2011 NATIONAL CHARITY LAW SYMPOSIUM

Transcription

1 2011 NATIONAL CHARITY LAW SYMPOSIUM May 6, 2011 LAURA E. WEST FASKEN MARTINEAU DuMOULIN LLP CONSIDERATIONS AND STRATEGIES IN CORPORATE GIVING In Canada, corporate charitable giving has become increasingly important to the charitable sector. As such, the number of issues that could potentially be explored under the heading of considerations and strategies in corporate giving is significant. Such potential issues include all of the relevant tax rules governing corporate donations, as well as the charitable donation planning issues relevant to corporations and their shareholders. 1 Relevant issues could also include an analysis of the nature and scope of corporate charitable investment practices in Canada. 2 Since many of these tax, planning and analytical issues have been covered in detail in other publications, 3 this paper will instead focus on a number of discrete issues relevant to corporate charitable giving, including: (a) a comparison of corporate charitable gifts and sponsorship arrangements; 1 See Carole Chouinard, Considerations in Corporate Giving Canada Bar Association National Symposium on Charity Law, May 10, 2007, Toronto, Ontario and Teresa L. Man, Corporate Giving: A Tax Perspective, September, 2006, online at 2 For more information on this topic, please see the various publications associated with the Business Contributions to Community (BCTC) research initiative of Imagine Canada, online at www. 3 See supra notes 1 and 2.

2 - 2 - (b) (c) a discussion of issues may be advisable to incorporate into gift acceptance and/or sponsorship policies; and a consideration of the relevant issues that should be canvassed when creating a corporate parallel charitable foundation. The following discussion does not represent an exhaustive overview of the aforementioned issues, but instead is meant to provide a discussion of some of the relevant considerations in this important, but sometimes overlooked, area of charitable giving. 1. Corporate charitable giving vs. Corporate sponsorship arrangements Generally speaking, there are two main ways in which corporations can receive tax benefits when transferring property to registered charities. Certain tax benefits are available to corporations that make charitable gifts to registered charities. Subsection 110.1(a) of the Income Tax Act, 4 provides that a corporation, when computing its taxable income, is entitled to deduct the eligible amounts of gifts made to qualified donees. 5 Generally speaking, this tax deduction is capped at a maximum of seventy-five percent (75%) of the corporation s net income, plus twenty-five percent (25%) of certain taxable capital gains and capital cost recapture. 6 Charitable tax deductions can be carried forward by the corporation for a period of five years. Certain other tax benefits are also available to corporations that transfer property to registered charities for marketing, promotional or advertising purposes, because, provided that certain tests are met, such expenses can be deducted as business expenses by corporations pursuant to section 18 of the Income Tax Act. The relevant tests include whether the expense was incurred for the purpose of earning income, was reasonable in amount, was not a personal expenditure and was 4 R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the Income Tax Act ). 5 See paragraph 110.1(1)(a)(i) through (viii) of the Income Tax Act for a description of what constitutes a qualified donee, including registered charities, registered amateur athletic associations, municipalities, etc. See paragraphs 110(1)(a)(i) to (d) for specific rules regarding gifts of medicine, gifts to her Majesty, gifts to institutions and ecological gifts. See subsection 110.1(3) for provisions relating to gifts of capital property made by corporations. 6 See subsection 110.1(a) of the Income Tax Act. See also Teresa L. Man and Carole Chouinard, supra note 1.

3 - 3 - not expressly prohibited by the Income Tax Act. 7 Jurisprudence has supported the ability of corporations to deduct certain donations made to registered charities that were incurred for advertising and publicity purposes in this manner. 8 Although there are many ways in which corporations can support registered charities, some of which will be discussed in more detail below, important sources of corporate support for registered charities in Canada often take one of two different forms: (i) charitable donations; and (ii) sponsorship arrangements, both of which have different tax consequences. The difference between corporate charitable gifts and sponsorship arrangements, and their treatment for tax purposes, used to be relatively more simple before the advent of the new splitreceipting regime. Previously, charitable gifts were considered to be transfers of property made by corporations without consideration and sponsorships were arrangements whereby the corporate sponsor received greater than de minimis publicity, advertising or other business or economic benefits in consideration for the transfer of funds to the registered charity. 9 The former would entitle the corporation to a charitable receipt and corresponding related tax benefits and the latter, although not entitling the corporation to a charitable receipt, could still result in certain positive tax benefits if the expenditure qualified as a deduction for business purposes. 10 The definition of the term sponsorship was considered to be somewhat murky even before the advent of the split-receipting regime, with the ability to attract multiple definitions and interpretations. 11 Notwithstanding this past and current uncertainty, the term sponsorship is still generally used to refer to arrangements whereby corporations or other businesses provide funds to registered charities and, in return, receive advertising or promotion of their brand, products or services Teresa L. Man, supra note 1. 8 Carole Chouinard, supra note 1, and as quoted in her article, see Olympia Floor & Wall Tile Ltd. v. MNR [1970] C.T.C. 99 (Exch) and Impenco Ltd. v. MNR [1988] 1 C.T.C (TCC). 9 See Canada Revenue Agency, Employee Speech CES-012 CCRA Update October 3, Ibid. 11 Ibid. See also Teresa L. Man, supra note 1, where she notes that sponsorship is not a defined term in the Income Tax Act. 12 CRA, Online at:

