Topics: News, Canadian Charity Law, Global Giving, Ethics and Canadian Charities, Avoiding 'Charity' Scams
Valuation is complicated but don’t rely on the donor to tell you the value or use some optimistic number. If a charity provides an official donation receipt for a donation of pharmaceuticals to a donor that charity is obliged to determine the fair market value. If you can order similar pharmaceuticals internationally at 1% of the cost it is difficult legally (and perhaps unethical) to claim a far higher Canadian value or “wholesale” value in Canada. This can result in a charity losing its charitable status. You might find The International Drug Price Indicator Guide helpful http://erc.msh.org/dmpguide/index.cfm?search_cat=yes&display=yes&module=dmp&language=English&year=2008 Here is the print version of the International Drug Price Indicator Guide. http://erc.msh.org/dmpguide/pdf/DrugPriceGuide_2008_en.pdf
Remember that if you cannot determine either the value of the donation or the advantage you should not be issuing any official donation receipts. Also keep in mind that for many companies when they are donating out of inventory it may not make any difference if you give them an official donation receipt as they will have to include the fair market value in their income. Therefore the receipt only offsets their original income. Many charities are better off not issuing a donation receipt but still counting when the items are used in charitable activities the fair market value to meeting their disbursement quota requirement.
Also remember that if you value drugs at say $100,000 and issue a receipt for $100,000 and 3 years from now CRA says they think they are only worth $20,000 then you will have a disbursement quota shortfall in terms of the gift which needs to be made up elsewhere or the charity can lose its charitable status.
Also keep in mind if the donation is a sponsorship arrangement you would not issue a receipt and even if there is only some advertising benefit to the company you need to deduct the “advantage” from any receipt.
Also remember that if a product was purchased within 10 years and the purpose in part was to donate the product to a charity you have to use the lesser of the fair market value and the amount paid for the item.
“The International Drug Price Indicator Guide contains a spectrum of prices from pharmaceutical suppliers, international development organizations, and government agencies. The Guide aims to make price information more widely available in order to improve procurement of medicines of assured quality for the lowest possible price. Comparative price information is important for getting the best price, and this is an essential reference for anyone involved in the procurement of pharmaceuticals.”
Here are some other links that may be of interest:
Canadian charities and pharmaceutical donations -some ethical issues
“Sources and Prices of Selected Medicines for Children,” January 2009, published by UNICEF and WHO
“Untangling the Web of Price Reductions: A Pricing Guide for the Purchase of ARVs for Developing Countries,” 11th edition, July 2008
If the donation is out of inventory you might find the following helpful:
“Policy Commentary Release Date
March 29, 2000
CPC - 018
Official donation receipts - Whether gifts out of inventory qualify as charitable donations
To clarify the Directorate’s policy regarding gifts out of inventory.
1.A registered charity can issue an official donation receipt to a business for the market value of a gift out of inventory.
2.The charity’s responsibilities are
a.determining that it has in fact received a gift;
b.determining the value of the gift.
3.If the transaction results in a material benefit to the business, such as promotion or advertising, there has been no gift at law, and the charity should not issue an official donation receipt.
4.It is the Canada Revenue Agency’s responsibility to ensure that businesses comply with the provisions of the Income Tax Act, not the charity’s. If asked, the charity may advise a business of the tax implications as follows:
a.The business can, of course, deduct the cost of acquiring or producing the item given to the charity from its income.
b.If the business does make a true gift out of inventory, it must add the fair market value of the item to its income per subparagraph 69(1)(b)(ii) of the Income Tax Act, and then claim a charitable tax deduction.
c.If the business obtains a material benefit from the transaction, it can probably write off the cost as a business expense.
5.The following example explains the tax consequences for a business where a gift is made out of inventory.
Calculation of taxable income
Sale of bread $50,000
Plus the value of bread donated to charity + 1,000
Less production costs 25,500
Net income $25,500
Less tax deduction for donated bread - 1,000
Taxable income $24,500”
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.