The CRA has just issued a revised guidance on “Donation of Gift Certificates or Gift Cards Guidance”. This guidance replaces Policy Statement CPS-018, Donations of Gift Certificates. Gift certificates and gift cards are frequently donated to charities but can the charity issue a tax receipt? Well it depends.
Here is the CRA Guidance
Donation of Gift Certificates or Gift Cards Guidance
August 15, 2011
This guidance replaces Policy Statement CPS-018, Donations of Gift Certificates.
Registered charities can issue official donation receipts for income tax purposes for the eligible amount of gifts of gift certificates and gift cards under specific circumstances. This guidance outlines the Directorate’s policy on these circumstances.
Eligible amount: The eligible amount of a gift is, under the proposed split-receipting rules, the amount by which the fair market value of the gift exceeds the amount of the advantage. The amount of the advantage is generally the value, at the time the gift is made, of any property, service, compensation, or other benefit received, or expected to be received in the future, as partial consideration for, or in gratitude for the gift. Generally, for the purposes of determining the eligible amount of the gift, the fair market value of a property that is the subject of a gift is deemed to be the lesser of the fair market value of the property, otherwise determined, and the cost of the property immediately before the gift is made if the donor acquired the property less than three years before the day the gift is made.
Gift certificate: a certificate with a clearly stated monetary value that entitles the recipient to purchase goods and/or services in the issuer’s establishment.
Gift card: a card that has a clearly ascertainable monetary value that entitles the recipient to purchase goods and/or services in the issuer’s establishment.
Holder: person who has acquired a gift certificate. A holder cannot be an issuer.
Issuer: the person (individual, retailer, business) that creates a gift certificate or a gift card redeemable for goods and/or services from that person. An issuer cannot be a holder.
For purposes of this policy statement, “gift certificate” and “gift card” are collectively referred to as “gift certificates.”
2.1. Registered charities often accept gift certificates and use them in fundraising events, such as auctions and raffles, or to acquire goods or services for use in their charitable activities.
2.2. A charitable donation must involve a transfer of property of any kind, real or personal, corporeal or incorporeal, which includes rights. A right is a legally enforceable claim by one person against another. Whether the donation of a gift certificate constitutes a transfer of property depends on the particular circumstances.
2.3. A gift certificate can be considered to be a promise from a merchant to supply goods and/or services in an amount equal to the dollar value of the certificate. A gift certificate constitutes property and a right, but only if the promise is enforceable, that is, only when the certificate is issued for consideration.
2.4. Registered charities may issue an official donation receipt for a gift certificate only in the following situations:
a) when the holder of a gift certificate that has been issued for consideration (the terms of which permit its assignment) donates the gift certificate to a registered charity, the charity may issue an official receipt to the donor for the eligible amount of the gift;
b) when the issuer of a gift certificate donates it to a charity for no consideration, the registered charity can only issue an official receipt at the time the charity receives property when is redeems the gift certificate. The official receipt may be issued for the eligible amount of the gift of the property to the charity by the issuer; or
c) when the issuer of a gift certificate gives it to a charity for partial consideration, the charity may issue an official receipt to the donor for the eligible amount of the gift.
A receipt that the charity issues should specify the nature of the property it received in exchange for the gift certificate, as well as the eligible amount of the gift.
2.5. Registered charities cannot issue official donation receipts for gift certificates they receive directly from the issuer for no consideration. However, when these gift certificates are redeemed for property, official donation receipts can then be issued as stated above in 2.4.(b)
3.1. Holder owns a gift certificate and donates it to a charity
When a gift certificate has been issued for consideration and the terms permit its assignment, upon donating the gift certificate to a registered charity, a holder who has purchased or otherwise acquired a gift certificate, can receive an official donation receipt for the eligible amount of the gift.
3.2. Issuer donates a gift certificate to a charity for no consideration
When the issuer transfers a gift certificate directly to a charity for no consideration, there has not been a valid transfer of property as noted in paragraph 2.2 above. As a result, the issuer is not entitled to an official donation receipt at the time the transfer is made. In this scenario, the issuer does not realize any income for having transferred the gift certificate since the transfer does not constitute a transfer of property. The issuer may be eligible for an official donation receipt if the charity redeems the certificate for property. Therefore, to be eligible for a receipt, redemption of the certificate must result in a transfer of property that would otherwise have constituted a gift. A receipt cannot be issued if the charity redeems the gift certificate for a contribution of services, such as time, skills, or effort, because these are not property and do not qualify as charitable donations.
In this scenario, once the charity redeems the certificate, the issuer of the gift certificate will realize income equal to the value of the property gifted. Generally, when the issuer is carrying on a business and the property gifted is inventory, the issuer can deduct an amount equal to the cost of goods gifted. (see CPC-018, Gift Out of Inventory) The charity may issue a receipt for the eligible amount, which is the amount by which the fair market value of the property received from redeeming the certificate exceeds any advantage received by the donor. Generally, for the purposes of determining the eligible amount of the gift and determining the value of the property gifted for purposes of the income inclusion noted above, the fair market value of a property that is the subject of a gift is deemed to be the lesser of the fair market value of the property otherwise determined and the cost of the property immediately before the gift is made if the donor acquired the property less than three years before the day the gift is made. There are certain exceptions to these rules including the gifting of inventory.
3.3. Issuer gives a gift certificate to a charity for consideration
When the gift certificate is issued to the registered charity for consideration equal to the fair market value, the issuer must include the consideration received in their income. Since the consideration the issuer receives constitutes an advantage, the eligible amount of the gift will be NIL. Therefore, no receipt should be issued. When the issuer is carrying on a business and the property gifted is inventory, the issuer will generally be entitled to deduct an amount equal to the cost of inventory sold when the gift certificate is redeemed.
If the consideration is less than the fair market value of the certificate, the issuer must include the fair market value of the certificate in income. However, the registered charity may issue an official receipt for the eligible amount of the gift. Again, when the issuer is carrying on a business and the property gifted is inventory, the issuer will generally be entitled to deduct an amount equal to the cost of inventory sold when the gift certificate is redeemed.
3.4. Charity transfers an issuer donated gift certificate to a third party
When the issuer donates a gift certificate directly to a charity, and the charity transfers the certificate to a third party (for example, at an auction or a raffle), the redemption of the gift certificate by the third party does not entitle the issuer to a receipt. The honouring of the gift certificate by the retailer cannot transform the character of the original transfer of the gift certificate to the charity into a gift. Each transaction must be viewed independently when determining whether a gift has been made.
In this scenario, no income is realized for the donation and no donation deduction or tax credit can be claimed. However, when the issuer has donated and redeemed a gift certificate for inventory for the purpose of earning income in its business, a deduction is generally available for the cost of the goods [Footnote 1].
4. Value of a gift certificate
In some instances, the fair market value of a gift certificate may not be the equivalent of its face value. Factors that may affect the fair market value of the gift certificate include:
•the flexibility of the certificate—does the certificate 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
•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).
5. Information that must appear on official donation receipts
A registered charity must ensure that the official donation receipts it issues comply with the requirements of the Income Tax Act. The requirements are listed in the Issuing receipts section of the Charities and Giving Web pages.
•Income Tax Act, R.S.C. 1985, (5th supp.) c.1. s.248(1)
•Income Tax Technical News, No. 26
Footnotes[Footnote 1] Section 9 of the Income Tax Act
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.