4 - 4 - What is now potentially problematic about the ongoing confusion over the meaning of the term sponsorship, is that transfers of property can still qualify as gifts notwithstanding that the donor receives something in return pursuant to the new split receipting regime. Therefore, in the circumstances of corporate charitable donations, instead of a two option analysis (charitable gift vs. sponsorship), a three option analysis may be required (charitable gift, sponsorship, or part charitable gift and part sponsorship). 13 In essence, the split-receipting regime rebuts the common law definition of a gift (i.e., a voluntary transfer of property made without consideration) to allow those voluntary transfers of property made with consideration to qualify as gifts provided that the provisions of proposed subsection 248(30) of the Income Tax Act are met. 14 Subsection 248(30) provides that consideration will not rebut the existence of a gift for charitable receipting purposes, provided that the amount of the advantage does not exceed 80% of the fair market value of the transferred property and the transferor of the property establishes to the satisfaction of the Minister that the transfer was made with the intention to make a gift. For the purposes of the split receipting regime, when determining the eligible amount of gifts for charitable receipting purposes, proposed subsection 248(31) of the Income Tax Act provides that the eligible amount of the gift is equal to the fair market value of the property donated net of the amount of the advantage the donor or a person non-arm s length to the donor receives. 15 The definition of what constitutes the amount of advantage of a gift made to a registered charity is set out in proposed subsection 248(32) of the Income Tax Act, which provides as follows: 13 Teresa L. Man, supra note Although these proposed changes have not been enacted, the CRA released Income Tax Technical News No. 26 on December 24, 2002, concerning proposed new rules and administrative guidelines for issuing split-receipts involving various fundraising events premised on these proposed changes, such as golf tournaments, fundraising dinners, charity auctions, lotteries, etc. Furthermore, the British Columbia Supreme Court in Richert v. Stewards Charitable Foundation [2005] B.C.C.J. No. 279 (appeal to the B.C.C.A. dismissed in [2006] BCCA 9.) up-held compliance with Technical News No. 26, as required by the CRA in spite of the fact that the splitreceipting rules have yet to be enacted as law. In this regard, the CRA s Registered Charities Newsletter No. 17 specifically indicates that the proposed guidelines in Income Tax Technical News No. 26 can be relied on now, despite the fact that the proposed legislation is not yet law. 15 The exact wording of proposed subsection 248(31) is as follows: The eligible amount of a gift or monetary contribution is the amount by which the fair market value of the property that is the subject of the gift or monetary contribution exceeds the amount of the advantage, if any, in respect of the gift or monetary contribution.

5 - 5 - The amount of the advantage in respect of a gift or monetary contribution by a taxpayer is the total of: (a) the total of all amounts other than an amount referred to in paragraph (b), each of which is the value, at the time the gift or monetary contribution is made, of any property, service, compensation, use or other benefit that the taxpayer, or a person or partnership who does not deal at arm s length with the taxpayer, has received, obtained or enjoyed, or is entitled, either immediately or in the future and either absolutely or contingently, to receive, obtain or enjoy (i) (ii) (iii) that is consideration for the gift or monetary contribution, that is in gratitude for the gift or monetary contribution, that is in any other way related to the gift or monetary contribution, (b) the limited-recourse debt, determined under sub-section 143.2(6.1), in respect of the gift or monetary contribution at the time the gift or monetary contribution is made. This is a very expansive definition that necessitates a consideration of whether the donor, or a person with whom he or she does not deal at arm s length, has received, obtained, enjoyed or is entitled to, either immediately or in the future or either absolutely or contingently, any property, service or compensation that is in any way related to the donation. 16 The Canada Revenue Agency (the CRA ) has indicated in Technical News No. 26 (December 24, 2002) that any advantage received or obtained must be clearly identified and its value ascertainable. It further indicates that if its value cannot be reasonably ascertained, no charitable tax deduction or credit will be allowed. As such, the CRA recommends that in relation to valuations, the donee should consider obtaining a qualified independent valuation of the amount of the advantage. 16 For a more thorough consideration of these issues, please see M. Elena Hoffstein, Theresa Man and Laura West, When is an Advantage not an Advantage: Issues Arising from the Proposed Split-Receipting Regime CBA Fourth Annual Symposium on Charity Law (May 2006). This section of the paper relies, in part, upon that publication.

