Tag: Charity

Tax aspects of charitable giving

An important part of sharing in our society is the support we provide to charitable causes and organizations. In fact, our tax system has a variety of rules that ease the cost of donating.

While keeping the needs of the charity at the forefront, a tax-informed donor may wish to act strategically to gain greater benefit personally and for the charity. In that way, a donation can achieve its philanthropic purpose at the least tax cost to the donor – a value proposition that benefits both parties to the transaction.

Two-tier credit structure

Despite that many people casually refer to donations as being tax-deductible, they instead entitle a donor to claim a tax credit. Deductions are generally more valuable as they can reduce high-tax-bracket income, whereas tax credits are usually limited to the lowest-bracket rates. However, the charitable donation tax credit is structured to quickly become a tax-lucrative proposition.

The initial tax credit rate is indeed set at the lowest federal bracket rate of 15%, but once donations exceed $200, then the highest bracket rate of 29% applies. Provincial and territorial credits are applied against respective provincial/territorial taxes in a similar two-tier manner, using this same $200 threshold.  For first-time donors, the 2013 Federal Budget introduced an enhanced “super” tax credit. It adds 25% to the federal credit rates (i.e., 40% and 54% at each tier) for cash donations up to $1,000. To qualify, a taxpayer (including the spouse) cannot have claimed charitable gifts since 2007. The enhanced tax credit is available until 2017.

For a given tax year, a person can claim a donation amount up to 75% of net income. Any unused donations can be carried forward to be claimed up to five years into the future.

Rather than simply making a cash donation, a donor might consider giving appreciated marketable securities, such as stocks, bonds or mutual funds. If these securities are donated in-kind to the charity, a special rule allows any as-yet unrealized capital gains to be effectively negated by the donation. Had the donor instead cashed out the investment before donating, taxes on disposition would have reduced the cash available for the subsequent donation.

Administratively, the Canada Revenue Agency allows spouses to pool donations to determine the amount of credit available, and either spouse is entitled to make the claim. Since it is a credit against tax due, there is no serious tax revenue loss for the government by making such concessions, except that it allows couples to collectively break through the $200 threshold sooner than if they were required to do so individually.

Donations at death

A special rule applies in the year of death, whereby donations can be claimed against as much as 100% of net income. If donations exceed this amount then the excess can be carried back to the year prior to death, again with the potential to offset 100% of that year’s net income.

Donations made by beneficiary designation on registered plans and life insurance are deemed to occur in the year of death, despite that it is the person’s death that leads to the payment.

Similarly, donations by a person’s Will are deemed to occur in the year of death, but the actual donation must occur in the first year of the estate in order to take advantage of this rule.

Charitable remainder trust

Though, as mentioned above, a greater amount of credit is available in the year of death, it remains a benefit after the person’s death. For someone planning to make a very large donation at death but looking to take advantage of the tax credits personally while living, a charitable remainder trust may fit the situation.

This is a formal arrangement that requires the assistance of legal, tax and actuarial advice. The value of the donation is the present value of the capital at the person’s expected date of death, which is when final outright ownership passes to the charity. In the meanwhile, the donor retains a life interest, for example, to continue to live in a house, or possibly even receive income from the property until death.

As this is an inter vivos trust (i.e., settled during the donor’s life), the donor can claim the donation in the year of settlement, with the five-year carry forward available. This might be ideal for someone donating everything to charity at death, as the tax credits would otherwise go unused.

Donating frequent flyer points – Is all “Hope” lost?

Frequent-flyer plans often allow members to donate points to charities. One charity that benefits is Hope Air, a provider of free flights to individuals who are in need of travel to obtain medical treatment but cannot afford travelling costs. The recipients’ average household income is below the poverty line, and many patients require cancer treatment or organ transplants. The charity has been in operation for almost 25 years and each year organizes about 2,500 flights.

Air travellers’ security charges

In 2007, Hope Air was at odds with the Minister of National Revenue over its claim for a refund of charges it paid under the Air Travellers Security Charge Act (the “Act”) between 2002 and 2007. It based its refund claim on an exception in the Act that says, 

“No charge is payable in respect of an air transportation service that is acquired … by a registered charity from an air carrier for no consideration, if the service is donated by the charity to an individual for no consideration and in pursuit of its charitable purposes.”

Hope Air faced a bill of over $40,000 despite its charitable status, so it appealed the assessments to the Tax Court of Canada.

