Tag: Donation

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.

A tangled web – Taxes don’t bug this amateur entomologist

Can someone actually enjoy an insect collection? Maybe not in the strict sense of the word, but one may nonetheless enjoy the tax results that derive from it.

This was actually one of the questions canvassed in a recent appeal heard at the Tax Court of Canada. It was an appeal from the assessment of tax associated with the charitable donation of an insect collection, which was ultimately decided on the issue of whether the collection was a “set.”

The Plamondons and PUP

Danielle Plamondon and her spouse were amateur entomologists who collected insects all over the world. In recent years they donated specimens to various non-profit organizations, for which they would receive donation tax receipts. 

It was a donation to Laval University in 2005 that became the subject of dispute between Plamondon and the Canada Revenue Agency. The donation tax receipt referenced a “collection of insects,” and indicated a value of $25,419. CRA interpreted this as a single donation of “personal-use property” (PUP), for which the prescribed adjusted cost base would be $1,000, with the value of disposition being the greater of $1,000 and the actual proceeds. This resulted in the assessment of a capital gain of $24,419. 

While not the determining factor in the case, the Court scrutinized the issue of enjoyment. Plamondon testified that the specimens “are beautiful to an entomologist who is passionate about this, but we don’t have any insects displayed in the house. I have no need to see any on my walls.”

What the case really turned on was whether the insect collection truly constituted a “set” under the PUP rules. Plamondon had donated 2,158 insects from 46 different counties, covering at least 268 different species. Each insect was independently evaluated by a professional appraiser who took into account the preparation, humidification, display, pinning and identification to attribute a value to each specimen. 

Based on these facts, the judge held that the donated insects are distinct properties, not linked to one another, and do not form an unbreakable set. The PUP rules should therefore apply to each item separately, and as none of the insects had a value higher than $1,000, there would be no tax owing on the donation. 

Recall Mr. Donato and his cartoons

The present case brings to mind a similar case from a couple years back that dealt with the donation of cartoons.

Andy Donato produced political cartoons for daily publication in the Toronto Sun. Over the years, he donated some of the cartoons to museums, educational institutions and other recipients. In 2007, Mr. Donato was assessed for the 1999 and 2001 taxation years on the basis that he realized taxable capital gains when the works were gifted to charities.

The judge in the Donato case determined that the cartoons were not personal in nature, but rather arose out of commercial obligations with his publisher. 

With respect to 2001, the PUP rules therefore did not apply, and the assessment of a taxable capital gain was upheld. The distinction between individual items and a collective “set” was also mentioned, but it had no bearing on the result, given the determination that the PUP rules did not apply.

With respect to 1999, the judge held that the assessment was statute-barred. Mrs. Donato made the donation after being gifted the pieces from her husband; the gift was subsequently reversed via a Rectification Order. Still, the judge held that Mrs. Donato’s claim as to personal use property (and thus not reporting a capital gain) was a reasonably held belief in 1999, and subsequent events did not enable CRA to assess beyond the normal reassessment period.