6 - 6 - As a result of the split receipting regime, it appears that there may be three categories of corporate giving: 17 (i) charitable gifts where no advantage is received by the corporate donor that is greater than the administrative de minimis level established by the CRA; 18 (ii) sponsorship arrangements where the value of the advantage received by the corporate donor is greater than eighty percent 80% of the contribution made; and (iii) part sponsorship arrangements and part charitable gifts where an ascertainable advantage is received by the corporate donor which has a value that is greater than the de minimis standard but less than 80% of the contribution made and where the corporate donor s intention to make a charitable gift is present. It may be possible to issue charitable receipts for gifts falling into categories (i) and (iii) but not for gifts falling into category (ii). However, as with most matters of regulatory compliance, the devil is in the details of each particular gifting scenario. In the regard, the current policy of the CRA appears to be that the provision of sponsorship to a charity or to a charitable event is not a gift, and a charity generally cannot issue a receipt for sponsorship. 19 This appears to be based on the CRA s position that if a business receives special recognition for its donation, or if it receives more than nominal recognition, this usually constitutes sponsorship. Because it is difficult, if not impossible to establish a fair market value for sponsorship, and when the fair market value cannot be determined, a receipt cannot be issued, in most cases sponsorship arrangements will not be considered gifts and will not be eligible for charitable receipts. 20 In this same policy statement the CRA acknowledges, however, that if a business or corporation receives the same level of recognition as all other donors, with no special treatment, and the recognition is nominal, this usually constitutes a simple acknowledgment, and a receipt may be issued for the full amount of the donation. 21 However, it should be noted that in certain circumstances, what constitutes an advantage for a business or corporation may not constitute an 17 Teresa Man, supra note The CRA has acknowledged in Technical News 26 (December 24, 2002) that an amount of the advantage received by the donor that does not exceed the lesser of 10% of the value of the property transferred to the charity and $75 will not be regarded as an advantage for the split receipting regime. Note that the revised de minimis threshold will not apply to cash or near cash advantages. 19 CRA, Online at: 20 Ibid. 21 Ibid.

7 - 7 - advantage for an individual. For example, according to CRA policy, naming opportunities for individual donors do not constitute a formal advantage for the purpose of the split receipting regime whereas naming opportunities where there is an economic benefit to the donor arising from the naming opportunity, such as those afforded to a business or corporate donor, may constitute an advantage. 22 As the foregoing demonstrates, potential issues will arise when registered charities are offered corporate donations that contain mixed elements of sponsorship and charitable gift. How and when should charitable receipts be issued by registered charities? How should the advantage arising from the economic benefit of publicity and/or advertising be valued? What policy guidance should registered charities be following when dealing with such matters? As of the date of this paper, the CRA is still developing a formal policy to provide clarification in this regard and has sought input from the charity community as to the subject matter of such policy. 23 In Registered Charities Newsletter No. 22 (Spring 2005), the CRA commented as follows: The Charities Directorate has received many questions about situations where a donor receives advantages (promotion, advertising) as a result of making a donation. Does such an advantage negate the gift entirely? If there is an advantage, should the rules of split-receipting apply so that only part of the donation may be considered a gift? Or can the entire amount be receipted? These questions apply principally to business donors as well as to some individual donors who are synonymous with a business. If the benefits provided to business donors make it impossible to consider the transfer of property a gift, donors may still benefit from the ability to write off the transfer as an advertising expense. We want your input to help draft a policy on the types and value of advantages received by a donor. We are particularly interested in hearing your comments on the value of benefits that may be considered to be nil in some cases (e.g., simple recognition or thanks). Have you encountered specific scenarios in dealing with the issue of advantage received by a donor when there is some form of promotion, advertising, or sponsorship at issue? What logic or criteria do you think we should use to determine when donor recognition constitutes an advantage and its value? 22 See for example CRA document numbers R3, dated March 16, 2005; R3, dated July 13, 2005; and , dated December 10, 2003 and Advance Ruling R3. 23 Note that the official policy on sponsorship CSP-S13 (September 3, 2003) is currently described as being under revision on the Charities Directorate website. See online at:

8 - 8 - The Newsletter goes on to reference particular policy issues that will no doubt will be reflected in the final policy that is issued by the CRA: We currently consider these situations on a case-by-case basis, but we would like charities to have a better understanding of when an advantage will reduce the eligible amount of a gift. Here are some of the many factors or questions that charities officers consider in these cases: Purpose: Is one of the purposes of the donation to obtain recognition? Source: Is the donation from an individual or a business? Contracting: Is there a contract (a written or unwritten understanding concerning the benefits the donor will receive in return for the donation)? Does such an understanding, whether or not it is formally written, indicate that the donor expects and receives an economic benefit in return for the donation? Valuation: Can the value of the exposure (promotion, advertising, sponsorship) be determined? How much is the equivalent exposure worth? Token recognition or not? Naming Is simply being named as a donor necessarily a benefit (e.g., newsletters, plaques, cards)? If the recognition takes place in a newsletter or similar publication, is the publication available to members only, or is it distributed externally? Does making donor recognition cards available constitute a benefit? Does it make a difference if a donor company s logo, rather than just its name, is used? Even where there is a benefit, does it have value? 24 The determination of whether a corporate donation is a charitable gift or a sponsorship, or partly a charitable gift or partly a sponsorship, may not have any tax implications for the donating corporation due to the potential ability of the corporation to write off any portion of the corporate donation not constituting a charitable gift as a business expense This quotation has been shortened and redacted in part. 25 The tax differences between a charitable donation and a business expense to a corporation is that the deduction of charitable donations is limited to a percentage of the income of the corporation, whereas the deduction of business expenses is not so limited and the charitable donations can be carried forward for five years whereas the