Form and routing of the donation

In general, Aeroplan members can donate or relinquish their points to approved registered charities or programs, including Air Canada’s charitable program Kids’ Horizons. Aeroplan began in 1984 as Air Canada’s points program, but by 2002 it had become a separate legal entity. 

At the beginning of each year, Hope Air would meet with a Kids’ Horizons representative to request support based on the coming year’s expected needs. Air Canada then donated Aeroplan points and return-flight passes based on those discussions. On average, that amounted to about 3 million points and 100 passes annually. 

As a given travel need arose, Hope Air determined whether it was more cost-efficient to use the flight passes or the points. The passes are redeemed with Air Canada directly, whereas Hope Air uses its account on the Aeroplan website to redeem points and purchase flights. The CRA’s assessments exempted the flight passes, but not the points. 

Consideration paid?

The decision hinged on whether both transactions — donation of points to Hope Air and acquisition of air travel by Hope Air — were completed for no consideration. While the former transaction fulfilled the requirement, the judge determined that the acquisition of the flight via the Aeroplan website was an exchange for consideration.

Ironically, one of the cases relied upon to come to this decision was a claim by a taxpayer for a medical expense tax credit based on using Aeroplan points to fund a flight from Thunder Bay to Chicago for medical treatment. The assessment asserted that the points had no value, but the taxpayer successfully appealed on the basis that there was exchangeable value in that circumstance. 

In the present case, the judge expressed that while Hope Air provides a valuable and essential service, it does not fall within the exclusion here. But he did suggest that the Crown could return the charges or remit the charges to Hope Air pursuant to provisions of the Financial Administration Act.

So maybe Hope is not lost after all.

Are charitable donation schemes finally history?

During a recent seminar on aggressive tax planning, a panelist outlined the onerous compliance burden of the proposed avoidance transactions rules.  He asked rhetorically what the government might be targeting with such an apparently wide casting of the net.

A neighbouring attendee whispered that maybe it would catch the charitable donation schemes.  An interesting thought, though CRA has long tracked donor-taxpayers, promoters and charities without the need of this further monitoring mechanism, and has successfully reassessed, prosecuted and de-registered, respectively.  

Even so, incredibly I had a conversation earlier in the summer with an advisor who had again been solicited for what appeared to be yet another such scheme.  

History of donations schemes

Though they’ve been around since the 1990s, I should be clear that I’m talking about the ‘buy-low, donate-high’ arrangements promoting tax benefits in excess of taxpayer outlays.  Early ones peddled artwork, computers and comic books, and later they reached for the heartstrings with things like textbooks, prescription drugs and medical supplies.  

CRA (when it was CCRA) directly warned of these schemes over a decade ago in December 1999.  By December 2003, new legislation was introduced limiting the value of a charitable tax receipt to the donor’s cost where property is donated within three years of acquisition or is acquired through a gifting arrangement.

CRA getting more active

Subsequently there has been a renewed CRA effort to address concerns about the charitable sector.  Some of this has been through more carrot than stick, such as the Charities Partnership and Outreach Program.  As well, the Budget 2010 relaxation of the disbursement quota rested in part upon the government’s expressed confidence in CRA’s ongoing monitoring capabilities.

Still, the stick remains.  Specifically, charities related fraud is one of the three tines of CRA’s Project Trident, the other two being tax preparer fraud and identity theft.  

Perhaps the watershed event evidencing CRA’s progress was in August 2008, with the de-registration of ICAN, The International Charity Association Network.  Here was a purported charity that dwarfed even the largest of known charities, propagated by such schemes.  It was the 200th registration revocation “for cause” since 1992, as published in the Charities Directorate listing on the CRA website.  While only a limited number would be related to this specific activity, it is interesting to note that there have been 78 more revocations for cause in the 2 years since, including some having similar allegations.

Recent court activity 

As to this seeming turn in the tide against charities related fraud, two cases reported in June 2010 are worth noting.  In an administrative review, the federal court upheld the revocation of EFILE privileges for a tax preparer who submitted doctored charitable receipts.  And in a private law suit, an accountant was found liable to his donor-taxpayer client for having received secret commissions in a buy-low, donate-high scheme.  

And that advisor who was solicited by the promoter just recently?  He just laughed it off.  Too bad it’s not so easy for us to see the backs of all these promoters, once and for all.