiving a taxable benefit. Consider a childcare centre as an example [ref to article]. Not-for-profit childcare centres sometimes provide childcare to their employee’s families at a discount. Offering an employee a 10% discount on an $800 monthly fee would result in the employee incurring a taxable benefit of $80 per month.

The same applies to providing employees with meals at work. Childcare centres often have excess food after a meal. Consumption of leftover food would generally not result in a taxable benefit. However, having daily meals provided for employees would. Take the example of a childcare centre providing catered food at a cost of $3 per day per child. If the same food is provided to the employees then they should have included in their taxable income an amount equal to the cost of the food. This could be as much as $600 a year in taxable benefits if employees eat daily at the centre.

The following table summarizes which benefits are taxable, which are not and which could be either:

This list of taxable and non-taxable benefits is far from complete. If you have questions on these or other benefits call Revenue Canada directly.

What expenses are deductible?
Deductible childcare expenses include:

• all costs of day nursery care and babysitting
• for camps and boarding schools an amount is allowable. Visit http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-09e.pdf for the amounts deductible
• generally, childcare payments made to any person who is a deemed resident in Canada except:
  • the father or mother of the child
  • a person under the age of 18 who is related to a parent of the child (for example, a sibling)
  • a supporting person who either claims a dependant deduction for the child or deducts the child care expenses of the child

When may expenses be deducted?
Childcare expenses may only be deducted in the year in which they have been paid. If you pay for December care in January or later then you are not able to deduct that care in the December year; you must wait until the following year. Consequently, it is important for supporting persons to ensure that childcare payments are up-to-date each year in order to be eligible for the maximum deduction.

Expenses must be supported by receipts even though the receipts need not be filed with the taxpayer’s personal tax return. The receipts should include:

• the name of the organization or person providing care (if it is an individual then their Social Insurance Number must also be included)
• the names of the supporting person and child
• the amount paid for childcare in the year
• the date of the payments
• the signature of the person who provided the childcare services or a signature on behalf of the day nursery.

Not receiving a receipt does not mean that you are denied the deduction for childcare. It does, however, mean that you will have a more difficult time supporting your claim should Canada Customs and Revenue Agency ask for proof of payment.

How much may be deducted?
The maximum annual deduction available to parents is the lesser of:

• See http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-09e.pdf for the amounts deductible this year.
• Two-thirds of the earned income of the person claiming the deduction. Earned income as defined in the Income Tax Act includes:
  • wages, salaries and related taxable benefits
  • profit sharing received from employment earnings
  • certain disability payments payable under the Canada Pension Plan
  • certain training allowances
  • taxable amounts of research grants, bursaries and fellowships

Who may claim the deduction?
The supporting person (not to be confused with the “parent”) with the lowest net income before the childcare deduction is the only person that may claim the expenses. Note that claiming childcare may be beneficial even if one of the members of a couple has no tax to pay. Claiming the deduction could increase the spousal/common law deduction available where one of the tax paying partners earns between approximately less than the maximum threshold per year even though the low income earner has no tax to pay.

An exception to the low income earner being the only one eligible to claim the expense occurs in two partner families where one of the partners is a full-time student while the other is in the work force. In this case, the working partner may claim the deduction while the other is at school. Full-time attendance at school is defined as enrolment in an educational program that lasts at least three weeks and requires that the individual spend at least ten hours a week on courses or work in the program.

Classification of revenue can make a significant difference if you are not a registered charity and if your revenue from government sources is below the 40% mark. If you currently net direct operating grants against salaries in your financial statements then you may not meet the 40% threshold. For example:

In scenario A, the government grant (DOG/WEG) revenue is disclosed in the financial statements as revenue and comprises 40% of total revenue. This not-for-profit centre is therefore eligible for a 70% refund of HST paid. In scenario B, the same grants have been netted against salary costs and therefore, in the absence of other government grant revenue, the 40% does not appear to have been met in the financial statements. The 70% HST refund could be lost.

In summary, if you are at or close to the 40% threshold of government revenue to total revenue and you are a not-for-profit centre then you should carefully review your financial statement disclosure of revenue from government sources to ensure that you will be eligible for the refund of 70% of HST paid.