9 - 9 - However, the determination of whether a corporate donation is a charitable gift, sponsorship or part sponsorship and part charitable gift should be important to registered charities because if they issue a charitable receipt otherwise than in accordance with the Income Tax Act, this could trigger the imposition of intermediate sanctions by the CRA, such as fines and other administrative penalties pursuant to section of the Income Tax Act. Penalties and sanctions can be assessed under subsections 188.1(7) and 188.1(8) for issuing receipts with incomplete or incorrect information and under subsection 188.1(9) and 188.2(1) for issuing receipts with false information. 26 As a result, it is important that registered charities establish appropriate protocols and procedures in order to ensure that the charitable receipts that are being issued to corporations appropriately record the eligible amount of the gifts (i.e., the fair market value of the gift less the advantage received) and that if a particular advantage cannot be ascertained, as may be the case in most sponsorship arrangements, a charitable receipt is not issued or a professional valuation or other advice is sought. As further guidance pertaining to these issues is released by the CRA in due course, registered charities should adapt and update their charitable receipting policies to ensure that they are in compliance with CRA polices with respect to these matters. 2. Corporate Charitable Giving: Gift Acceptance and Sponsorship Policies In light of the increasing size and sophistication of registered charities and the increasing regulatory oversight that they face in carrying out their charitable activities, it has become increasingly important for registered charities to consider the necessity of developing and implementing gift acceptance policies and ensuring that the rules and due diligence practices established in such gift acceptance policies are adhered to by staff, management, officers and directors on an ongoing basis. business expenses usually have to be applied in the year in which they are made. Also, See Teresa L. Man, supra note 1 and Carole Chouinard, supra note If it is the former, the registered charity could face a 5% penalty of the eligible amount on the incorrect receipt or 10% penalty upon repeat infractions within 5 years. If it is the latter, the registered charity could face a 125% penalty of the eligible amount on the false receipt, as well as suspension of its receipting privileges if the total amount of penalty for issuing false receipts exceeds $25,000 in the taxation year. In addition to the possibility of imposing the said penalties, gross mismanagement or continued inaction in this regard could result in the revocation of the registered charity s registered status under the Income Tax Act.

10 Corporate charitable giving should not be forgotten when registered charities engage in the development and implementation of gift acceptance policies and corporate sponsorship issues should either be specifically highlighted in the gift acceptance policy or set out as a separate independent policy. 27 Formal gift acceptance and sponsorship policies pertaining to corporate charitable giving and sponsorship arrangements can provide many benefits to registered charities, including: (a) (b) (c) (d) providing discipline and consistency to the gift acceptance and sponsorship process; promoting risk management and helping to avoid unanticipated costs associated with such gifts or sponsorships from arising in the future; helping to ensure that practices and procedures with respect to gift acceptance are not either reliant on imperfect institutional memory or made on an ad hoc basis; and managing donor and sponsor expectations by providing corporate donors and sponsors, and their advisors, with a pre-existing transparent and accessible set of guidelines, prior to the gift or sponsorship negotiation process. The breadth of this paper does not allow for a fulsome analysis of all of the potential components of an effective gift acceptance policy or sponsorship policy for registered charities. Instead, in the comments that follow, some of the specific issues relevant to corporate giving and sponsorship arrangements that can sometimes be overlooked when charitable policies are being formulated will be discussed. 27 This section of the paper relies, in part, upon the author s paper for the Canadian Bar Association and Ontario Bar Association s 2009 National Charity Law Symposium held on May 7, 2009, entitled Considerations in Gift Acceptance Policies.

11 (a) Corporate Charitable Giving Specific Considerations for Gift Acceptance Policies In addition to the charitable receipting issues referred to above in the discussion comparing charitable gifts to sponsorships, gift acceptance policies should provide registered charities, and their employees, officers and directors, with certain procedures to follow when determining whether to accept a corporate donation, how to (or how not to) issue a charitable receipt for the corporate donation, and how to deal with the corporate donation and the corporate donor on an ongoing basis. (i) Determining which Corporate Gifts are Acceptable When determining whether to accept a gift, a certain amount of due diligence needs to be carried out by the registered charity in order to allow it to reach a determination whether the gift is acceptable to the charity and thereby ensure that the acceptance of the gift will not expose the registered charity and its directors to potential loss, liability and/or reputational damage. As a preliminary matter, certain gifts may be unacceptable because of concerns of exposure to liability or public condemnation, because they will or are likely to cause unacceptable expenditures by the charity, or because they have restrictions or terms that either conflict with the purposes, activities, mission and/or values of the charity, are contrary to law or public policy (i.e. illegal or discriminatory gifts) or are impossible for the charity to carry out. The due diligence necessary for the registered charity to reach this determination should be set out in its gift acceptance policy. In this regard, registered charities should consider whether policies need to be put in place to ensure that sufficient information is obtained about the corporate donor in order to protect the charity and its directors from issues (and potential liabilities) arising in the future as further information about the corporate donor comes to light. For example, the corporate donor may be associated with persons, products or institutions that are repellent to the objects or mission of the charity. If the charity accepts a significant gift from such a corporate donor, even if unaware of these negative attributes or associations, negative publicity and loss of goodwill may result. Although due diligence will never uncover every potential issue pertaining to the donor which

12 could negatively impact the charity, some consideration should be had as to what, if any, investigations should be carried out by the charity in order to protect itself from issues arising in the future in this regard. Registered charities may also with to ensure that they have policies and procedures in place that ensure that gifts are not accepted from corporations and businesses whose philosophies and/or values are inconsistent with the overall philosophy and values of the registered charity. To achieve this aim, the gift acceptance policy should set out the steps required to figure out who exactly the donor is. This may seem self-evident in some circumstances. However, confusion can potentially arise. For example, the registered charity may be lead to believe that a particular corporation is making a gift only to find out later that the donor is actually a subsidiary corporation or even the owner/manager of the corporation. The registered charity may even find out eventually that the donor is actually the corporation s parallel foundation. Different receipting, acknowledgement and other issues will be applicable depending on whether the gift in question is from a business corporation, an individual or another registered charity and this identification should occur early in the gift acceptance process. (ii) Determining when Charitable Receipts can be issued for Corporate Donations Although a registered charity is not required to issue an official donation receipt for every gift it receives, it is prudent that registered charities make potential corporate donors aware of any circumstances in which they will not issue a charitable receipt. These circumstances could also be outlined in the gift acceptance policy. This will help to alert donors to the receipting policy of the registered charity and prevent any potential issues from being raised or potential claims instigated by disappointed donors when they are unable to claim the relevant charitable tax deduction for the gift. Specific types of issues that could be highlighted in this regard include: (A) Gifts of Services As has been noted research carried out by Imagine Canada, 28 corporations are increasingly providing registered charities with gifts of services, whether by employee volunteer hours or 28 For more information, see the various publications associated with the Business Contributions to Community (BCTC) research initiative of Imagine Canada, online at www.

13 gifts of professional or other services. A registered charity s gift acceptance policy should specifically note that registered charities are unable to provide charitable receipts for gifts of services provided by corporations. According to CRA policy, 29 and relevant case law, 30 volunteered contributions of services are not property and therefore the provision of such services to a registered charity does not constitute a transfer of property that qualifies as a gift for the purposes of the Income Tax Act. 31 (B) Rent Free Use of Property According to current CRA policy, if a corporation provides a registered charity with use of a property without charging any rent (e.g., the use of the corporation s business premises for various charity functions), no charitable receipt is available. The CRA has taken the position that the mere granting of a right to use property for a limited time does not constitute a sufficient transfer of property to qualify as a gift for charitable receipting purposes. 32 A registered charity s gift acceptance policy should draw attention to the fact that charitable receipts cannot be issued when a corporation offers the registered charity the right to use a property, or equipment, without charge. (C) Private Benevolence Corporations may wish to make gifts that are directed to specific families or individuals. For example, a corporation may wish to make a gift to a charitable organization for the purpose of supporting a former employee who has been the victim of a natural disaster. However, registered charities are unable to provide charitable receipts for gifts made for the purpose of private benevolence, i.e. gifts made subject to a direction by the donor that the charity transfer 29 See CRA, Policy Number CPC 017 (March 29, 2000) and CRA, Registered Charities Newsletter No. 27 (Fall 2006). 30 Rodolfo Jose Slobodrian v. Minister of National Revenue 2003 FCA 350 (Federal Court of Appeal). 31 CRA policy provides, at supra note 2, that a charity may issue an official donation receipt if a person provides a service to the charity, the charity pays for the service, and the person then returns the payment to the charity as a gift. In such circumstances, two transactions have taken place, the first being the provision of a service and the payment flowing therefrom, and the second being a gift proper. 32 See, for example, CRA, Registered Charity Newsletters No. 18 (Spring 2004).

14 the funds to a specified person or family. In such circumstances, the CRA s position is that the donor has made a gift to the person or family and not to the registered charity. 33 (D) Gift Certificates According to CRA Summary Policy CPS-018 (October 9, 2002), registered charities cannot issue official donation receipts for gift certificates they receive directly from the issuer of the gift certificate at the time the donation is made, 34 although the issuer may be eligible for an official donation receipt when the charity redeems the certificate in exchange for property. 35 If the charity does not redeem the gift certificate but passes it to a third party, such as at an auction or raffle, the redemption of the gift certificate by the third party does not entitle the issuer to a receipt. However, in this scenario, the CRA notes that while no donation deduction or tax credit can be claimed, where the issuer has donated and redeemed a gift certificate for property for the purpose of earning income in its business, a reasonable deduction may be available in respect of the cost of the property. 36 When valuing gift certificates for charitable receipting purposes, care should be taken that the gift certificate is valued correctly as the CRA has determined that in some instances, the fair market value of a gift certificate may not be the equivalent of its face value. 37 Gift acceptance policies should include references to these different considerations regarding donations of gift certificates. (iii) Management of Corporate Donors and Corporate Donations Issues pertaining to corporate donor acknowledgement and management may also form part of the gift acceptance policy in order to ensure that complaints or potential litigation do not arise in 33 See CRA, RC4108 Registered Charities and the Income Tax Act and Gifts and Official Donation Receipts IT- 110R3 (June 20, 1997). 34 Note that registered charities can issue official donation receipts for gift certificates when the donor is not the issuer of the gift certificate and the donor has obtained the gift certificate for valuable consideration either from the issuer or other third party. 35 Note that a receipt cannot be issued if the charity redeems the gift certificate for a contribution of services, because these are not property and do not qualify as charitable donations. 36 CRA, Summary Policy CPS-018 (October 9, 2009). 37 According to the CRA, ibid, factors to consider might be: (a) the flexibility of the certificate - does the coupon expire after a certain time, is it usable only within a specific timeframe, does it restrict the purchaser to specific merchandise within the store, and (b) its usefulness - does the retailer offer merchandise for the amount of the gift certificate, or will the certificate account for a portion of regular selling property, for example, a $50 gift certificate at a car dealership.

15 the future as a result of mistaken and/or unfilled corporate donor expectations. Such information may also form part of a separate sponsorship policy for corporate donors. For example, the gift acceptance policy could establish what type of donor acknowledgement is appropriate for what value of gift. Consideration may also be given to the form that the donor acknowledgment will take and the period of time during which the donor acknowledgement must be carried out or recognized. In this regard, some charities are often too willing to provide donors with perpetual recognition consideration must be had as to whether this is really in the charity s best interests so to do. The donor acknowledgement and management section of a gift acceptance policy may also provide guidelines with respect to donor agreements, i.e., when they are necessary, what specific terms and/or conditions they must or should have, etc. For example, consideration should be had, when preparing donor agreements pertaining to restricted or specific charitable purpose gifts, whether to provide for an alternate disposition of the funds upon the impossibility or impracticality of the specified charitable purpose in order to prevent an application from having to be made to court to vary the specified charitable purposes. In addition, consideration should be had as to whether donor agreements should provide for the manner in which the charitable gift is to be dealt with in the event of the dissolution or winding-up of the charity. The type and form of corporate donor imposed restrictions that the registered charity is willing to accept should also be considered. Finally, this section of the gift acceptance policy may also outline when the charity should seek professional assistance in the planning or documentation of charitable gifts. Furthermore, the donor acknowledgement and management section of a gift acceptance policy may remind the charity and potential donors that once a gift has been received by the registered charity and a charitable donation receipt issued, the property becomes a charitable asset and cannot be returned to the donor. This may allow the charity to more readily deal with donors who attempt to coerce or pressure the charity in to returning a charitable gift after a change in financial circumstances or a falling out with the charity. (iv) Determining how to deal with specific types of corporate gifts A gift acceptance policy of a registered charity may include specific provisions regarding certain types of corporate gifts that require additional consideration from both a charitable receipting

16 and a due diligence perspective. For example, it may be advisable for gift acceptance policies to highlight some of the potential issues that can arise for charities when they receive gifts of business interests or business related property such as inventory. Although the scope of this paper does not allow for a thorough consideration of all of the relevant issues that can arise in this regard, a brief list of some of the relevant issues that may be adverted to in a charity s gift acceptance policy has been set out below. 1. Registered charities that have been designated private foundations for the purposes of the Income Tax Act that receive gifts of securities must ensure that they are in compliance with the monitoring, reporting and divesture requirements of the excess corporate holdings regime imposed on private foundations pursuant to the provisions of the Income Tax Act Registered charities that have been designated public foundations and private foundations for the purposes of the Income Tax Act must ensure that they are not acquiring control of a corporation as a result of a receipt of a gift of business interests, as in doing so, they may run the risk of de-registration Registered charities that have been designated public foundations and charitable organizations for the purposes of the Income Tax Act must ensure that a gift of business interests will not result in them being considered to be carrying on a business that is not a related business for the purposes of the Income Tax Act. Otherwise, they run the risk of de-registration. 40 Private foundations cannot carry on any business pursuant to the provisions of the Income Tax Act and therefore they must ensure that the receipt of a gift of business interests will not result in this outcome. 41 In particular, it is important to note that the CRA currently takes the position that any registered charity that holds units of partnership will be seen to be carrying on a 38 See s of the Income Tax Act. 39 See s and 149.1(12) of the Income Tax Act of the Income Tax Act. For these purposes, control occurs when the foundation, or the foundation and persons with whom it does not deal at arm s length, owns fifty percent (50%) or more of a corporation s issued share capital, having full voting rights under all circumstances. However, as a specific exception, control will not occur when a public foundation which has not bought more than five percent (5%) of the relevant shares of the corporation is given a bloc of shares that brings up its total holding to more than fifty percent (50%). 40 See s (2) and s (3) of the Income Tax Act. 41 See s (4) of the Income Tax Act.

17 business, regardless of whether the registered charity is a limited or general partner or whether the business of the partnership is limited to the investment of funds Gifts of inventory by corporations or businesses are subject to specific rules, which should be set out in a registered charity s gift acceptance policy. 43 Gifts of other types of business interests can raise complex tax, valuation and due diligence issues. It may be important for a charity s gift acceptance policy to highlight that if a registered charity is offered certain types of property, additional due diligence should be carried out and/or professional assistance should be sought. For example, gifts of private company shares, exchangeable shares, limited partnership units, hedge fund interests and flow-through shares are all complex types business interests that may require additional due diligence and assessment to take place. (b) Corporate Sponsorship Considerations for Policies and Agreements Various considerations will impact whether a registered charity considers it advisable to enter into a specific sponsorship arrangement and the terms and conditions of such sponsorship arrangement that it will find acceptable. Various issues that a sponsorship policy, whether forming part of a registered charity s gift acceptance policy or existing independently, should highlight include, but are not limited to, the following. (i) Documenting of Sponsorship Arrangement in Written Agreement Documenting sponsorship arrangements entered into by corporations and registered charities is an important due diligence and risk management exercise in which registered charities can engage. Setting certain parameters for when written sponsorship agreements will be entered into by the registered charity and the corporation (e.g., sponsorships of a certain value) and establishing processes for the internal and/or external review of such agreements, where necessary, is an important component of the creation and implementation of a sponsorship policy. Having regard to the sponsorship versus charitable gift discussion highlighted above, care should be taken when documenting a sponsorship arrangement to highlight that the arrangement is in fact a true sponsorship and no portion of the sponsorship is meant to constitute 42 For a discussion of the CRA s policy on what constitutes the carrying on of a business and what constitutes a related business see Policy CPS-019, What is a Related Business? (March 31, 2003). 43 See Canada Revenue Agency, Policy Commentary CPC-018 (March 29, 2000).

18 a charitable gift. Conversely, if a registered charity is entering to a gift agreement with a corporation, and a charitable receipt is being issued for the donation made by the corporation, care should be taken to ensure that the gift agreement specifically adverts to the fact that a charitable gift is being made and that the language of the gift agreement does not inadvertently suggest the indicia of a sponsorship arrangement or the conferring of an advantage that is not in fact being conferred. (a) Acceptable and Non-Acceptable Sponsorship Arrangements Like a gift acceptance policy, a sponsorship policy should likely provide the charity with policies and procedures to follow when determining whether a sponsorship arrangement with a corporation will be acceptable to the registered charity. The reputation and goodwill associated with specific charities are important and valuable assets and steps should be taken to ensure that these assets are not damaged by hastily arranged sponsorship arrangements. For example, charities may wish to establish procedures to ensure that they do not enter into sponsorship arrangements with corporations that would jeopardize the financial or legal standing of the charity or impact negatively on the charity s standing and reputation in the eyes of the public. Procedures in this regard should be consistent with all other policies governing the operation of the charity. (b) Specificity with respect to the Parameters of the Sponsorship Arrangement Considerations relating to the parameters of sponsorship arrangements will likely be dependant upon the particular facts involved in each sponsorship arrangement. For example, sponsorship arrangements may involve permanent and/or long-term naming opportunities related to specific buildings or spaces, to particular charitable programs or to various events carried on by the registered charity. However, sponsorship policies should ensure that any sponsorship arrangement that is entered into by the charity has specific guidelines and that the roles and responsibilities of both the charity and the sponsor are appropriately documented in a sponsorship agreement. A review of the general literature in this area reveals that provisions that may be found in sponsorship agreements include, but are not limited to, the following: (i) a description of the

19 funding and timeline of the funding being provided by the sponsor; (ii) a description of the recognition being provided to the sponsor; (iii) the term of the sponsorship arrangement and procedures and possibilities for potential early termination; (iv) provisions relating to whether it is an exclusive sponsorship opportunity for the particular donor or whether it is an unlimited sponsorship opportunity; (v) a description of the obligations of the parties to one another; (vi) various representations and warranties with respect to the ability of each party to enter into the sponsorship agreement; (vii) notice, communication and dispute resolution provisions; (viii) provisions relating to the clarification of the relationship between the parties, such as the inability to assign rights under the agreement or specific provisions declaring that the agreement does not constitute a partnership, etc.; and (ix) liability and/or indemnity provisions. (c) Protection of Intellectual Property. In addition to the foregoing, registered charities should ensure that their sponsorship policies set out positive steps to be taken by the registered charity to protect the use of its trademarks, brand, name, goodwill and intellectual property when engaging in sponsorship arrangements. Registered charities may wish to ensure that the use of its name, marks, logos and insignia by the sponsor is prohibited without the written approval by the charity and that all written communications related to the sponsorship are subject to the charity s approval. It is likely that this will also be an aim of the sponsoring corporation. As an author has noted, [t]he whole point of the sponsorship relationship, in most cases, is to enhance the goodwill and reputation of the sponsor from its association with the event.if at the end of the day, the sponsor loses the ability to control the use of its trade-marks, or otherwise loses value in its name or brand, then the sponsorship becomes a dangerous liability to the sponsor, instead of having the intended effect Corporate Foundations As noted above, corporate support for registered charities in Canada is becoming increasingly important to both registered charities and corporate Canada. As Imagine Canada s research has 44 Jolan Storch, The Evolution of Sponsorship Agreements (March 2006). Online at:

20 revealed, although there are many reasons that businesses support charitable endeavours, 45 there is a general consensus among businesses that it is important to make corporate contributions because it is a good thing to do, irrespective of the financial returns to your company. 46 As corporate support of registered charities grows, the sophistication of approaches taken by corporations to philanthropic endeavours appears to be increasing as well. 47 Corporations may have dedicated corporate philanthropy officers, committees or departments, specific corporate philanthropy policies, benchmarks and planning and/or in some cases, may establish parallel foundations to serve as the independent vehicles for the corporation s charitable giving. (a) Determining whether to establish a parallel foundation There are certain factors that may militate for or against a corporation deciding to create a parallel foundation to serve as an independent vehicle for a corporation s charitable giving. Such factors include: 48 Potentially Positive Factors A. Centralization, Cohesiveness and Coordination A parallel foundation allows for better coordination by centralizing all of the charitable giving engaged in by the corporation and providing a single vehicle for this purpose. It allows for the day to day administrative burden of charitable giving decision-making, policy formulation and other related matters to be removed from the responsibility of the management of the corporation and transferred to dedicated decision-makers responsible for the operation of the parallel foundation. It may also provide a vehicle for charitable giving engaged in by employees and/or partners of the corporation as well. 45 See Steven Ayer Insights for Strategic Corporate Fundraising Further Findings from the Canada Survey of Business Contributions to Community Online at: Across industry sectors, the motives for supporting charities are relatively consistent.., with most businesses citing a desire to create strong relationships with the community, build healthy communities that are, in turn, good for business, or support causes that are consistent with their company s own traditions and values. 46 Ibid. 47 See Judith Chopra, The Changing World of Corporate Donations: Clarica, A Case Study The Philanthropist, Volume 17, No. 3. See also Raymond Dart, Charities in Business, Business in Charities, Charities and Business Mapping and Understanding the Complex Nonprofit / Business Interface The Philanthropist, Volume 18, No This next section of the paper is indebted to Teresa Man, supra note 1. See her more detailed discussion of these and other factors.

21 B. Flexibility A parallel foundation allows a corporation the flexibility to make charitable gifts to the foundation when necessary and/or advisable for tax purposes while still allowing grants to be made to registered charities by the foundation at different times. The timeline of actual distributions made to registered charities does need to be bound to the timeline mandated by the tax requirements of the corporation in any year. The corporation can make endowed gifts to the parallel foundation to allow for uninterrupted giving by the parallel foundation in years when corporate profits are reduced or the tax benefits of charitable giving are not required. C. Control A parallel foundation, depending upon the manner in which it is organized and the control exerted over it by the corporation, may allow the corporation to retain control over the charitable gifting engaged in by the foundation and to direct its overall administration. This would allow the corporation to coordinate the foundation s overall goals and outcomes with those of the corporation. A parallel foundation may also more easily allow a corporation to monitor the registered charities that are the recipients of its largesse over time and to engage in research regarding the outcome of its charitable giving. D. Publicity A parallel foundation that bears a corporation s name allows for publicity, marketing and branding consequences that may not be available to a corporation engaged in charitable giving on its own. A parallel foundation allows a corporation to show the importance that it places on charitable giving and potentially allows it to more significantly associate itself with philanthropic goals. Potentially Negative Factors A. Administrative and Regulatory Compliance Burden A parallel foundation will involve ongoing administrative and regulatory compliance burdens, including the incurring ongoing expenses and the requirement for ongoing oversight and professional advice. The regulatory and administrative compliance regime governing the parallel foundation will be different from the regulatory regime or regimes to which the corporation is subject. B. Potential for Negative Publicity If a corporation establishes a parallel foundation it runs the risk of negative publicity in the event that the parallel foundation is not administered properly and runs afoul of the regulatory regimes to which the parallel foundation will be subject.